Macs

This is Tim: Cook on Apple's third-quarter earnings

[Editor’s Note: As he usually does, Tim Cook took part in Apple’s Tuesday conference call with Wall Street analysts to discuss Apple’s quarterly earnings. And as we usually do, we lifted some of the choice things Apple’s CEO had to say about his company’s fortunes.]

On growth in China

The growth in Asia-Pacific was 25 percent, and that majority of the difference in our sequential growth rate was a result of Greater China, which represents about two-thirds of our revenue for the region. As we reported for [the second quarter], our Greater China revenue was $7.9 billion, and in Q3, our revenue was $5.7 billion. Now, that $5.7 billion is 48 percent year-over-year increase, so it still is growing at incredible rates. Virtually all of the $2.2 billion sequential revenue decline was due to iPhone sales in Greater China. About half of that [$2.2 billion] is attributable to changes in channel inventory, not the underlying sell-through with the iPhone.

As a reminder, in the previous quarter, in the fiscal Q2, we launched the iPhone 4S in China in January. We added China Telecom as a second carrier in March, and, as we proceeded across the quarter, we increased channel inventory to accommodate the sales and to reach our target inventory of four-to-six weeks. The remainder of the sequential revenue decline is mainly attributable to normal seasonality after the very successful iPhone 4S launch. We did not see an obvious impact in Q3 that we would associate with the economy in Mainland China. We look at the economic reports as all of you do and see the troughs, but again, we did not see anything that we would attribute to the economy in China.

In terms of iPhones in general in Mainland China, we were incredibly pleased with our results; we were up over 100 percent year-over-year. As you probably know, just last Friday, in [the fiscal fourth quarter], we launched our new iPad in China, after we resolved the iPad trademark issue, and so sales didn’t benefit from iPad the June quarter in Mainland China. Also, our new portables that we announced at the Worldwide Developers Conference began to ship in Mainland China last week, after we received routine inventory approval, so once again, the June quarter sales didn’t benefit from these products. We remain really confident about our plans and are very excited about our opportunities in China, and are very much looking forward to incorporating more local services, as you probably saw in our [WWDC] announcement of iOS 6, which will be coming in the fall.

On iPhone demand

First of all, at a global level, it’s important to understand as you compare our Q2 iPhone sales to Q3, there’s a fairly large channel inventory difference embedded in that. As you recall, in January, we completed the iPhone 4S rollout in all major countries, including China. It was our fastest iPhone rollout ever. We were also able to get the channel within our target inventory of four to six weeks by the end of March; so what that did was it increased sell-in over sell-through by 2.6 million units. In the quarter that we just finished, our sell-in was less than sell-through by 300,000 units. So the net change in channel inventory across quarter is about 3 million units. I think it’s important to understand that to look at the underlying sell-through trend.

In terms of what we see happening in different geographies, the U.S. was very strong, running at 47 percent, Japan was strong at 45 percent. I’ve already mentioned Greater China was up 66 percent, but Mainland China… as I said before, it was [up] over 100 percent. The geography that did not perform well was Europe—Europe was essentially flat, slightly positive year-on-year and that really hampered our total results.

Within Europe—now I’ll switch from iPhone to talking about gross revenue levels—we see a marked difference between countries in Europe. The UK was relatively solid at 30 percent growth, but France, and Greece, and Italy, were particularly poor; Germany was also only a single digit positive growth for the quarter. Eastern Europe was strong, materially stronger than Western Europe, but Western European countries drive [a] preponderance of revenue in that segment. We are certainly seeing a slowdown in business in that area. Fortunately, the U.S. and China, though I realize is getting a lot of press, we’re not seeing anything there that we’d classify as an obvious economic issue.

I think there’s a lot of speculation out there. It’s difficult to sort out, but I’m fairly convinced based on what I’ve seen that there’s an incredible anticipation out there for future products, and, as you would expect, given what we’ve been able to deliver in the past, I think it’s a reasonable amount.

On the Mac

It’s clear the PC market is weak, based on the latest IDC data, but frankly, we believe the primary factor of our lower growth rate in the Mac area is the timing of our portable announcement within last quarter. As you know, we announced an entirely new portable lineup that’s been incredible well received, that was done with less than three weeks remaining in quarter. The year-ago compare, we made a transition in the portable area in February, so we were selling our new lineup for the entire Q3 period.

Prior to [WWDC], our weekly Mac sales were running below the prior year. After [WWDC], the MacBook Pros and MacBook Airs drove year-over-year increases in weekly sell through, and they were to the level that got us back to an overall positive territory for the quarter, and our 25th consecutive quarter of growing faster than the market. The MacBook Pro with Retina Display was incredibly well received, we ended quarter in backlog, and we still have not caught up with demand yet, but anticipate doing so next month. Also, to further illustrate the portable point, for the month of June, the NPD data that just came out for the U.S. showed Apple’s portable share at 25.5 percent and a record 47 percent of revenue share for the month of June. I would attribute a large amount to what has happened in terms of the timing of our portable announcement.

On carrier partnerships

I don’t want to get into specific topics about different carriers, but generally I would just say that our role is to make the very best smartphone in the world, that has an incredible user experience, far superior to anything else that customers want to use every day. I think at the end of the day, the carriers want to provide their customers with what their customers want to buy. So the most important thing for Apple by far is to continue making the best products in the world, and we are very deeply committed to this, and we are maniacally focused on it. From carriers’ perspective, I think it’s also important to remember that the total subsidy that they pay is fairly small relative to the monthly payments they collect over a 24-month contract period.

I think many would tell you—they certainly told me—that the iPhone has several advantages for them over other smartphones. The churn rates are much less, you see carriers now focusing on shared data plans, and I think an iPhone customer is more likely to have a tablet or an iPad. And so, they really value these customers quite a bit. Also, our engineering teams are very sensitive to working with carriers to find the most efficient way to deal with data, and we think that we’re the most efficient as far as the market for smartphones that are in an app-rich ecosystem. And so, we’re going to continue focusing on making the best product. And I think that the carriers will be very motivated to make sure they provide that to customers.”

On growth in emerging markets

We’ve been very focused as you know on China, because we see it as an enormous opportunity for us. I’m very pleased that we were able to grow our iPhone sales over 100 percent last quarter—I feel very, very good about that. I firmly believe that people in emerging markets want great products, like they do in developed markets. We’re going to stick to our knitting and make the best product. We think that if we do that, then we’ve got a very good business ahead of us. That’s what we’re doing.

Our north star for the company in total, that resides across everything that we make, is to make the very best product. That’s more important and overshadows all other things. But we do believe by doing that we will have a great business, and I think our results really show that.

I love India, but I believe that Apple has some higher potential in the intermediate term in some other countries. That doesn’t mean that we’re not putting emphasis in India—we are. We have a business there; that business is growing, but the multilayer distribution there really adds to the cost of getting products to market. So we’re going to continue putting some energies there, but from my own perspective, in the intermediate term there will be larger opportunities outside of there.

On iPad sales

Keep in mind that the channel inventory is only for the indirect channel. It’s not used for any direct sales, and direct sales are Apple retail sales, Apple online sales, Apple education sales. I don’t want to give you specific guidance on iPad sales, but it’s important to keep that in mind. That’s not just the case with the iPad, but it’s the case with all products. I know that there are some companies out there that refer to their channel inventory in terms of their gross sales, but we don’t do that because we feel very strongly that it only supports the channel sales. That’s how we calculate.

You know, we re-priced the iPad 2 to $399 and it did very well in the quarter. The most popular iPad was the new iPad, but the iPad 2 did very well. It was particularly popular in the K-12 area that Peter spoke about earlier. We sold about 1 million units for the quarter. We have been very aggressive in this space, and I don’t see changing that.

In terms of competition, we’ve all seen, I think, many different tablets—hundreds of them, come to market over the last year—and I have yet to see any of them really gain what I would call any level of traction at all. We have over 225,000 apps that have been optimized for iPad. There’s an incredible experience on the iPad, and I still think the market very much, or most customers feel that they’re not really looking for a tablet, they’re just looking for an iPad. We’re going to keep innovating in this space and keep making great products and keep a very strong business going forward. The 17 million iPads was up 84 percent year-over-year, and we’ve now shipped over 84 million—this is as of the end of last quarter—iPads, which, if you look at that on a trajectory rate, it took us more than twice as long to achieve that on iPod, and we achieved it in a third less time on iPad than iPhone. So, we feel really, really good about our momentum today.

On iPad pricing

The reason that we [lowered the iPad 2 price] was because we believed that sales would be incrementally larger, that there was price elasticity, and that there was a buyer that really wanted the best product, but needed it to be a little less expensive. I believe that we saw that. I think it did help our sales. I think it’s particularly helping in K-12. The adoption rate of iPad in education is something that I’ve never seen from any technology product in history. Usually education tends to be a fairly conservative institution in terms of buying, or K-12 does, and we’re not seeing that at all on the iPad. It’s been a big help for us, and I’m really glad that we did it.

On the Apple TV

We sold 1.3 million [Apple TVs] last quarter, this was up over 170 percent year-over-year, and it brings fiscal year to 4 million units, which is pretty incredible. It’s still at a level that we would call it a hobby, but we continue to pull the string to see where it takes us. We’re not one to keep around products the we don’t believe in—there are a lot of people here that believe in Apple TV, so we continue to invest in it and see where it will take us.

We do it because we think it will lead us somewhere, so we’ll see. But 4 million is not a small number; its small relative to iPhones and iPads perhaps, but its not a small number, and there’s a lot of believers in it.

On Passbook as a potential digital wallet

Passbook in general is a very key feature [in iOS 6]. I think all of us have found that we were getting many passes and many tickets, maybe boarding passes, etc., that were scattered all over our iPhones in different apps, so Passbook does an incredible job of pulling all of those into one place—whether it’s offers or passes or tickets or whatever it may be. It’s an important feature of iOS 6, and I wouldn’t want to speculate about where it might take us.

On rumors and speculation

We try very hard to keep our product roadmap secret and confidential, and we go to extreme activities to try to do that. That, however, doesn’t stop people from speculating or wondering, and we’ll never do that. So, it’s a great thing about this country, people can say what they think and so forth. I’m not going to spend any energy trying to change that; that’s just the environment we’re in. I’m glad that people want the next thing; I’m super happy about it. There are obviously quite a few that want what we’re doing now as well, as witnessed by the amount of products that we’re selling. I’m not going to put any energy into trying to get people to stop speculating. I don’t think it’s going to amount to anything.

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