This is Tim: Apple's CEO on the iPad, Apple TV, future products, and China

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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 Wednesday. And, as usual, we've got a transcript of his answers while on the call, beginning with edited highlights of his opening remarks.

The iPhone was key in driving our stronger-than-expected results. We sold almost 44 million iPhones, setting a new March-quarter record. These strong results were broad-based, both from a product point of view, with demand for each of our three iPhones stronger than its predecessor, and from a geographic standpoint. We gained smartphone share in many developed and emerging markets including the U.S., the U.K., Japan, Canada, Germany, France, Vietnam, and greater China, just to mention a few.

iTunes software and services revenue continued to grow at a double-digit rate, thanks to an incredible ecosystem and our very large, loyal, and engaged customer base. With strong momentum and growing profitability, iTunes is a very important driver of our business, not only here in the United States, but around the world. We now have an almost 800 million iTunes accounts, most of these with credit cards. This is a staggering number.

We continued to gain share in the personal computer market as well. We defied industry trends again by growing while the market contracted. Our bold decision to make OS X free has resulted in the largest-ever percentage of the Mac install base running on the latest version of the operating system, just months after its release.

iPad sales came in at the high end of our expectations, but we realized they were below analyst estimates, and I would like to proactively address why we think there was a difference.

We believe almost all of the difference can be explained by two factors: First, in the March quarter last year, we significantly increased iPad channel inventory, while this year, we significantly reduced it. We will go into more detail about this later.

Second, we ended the December quarter last year with a substantial backlog of iPad minis that were subsequently shipped in the March quarter, whereas we ended the December quarter this year near supply-demand balance.

We continue to believe that the tablet market will surpass the PC market in size within the next few years, and we believe that Apple will be a major beneficiary of this trend.

We are continuing to invest in our retail stores, and since our last call, we’ve opened our first stores in Brazil and Turkey, and we now have retail stores in 15 countries around the world.

And I’m looking forward to welcoming our new retail and online leader, Angela Ahrendts, who will be joining Apple’s executive team next week.

We estimate that over the last six months, we’ve added over 60 million new registered users of our four product categories. Additionally, over two-thirds of people registering an iPad in the past six months were new to iPad, while over half of the people registering iPhones were new to iPhone.

It’s wonderful to add tens of millions of first-time Apple product users, especially considering the strong halo effect we’ve seen over and over again in our history. Customers who have a great experience with their first Apple product often become loyal and happy owners of multiple Apple products over time.

As always, I’d like to thank our talented employees who make these results possible through the creativity and passion they bring to their work every day. And I’d like to thank our hundreds of millions of customers for their loyalty and enthusiasm, and for continually inspiring us to surprise and delight them.

Apple has created tremendous value for shareholders by developing great products that enrich people’s lives, and that will always be our top priority and driving force. We’ll continue to innovate by investing in research and development, and capitalizing on our strengths in hardware, software, and services. We’ll keep investing in our supply chain to promote scale and efficiencies; expanding our global presence by building retail stores; investing in marketing and distribution; and extending our reach into new markets.

We are expanding Apple’s products and services into new categories, and we are not going to under-invest in this business.

We’re also investing through acquisitions, and we’ve acquired 24 companies in the past 18 months.

To invest organically, and to make acquisitions strategically, we need to maintain financial flexibility.

We decided to continue to allocate the vast majority of the incremental capital return to share repurchases, because we believe our current stock price does not reflect the full value of the company.

Finally, before we start the Q&A, I’d like to take a minute to talk about my dear friend and colleague, Peter Oppenheimer. As you know, Peter will be transitioning from the CFO role in June. Peter has been Apple’s CFO for ten years, and the list of his accomplishments is immense. Apple is now more than 20 times the size it was when Peter became our CFO, and his expertise, leadership, and incredibly hard work have been instrumental to the company’s success.

I’d like to thank him very publicly for his contributions to Apple, from the very bottom of my heart, and wish him all the best in his approaching retirement at the end of September.

And I’d also like to recognize him, that he has never never missed guidance in his ten years as CFO, which must be an all-time record for CFOs.

On iTunes software and services profits

Keep in mind, in that category there are several things, not just the app store kind of revenues. And so if you looked at App Store only, it would look a little different than what you’re saying [a sequential decline in profits year over year].

In terms of your question about monetization, I do believe that we can monetize more than we are from a services point-of-view, in existing areas and in new areas, and I’m particularly encouraged that when I look at the App Store and how it’s doing, the strength was broad-based. In fact, in China, the growth was in the triple-digits.

On iPhone 5s vs 5c and charging more for products

We’ve priced things in such a way that we think is a fair price for the value that we’re delivering. And we make those decisions on each thing as it gets closer to market.

On the strength of the iPhone internationally

We saw some pressure in the quarter because of the stricter enforcement of upgrade policies, but this is primarily in the U.S. as I’d mentioned last time.

But if you really look at iPhone, the strength of iPhone was very broad-based, and as I’d mentioned we gained share in a whole host of markets; from developing markets like the U.S., U.K., France, [and] Germany to more of emerging markets like China [and] Vietnam, and had the largest total sales of iPhone in the BRIC countries that we’ve ever seen in our history. And so we feel very, very, very good that the strength was broad-based.

On iPhone replacement cycles and upgrade frequency

Just to be clear, on the iPhone 4 question, we’ve sold a very, very low single-digit percentage of those, and so it has extremely minimal impact or result on the quarter.

In terms of the general upgrade, or the installed base, some of the programs that the carriers are running may serve to increase the upgrade cycle, because there’re some areas where customers can pay a bit more in the beginning and have the ability to essentially upgrade each year.

But what I see as the bigger opportunity for Apple is that the smartphone market is still only a billion or so units, and it will eventually take over the entire mobile phone market. We’ve seen our ability to attract new users to iPhone to be very significant in the emerging markets. I mean, we were seeing new-to-iPhone-numbers on the iPhone 4s, sales in the 80 percentages, in certain large geos.

And so this, to us, gives us a great comfort that we can continue to grow and we may not be able to attract some of those buyers to our top phone because of price point. But if we can get them in on the entry iPhone, it gives them a great product at a great value and gets them into the ecosystem. And, as you know from following us for a while, our ability to keep customers is very good, and our ability to show other products that Apple produces to a family that’s buying Apple products is also very good.

And so, at the macro level, I see the opportunity of the market—and getting more people into the Apple ecosystem—much larger than any of the noise around the different carrier plans. Some of which I think help, and some of which I think work the opposite way, and it’s completely unclear to me how those net.

It’s probably also important to know that the bulk of the things you’re seeing in the U.S. are not occurring in many of the other geos, in terms of the upgrade polices and so forth. I mean, each country has its own kind of cadence associated with this; the U.S. is in the 30 percentages of our business, not 100, so it’s important to weigh it with the proper perspective.

On creating great products that increase upgrading

The most important thing that we do is to make great products that really get our users excited to want the next one, and that will always be the case. And you can bet that that’s where the vast majority of all of our attention is, on doing those things.

In terms of the pressure of getting new products, you have seen in the past that exists, I think you’ve also seen that we have a way of working down the cost curve. That was certainly very key in achieving the 39.3 percent gross margin for this past quarter.

And as I’ve said before, we price things at a level that is fair for the value that we’re providing, and so we’re certainly not stuck on certain price points. We price at values that are fair for the value that we’re delivering.

On the iPad and its decline year over year

It’s a good question. Let’s talk about iPad a little more than we did in the comments.

When I back up from iPad, here’s what I see: It absolutely has been the fastest-growing product in Apple’s history. And it’s been the only product that we’ve ever made that was instantly a hit in three of our key markets, from consumer to business, including the enterprise and education.

And so, if you really look at it, in just four years after we launched the very first iPad, we’ve sold over 210 million, which is more than we or I think anyone thought was possible over that period of time.

And it’s interesting to note that that’s almost twice as many iPhones as we’d sold in a comparable period of time, and over seven times as many iPods as we had sold in the period of time. And so I think it’s important to kind of put that in perspective. We’ve come a long way very very quickly.

Looking at it by market a bit, which I think is important; I think Luca mentioned a little bit of this in his comments, in the education market in the U.S. we have a 95 percent share. And so the focus in education is on penetration, is in getting more schools to buy. And my belief is the match has been lit, and it’s very clear to the educators that have studied this that student achievement is higher with iPad in the classroom than without it. And so I’m confident we’ve got a really great start in education, far beyond the U.S. now; this is happening in many, many parts of the world.

In the enterprise market, we’re seeing virtually all—98 percent—of the Fortune 500s that are using iPad, and we’re seeing, according to the latest data we have, that 91 percent of the activations of tablets in enterprise were iPad. And so this is also an astonishing number, and many of those enterprises are writing apps that are key proprietary apps for running that business. And this is great for that company because they’re more productive as a result of that.

And so once again, our—just like in education in a way, what we have to do in enterprise is focus on penetration. It has to be deeper, and broader, but in terms of having people begin the process, begin writing apps, we’re doing a pretty good job of that.

In the retail market, if you look at the U.S. as a proxy—the NPD numbers from March just came out a few days ago, and we had 46 percent share. And, embedded in that 46 [percent], there’s a lot of things in there that I personally wouldn’t put in the same category as iPad, and that are weighing the share down. It’s certainly a market we wouldn’t play in, and a type of product you would never see an Apple brand on. So we feel like we’re doing well, there.

Office [for iPad], I believe, does help. It’s very unclear to say how much; I believe that if it would have been done earlier, it would have been even better for Microsoft, frankly. There’s lots of alternatives out there from a productivity point of view: some of which we brought to the market, some of which many, many innovative companies have brought. But I do see that Office is still a very key franchise in the enterprise, in particular, and I think having it on iPad is good. And I whole-heartedly welcome Microsoft to the App Store to sell Office. Our customers are clearly responding in a good way that it’s available. But I do think it helps us particularly in the enterprise area.

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