This is Tim: Apple CEO on iPhones, China, and the drive to disrupt

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As usual, Apple CEO Tim Cook was the focus of attention during the company's quarterly earnings call with analysts on Monday. And, as usual, we've got a transcript of his remarks while on the call.

On China

We’ve been selling with China Mobile now for about a week, and last week was the best week for activations that we’ve ever had in China. So it’s been an incredible start. At this moment, we’re selling in just 16 cities with China Mobile...this number is projected to be over 300 cities by the end of the year.

So we’ve got quite the ramp in front of us, and we’re incredibly excited. This comes after a new high-water mark in China for us last quarter: We grew revenues, including our retail stores, at 31 percent. And we had some very, very strong sales on iPads. iPads in greater China were up 64 percent year-over-year, Macs were up 28 percent; this compares to a tablet market in China that’s growing at 21 percent per IDC, and a PC market that is contracting by 7 percent.

And so, in addition to the great iPhone news with China Mobile and how we’re looking there, we really, we really turned in a stellar quarter in Greater China overall, and we’re very proud of it.

On lowering the cost of iPhone components

You can see that we’ve projected in the guidance gross margins between 37 and 38 percent. That's despite going from a holiday quarter to a non-holiday quarter, we lose quite a bit of leverage from doing that. And so one of the primary things that’s going on there is cost.

On Touch ID and mobile payments

In general, we’re seeing that people love being able to buy content—whether it’s music or movies or books—from their iPhone using Touch ID. It’s incredibly simple and easy and elegant and it’s clear that there’s a lot of opportunity there.

The mobile payments area in general is one that we’ve been intrigued with—that was one of the thoughts behind Touch ID—but we’re not limiting ourselves just to that. So I don’t have anything specific to announce today. But you can tell by looking at the demographics of our customers and the amount of commerce that goes through iOS devices versus the competition that it’s a big opportunity on the platform.

On iPhone growth and Mac growth versus the rest of the market

As I’ve said before, our objective has always been to make the best, not the most. And we feel we’re doing that. If you look at what we did this year, we announced two iPhones for the first time, rather than one. And looking at last quarter, if you looked at our sell-through of what I’ll just call our entry phone, our mid phone, and our top phone (the 5s), all of those grew year-over-year versus the phones that were in those categories previously.

If you look at the emerging markets, we have to grow in these areas, and grow at reasonable amounts: In Latin America we grew at 76 percent year-over-year; in the Middle East and Africa we grew at 65 percent; in Central and Eastern Europe we grew 115 percent. In China we grew at 20 percent, but as you know we just added China Mobile, the largest carrier there, this quarter; we did not have a channel-load in China Mobile last quarter.

Also, in Japan, as we’ve added DoCoMo, iPhone units were up 40 percent. Now, when you translate that performance into revenue in Japan, we have that issue with the yen that Peter spoke about earlier and so the revenue growth looks much less than that because of the strength of the dollar there.

In North America, we did not do as well, and this weighed our results; our North American business contracted somewhat, year-over-year. One was that, as we entered the quarter and forecasted our iPhone sales, we actually sold more iPhone 5ses than we projected. So the mix was stronger to the 5s, and it took us some time to build the mix that customers were demanding. As a result, we lost some units for part of the quarter in North America. And relative to the world, it took us the bulk of the quarter, almost all of the quarter, to get the iPhone 5s into proper supply.

The other thing that happened in North America specifically was that some carriers changed their upgrade policies. And this affected last quarter and will have some effect on the current quarter. This restricted customers who were used to upgrading earlier than the 24 months that they were allowed, and sort of stretched the time out to be a hard and fast 24 months. And so that’s a major factor playing into the North American results.

So as I back up and zoom out on this and look at it, one of the most important things for us in the iPhone business was to do really well in emerging markets, and we had the best quarter ever from that respect. Another was to grow in China, because I think you can’t be in the business that we’re in and not have a reasonable China business. And you can see how we did last quarter, and we’ve now followed that up with a deal with China Mobile. And so I feel great about that.

I think part of what’s happening in North America is a short-term effect because of these upgrade policy changes; this affects a period of time and then it washes through. So, as I look at it, I feel very good about where we are, and I would guess that the market numbers that—some of the stuff that you’ve been seeing will actually be decreased as the revisions come out, given what you’re hearing about what everyone is saying.

On looking for success with China Mobile

I’m not going to give you a forecast for it. I think if you just back up and look at it from a commonsense point of view, China Mobile has more subscribers than anyone in the world; it has three-quarters of a billion. And so I do see it as a watershed moment for Apple, and have a very very strong belief in the abilities of the two companies to do great things together.

On the stock buyback program

We’ve been buying back stock. As you know, last year we increased the program overall—our cash return—doubling it to $100 billion, and $60 billion of that is buyback and we’ve been progressing on that. So we’re a big believer in buying back the stock, and that doesn’t change today whether the stock goes up or down.

On iPhone: new users versus existing upgraders

We saw a significant new-to-iPhone number, particularly on the 5c, which is what we wanted to see. So it’s clearly not just upgraders; as a matter of fact, the upgraders, particularly in North America, would have been less than we’d thought because of the changes in the upgrade policy that I talked about earlier.

On innovation at Apple

It’s never been stronger. I’m very confident with the work that’s going on and I think our customers are going to love what we’re going to do.

On current iPhone pricing

I think last quarter we did a tremendous job, particularly given the mix was something very different than we thought. It was the first time that we’d ever run that particular playbook before, and the demand percentage turned out to be different than we thought. We obviously always look at our results, and [figure out] what to change moving forward. And if we decide it’s in our best interest to make a change, then we’ll make one. Obviously, I’m not going to predict price changes.

We’re willing to make any product that’s a great product. Where our line in the sand is is making something that’s not fantastic.

On why the iPhone 5s is selling better

People are really intrigued with Touch ID. It’s a major feature that has excited people, and I think that, associated with the other things that are unique to the 5s, got the 5s a significant amount more attention and a higher mix of sales.

On iOS and enterprise

It’s clear that the enterprise area has huge potential and we’re doing well from a percentage of companies that are using iPhone and iPad—it’s up to unbelievable numbers. The iPhone is used in 97 percent of the Fortune 500 and 91 percent of the Global 500, and iPad is used in 98 percent of the Fortune 500 and 93 percent of the Global 500. And we have a number of accounts that have tens of thousands of iOS devices working.

90 percent of tablet activations in corporations are iPad; 95 percent of total activations were on iOS. I think that’s an incredible measure of ultimately how sticky the products are. You can get so much productivity out of an iPad or iPhone. And so I think the road in enterprise is a longer one; the arc is longer than in consumer, which can immediately go out and buy things.

On last year’s allusions to Apple exploring new product categories in 2014

Yes. Absolutely. No change.

On Apple’s long-term trajectory

I would say that innovation is deeply embedded in everybody here. And there’s still so much of the world that is full of very complex products; we have zero issue coming up with things we want to do that we think we can disrupt in a major way. The challenge is always to focus on the very few that deserve all of our energy. We’ve always done that and are continuing to do that.

Edited 1/30/14 at 10:20AM ET to fix a few typos and rephrase our editors' opening statement.

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