Apple's Cook talks quarterly earnings, new products

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Apple’s fiscal second quarter earnings announced Tuesday proved to be a mixed bag for the company—record sales for the March quarter, offset by a drop in income. But Apple CEO Tim Cook is optimistic about the company’s future, as he made clear during a conference call with analysts.

Here’s an edited transcript of what Cook had to say on Tuesday about Apple’s most recent quarter.

We’re now halfway through our fiscal 2013 and we’ve accomplished a tremendous amount. We’ve introduced and ramped production of an unprecedented number of new products, and we’ve set many new sales records. Our revenue for the first half was over $98 billion, and our net income was over $22 billion. During that time, we sold 85 million iPhones, and 42 million iPads. These are very, very large numbers, unimaginable even to us just a few years ago.

Despite producing results that met or beat our guidance, as we have done consistently, we know they didn’t meet everybody’s expectations. And though we’ve achieved incredible scale and financial success, we acknowledge that our growth rate has slowed and our margins have decreased from the exceptionally high level we experienced in 2012.

Our revenues grew about $13 billion in the first half of this fiscal year. Even though that’s like adding the total first-half revenue of five Fortune 500 companies, our average weekly growth slowed to 19 percent, and our gross margins are closer to the levels of a few years ago. Our fiscal 2012 results were incredibly strong, and that’s making comparisons very difficult this year. Last year, our business benefited from both high growth demand for products, and a corresponding growth in channel inventories, along with a richer mix of higher gross margin products, a more favorable foreign currency environment, and historically low costs.

These compares are made further challenging until we [hit the] anniversary [of] the launch of the iPad mini, which as you know we strategically priced at a lower margin. As [chief financial officer] Peter [Oppenheimer] will discuss, we are guiding to flat revenues year over year for the June quarter, along with a slight sequential decline in gross margins.

The decline in Apple stock price over the last couple of quarters has been very frustrating to all of us. But Apple remains very strong, and we will continue to do what we do best. We can’t control items such as exchange rates and world economies, and even certain cost pressures, but the most important objective for Apple will always be creating innovative products. And that is directly within our control.

We will continue to focus on the long term, and we remain very optimistic about our future. We’re participating in large and growing markets. We see great opportunities in front of us, particularly given the long-term prospects of the smartphone and tablet markets, the strength of our incredible ecosystem which we plan to continue to augment with services, our plans for expanded distribution, and the potential of exciting new product categories.

Take the smartphone market, for example. IDC estimates that the smartphone market will double between 2012 and 2016 to an incredible 1.4 billion units annually. And Gartner estimates that the tablet market is growing at an even faster rate, from 125 million units in 2012 to a projected 375 million by 2016.

Our teams are hard at work on some amazing new hardware, software, and services that we can’t wait to introduce this fall and throughout 2014. We continue to be very confident in our future product plans. Apple has many distinct and unique advantages as the only company [in] the industry with world-class skills in hardware, software, and services. We have the strongest ecosystem in the industry, with App Stores in 155 countries, iTunes Music Stores in 119 countries, hundreds of millions of iCloud users around the world, and most importantly, the highest loyalty and customer satisfaction rates in the business.

And, of course, we have a tremendous culture of innovation with a relentless focus on making the world’s best products that change people’s lives. This is the same culture and company that brought the world the iPhone and the iPad, and we’ve got a lot more surprises in the works.

On China

Apple’s Tim Cook (center) pays a visit to China, an increasingly important market for Apple.

We actually had our best quarter ever in Greater China; it was a record for us. The revenue came in at $8.8 billion: That includes retail stores that are in that region. That’s up 11 percent year on year—again, that includes retail stores that are in that region—which is the same as Apple is growing. The highlights for the quarter in China were that iPads grew 138 percent year on year, and we set new records for sell-through for iPhone and iPad during the quarter. There were some significant year-over-year timing differences with regards to channel inventory, relative to iPhone, that affected the compare year-over-year.

In particular, in the year-ago quarter, we increased iPhone channel inventory globally by 2.6 billion, as you probably recall. 1.6 of the 2.6 occurred in Greater China to support the launches that were in the March quarter last year. And so if you look at revenue on a sell-through basis, greater China revenue was actually up approximately 18 percent. And so it’s a bit better than it first looks. As I said, in the year-ago quarter, we launched the iPhone 4S with China Unicom in January, and we launched China Telecom in March; this year, iPhone 5 launched in December. And so it’s a very—very different set of dynamics in a year-on-year basis.

Going forward, we still see a significant opportunity in China. It’s a great market, we have 11 stores there; we expect to double those in less than two years. We have added about 8000 iPhone point-of-sales in the indirect channel to about 19,000 a day, and we obviously have a plan to add more, and further grow our distribution. This number’s obviously just too low currently.

We’re also innovating with our online store there, and adding different functionality to the store. China has an unusually large number of potential first-time smartphone buyers, and that’s not lost on us. We’ve seen a significant interest in iPhone 4 there and have recently made it even more affordable to make it even more attractive to those first-time buyers. And so we’re hopeful that will help iPhone sales in future.

On the competition

The smartphone market has always been competitive. The names of competitors have changed. In the beginning, RIM was the, sort of, the very strongest player because the smartphone as you know really got going in the enterprise area. And of course, today, our top competitor from a hardware point of view would be Samsung, married to Google on the operating system side.

They’re obviously tough competitors, but we feel that we have the best products by far. We are continuing to invest in innovative products, and feel really really confident about our product pipeline in both hardware, software, and also services. We have the best ecosystem by far, and we’re just going to keep augmenting it and making it better and better, and that shows up in both our loyalty ratings and our customer satisfaction. And so I’m feeling very good about our competitive position.

On potential new products

I don’t want to be more specific, but I’m just saying we’ve got some really great stuff coming in the fall and across all of 2014.

On the supply chain

We exited March quarter with no shortages, while achieving inventory turns of over 90, which is still to this day a staggering [number] for our industry. The December quarter was the largest quarter ever in the history of Apple and the technology industry as a whole. And, as you know, it included for us a number of new products, an unprecedented number, and of new product ramps. The reality is, the work we do to produce truly innovative products is very hard, and there’ve always been challenges that I’m sure we’ll face in the future; however, I would assure you that we are working very closely with our manufacturing partners to execute what we feel is a very exciting road map.

On iPhone and iPad sales

The numbers that we’ve seen from IDC would indicate they believe the [tablet] market in March declined by 30 percent from December; December being obviously a seasonally high quarter with the holiday. As you can see from our numbers, we declined 15 percent; and so, if that holds, we did much better than the market, and had a very nice pickup in market share.

iPad Mini
iPad mini

And, obviously, on iPad, we continue to have an ecosystem story that is unparalleled; we have 350,000 apps that are optimized for iPad versus a few hundred for our competition. And the overall experience and the fit and finish of the product, I think you would agree, is substantially better than the options there.

On the phone side, the numbers that you talked about, the sell-in comparisons year-over-year, you have to convert that to sell-through to look at the underlying demand. And as I’ve gone through before, we did grow channel inventory in the year-ago quarter because we were catching up on the rollout of the iPhone 4S. In fact, we grew about 2.6 million. And so you have to factor in to get at the real sell-through. However… if the market did grow by 30 percent—we, still after that normalization, we grew less than that. And so I think the question, or this point is not lost, and we do want to grow faster—we don’t view it, however, as the only measure of our health.

The things that are very important to us in addition to market share and unit volumes include things like customer satisfaction, which were the highest by far, winning JD Powers [customer satisfaction survey] nine times consecutively, with the customer loyalty and repurchase rates, which were the highest by far—the 95 percent according to Kantar. And the ecosystem commerce, which attracts developers, is incredible. Analysis says that we have 74 percent; so basically $3 out of $4 that are spent on apps are spent in our ecosystem.

And if you then look to usage statistics, they’re staggering at the usage of iOS versus other operating systems. And so, I think market share is important and unit volumes are important, but these other things for us are extremely important, because we’re all about customer experience and enriching lives.

Now, that said, we see an enormous number of first-time smartphone buyers coming to market particularly in certain countries around the world. And so what we’ve done with that, and we started last quarter, is we’ve made the iPhone 4 even more affordable, and which has made it more attractive to first-time buyers, and we caught up on the demand toward the—late in the quarter last quarter. And we’re continuing to do that in other markets. We believe that the phone for the price point that we’re offering is an incredible value for people that allows them to get into the ecosystem with a really, really phenomenal product.

On iPhone screen sizes

My view continues to be that iPhone 5 has the absolute best display in the industry. We always strive to create the very best display for our customers. Some customers value large screen size, others value also other factors, such as resolution, color quality, white balance, brightness, reflectivity, screen longevity, power consumption, portability, compatibility apps, many things.

Our competitors have made some significant trade-offs in many of these areas in order to ship a larger display. We would not ship a larger-display iPhone while these tradeoffs exist.

On updating iOS

I would just add to that that because we are not fragmented like our competition, we can update an OS with a major release and a substantial percentage of our customers will update to the—to our latest software. We’ve made that very elegant and very easy. Also, because the usage for iOS is so much higher, when we integrate things well, people use them a lot more. And so, just those concepts by itself are huge advantages from a customer experience point of view.

On the Mac

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