Business

This is Tim: Cook on Apple's fourth-quarter earnings, the iPad mini, and more

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

On Apple's philosophy

We’re dedicated to making the very best products in the world and we think about the smallest of details and we’re unwilling to cut corners in delivering the best customer experience in the world. It’s this relentless commitment to innovation and excellence [that] is the reason that our customers choose to buy our products, and this will always be the driving force behind Apple. We’re managing the company for the long run and we’ll continue to make great long-term decisions. We remain very, very confident in our strategy and will use our world-class skills in hardware, software, and services.

iPhone

The demand for iPhone is extremely robust. We’re thrilled with what we see. We are in a significant state of backlog right now. In terms of the production, our output has improved significantly since earlier this month, and I’m very very pleased with the progress that we’ve made there. I’m pleased with the current level of output in what is the largest volume ramp in Apple’s history.

It’s difficult to predict when supply and demand will balance, but I’m feeling very confident on our ability to supply quite a few iPhones.

I’m actually not projecting whether supply and demand will balance for the quarter; I’m saying that I feel great about where we are on the manufacturing ramp; our supply output is significantly higher than it was earlier in October. I’m confident that we’ll be able to supply quite a few during the quarter, but in terms of when that balance occurs, I can’t tell at this point. Demand is very robust.

Rolling out to multiple countries

We still continue to anticipate rolling out to the 100 countries that we announced before; it is our fastest rollout ever. There will be some large countries in the month of December, but we anticipate still achieving the 100. In terms of cost, with each new product we see learning curves associated with ramping production. And the new products we have now are no exception to that. The difference is the number of new products that we have moving at once. As Peter said, and as you can tell from the announcements we’ve had the last couple months, this is the most prolific period in our history in terms of new product introduction and innovation [and] the past six weeks have been phenomenal in terms of new product introduction. And so we do see all of these costs associated with each of these, but I don’t see those costs accelerating on a per-unit basis as we go through the quarter; I see it very much being a production ramp across many, many new products.

iPads in the PC market

As you know, we don’t comment on our future views on products and roadmaps et cetera. But let me make some comments on your question. We continue to be very confident that the tablet market will surpass the PC market. There is incredible development in both ecosystems and products going on in the tablet space. It is already extremely compelling for many, many customers to choose a tablet—in particular, an iPad—over a PC. And when you look at the size of the PC market, there is an enormous opportunity for Apple there. Pretty much each quarter you see 80 to 90 million PCs being sold. And so we do think that the iPad and the iPad mini and the iPad 2 will all be extremely attractive offerings for people in lieu of PCs. And we’re going to continue to very much focus on the future of iPad, we’re very, very confident with what we have in the pipeline, and we’re extremely pleased to have launched the iPad mini and can’t wait until next Friday when we begin selling the very first units.

China

In terms of what we saw in China for Q4, revenue was $7.5 billion, that’s up 26% year on year, Mac was up extremely strong, up 44 percent. As you recall, we launched portables for the first time in July; the portables that we’d previously announced in the U.S. in June, we announced in China in July. iPad was up 45 percent in greater China, iPhone was up 38 and so all in all, a fantastic quarter.

That brings us to a full fiscal year revenue number of $23.8 billion for China, which is really phenomenal when you think about it—that’s up over 10 billion year on year, up 78 percent and greater China now represents about 15 percent of Apple for the fiscal year. And so we’re extremely happy with how we’ve done in China; as Peter alluded to in his opening remarks, we are continuing to invest in our own retail stores there. We continue to expand distribution with channel partners as well, and we continue to see it as an extremely exciting market with more and more people wanting Apple products.

iPads vs the competition

I haven’t personally played with a Surface yet, but the...What we’re reading about it is that it’s a fairly compromised, confusing product. I think one of the toughest things you do deciding [about a] product is to make hard tradeoffs, and decide what a product should be. We’ve really done that with the iPad, and the user experience is absolutely incredible. I suppose you could design a car that flies and floats, but I don’t think it would do all of those things very well, and so I think people, when they look at the iPad versus competitive offerings, are going to conclude they really want an iPad. I think people have done that to date and I think that they’ll continue to do that.

The iPad mini and cannibalization

We don’t really have an old product, we have only new products. You know, we just announced the fourth-generation iPad as well, and so the way that we look at this is that we provide a fantastic iPod touch, we provide an incredible fourth-generation iPad and an iPad mini and an iPad 2. Customers will decide which one or two or three or all four that they would like and will buy those. And so we’ve learned over the years not to worry about cannibalization of our own products; it’s much better for us to do that than somebody else to do it. And the far, far bigger opportunity here are the 80 to 90 million PCs that are being sold per quarter. There’s still over 300 million PCs being bought per year, and I think a great number of those people would be much better off buying an iPad or a Mac. And so, that’s been a much bigger opportunity for Apple. Instead of being focused on cannibalizing ourselves, I look at it much more that it’s an enormous incremental opportunity for us.

On the Apple TV

For Q4, we sold 1.3 million, that’s up over 100 percent year on year. That means that we sold more than 5 million Apple TVs during the fiscal year, which is almost double the previous year; we sold 2.8 the previous year. The business continues to do very well, but if you look at the revenue of this business versus our other businesses, it’s quite small. And so, it still has the “hobby” label, however, it’s a beloved hobby. We continue to focus on it and continue to believe there’s something more there and continue to pull the string to see where it takes us.

Why iPad sales declined

The June to September [quarter] was 17 million to 14 million. The first thing to note there is that as we talked about in the July call, the June quarter contained a 1.2 million increase in channel inventory. And so the actual sell-through sequentially in comparison looks very different than our reported sell-in numbers do.

The second thing is that the 14 million exceeded what we had expected to do in iPad. And the reason we had expected it to decline is that we believed that, based on the two or three years of results that we’ve got, normally we would see a seasonal reduction in the September quarter versus the June quarter. Part of this is because K-12 heavily buys in the June quarter; K-12 doesn’t buy very much in the September quarter, it becomes a higher-ed kind of move, and higher-ed is still buying notebooks for the most part. There’s some kind of normal seasonal. That’s exaggerated further when we announce a new product in March and have an enormous full quarter of demand in the June quarter; when you compare that to the September quarter there would be a natural phase down. In addition to all of that, it’s clear that customers delay purchases of tablets due to new product rumors, and these intensified in August and September.

Some of that was anticipated and some of it I wish wouldn’t occur, but it did occur. And so, that’s how I’d explain the sequential difference. On a year over year basis, because of the year-ago quarter having also a channel inventory build as we stocked the channel to the proper level, the sell-through, year over year, actually grew 44 percent. The underlying sell-through was extremely strong. We continue to feel great about how iPad has done, and with announcing the fourth-generation iPad just this week and adding iPad mini to the family, we think it’s going to be an incredible holiday season.

The iPhone 5 global rollout

What we did initially was we planned the first 30 to 40 countries prior to introducing the product and rolled those out across September in two different dates. The balance of the quarter, we planned with an eye toward the supply and what we think the demand would be, but we do plan these in advance and so it is not a precise science. We obviously have to plan those with several weeks of notice, and so occasionally it can be different than what we think.

iPad mini pricing philosophy

One of the things we try to do is to create a product that people will love for months and years after they’ve purchased it and continue using it in a robust way. So that’s what iPad mini has been designed to do; you can really see that more broadly on an iPad by looking at the usage statistics. As I’d mentioned earlier this week, over 90 percent of the Web traffic from tablets are from iPad. Apple will not make a product that somebody may feel good about the moment they’re paying for it and then when they get it home they rarely ever use it again. That’s not what we’re about, it’s not the kind of experience we want our customers to have, and I would encourage you to use an iPad mini, and I don’t think you’ll be using anything other than maybe another iPad or something after you do that.

iOS in the enterprise

We now have almost all of the Fortune 500 that are testing or deploying iPads, and I think with the recent announcements, penetration will only grow. We’ve also pushed fairly aggressively in the Global 500, and those numbers now are above 80 percent on both iPhone and iPads. I feel like we’re doing fairly well there; there’s clearly much more to do, but I’m feeling pretty good about it.

Component constraints

In terms of iPad and iPhone, I don’t see a component shortage gating us for the quarter in the numbers that we’ve given you in the guidance. I think we’ve solved some challenges there and feel good about our position. In terms of general shortages, on the iMac we’ll be constrained for the full quarter in a significant way. Part of that is that we’re beginning shipping the 21-inch iMac in November and the 27-inch in December, and so there will be a short amount of time during the quarter to manufacture and ramp those and I expect the demand to be robust. We will have a significant shortage there; the others are more based on how big is “big” from a demand point of view, and that is very difficult to predict. But you can tell that we’re extremely bullish on the demand with the revenue guidance that Peter talked about earlier.

iPad vs low-cost challengers

We’ve seen low-cost challengers before, and iPad continues to beat every other tablet on the market at any price. We think customers are very smart, we think they have very high expectations, we think that they want a device that can do more, and we’re confident that our focus on making the best product is what will win at the end of the day and we will stay true to that.

Samsung: Still on the supply chain?

I would not say that there’s been a significant change in our supplier partners. There’s always some change, obviously, but I wouldn’t describe any change as significant, and there hasn’t been a change that would have driven more cost. We continue to be a customer of Samsung, and continue to have a commercial relationship.

The decision to do a smaller iPad

The comment that I think you’re referencing [regarding Apple not doing a 7-inch tablet] is a comment that Steve had made before about 7-inch tablets, and let me be clear: We would not make one of the 7-inch tablets. We don’t think they’re good products, and we would never make one.

Not just because it’s seven inches, but for many reasons. One of the reasons, however, is size. I’m not sure if you saw our keynote, but the difference in just the real estate size between the 7.9—almost 8—versus the 7 is 35 percent, and when you look at the usable area, it’s much greater than that. It’s from 50 to 67 percent. The iPad mini has the same number of pixels as iPad 2 does; you have access to all 275,000 apps that are in our App Store that have been custom-designed to take advantage of the full canvas. And so iPad mini is a fantastic product, it’s not a compromised product like the 7-inch tablets. It’s in a whole different league.

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