In his own words: Tim Cook on Apple earnings, cannibalisation and much more

How Apple's CEO sees nearly everything going forward

Here are the core comments from Apple CEO Tim Cook's 'state of the union' earnings address.

iPhone outside of the U.S.

Sequentially we increased over 70 percent from the September quarter, which was 3.5 times the market, and so we could not be happier with that. In terms of geographic distribution, we saw our highest growth in China, and it was into the triple digits. And so I would characterize it as we're extremely pleased.

The iPhone's screen size

The iPhone 5 offers a new, 4-inch Retina display, which is the most advanced display in the industry. No one comes close to matching the level of quality as the Retina display. It also provides a larger screen size for iPhone customers without sacrificing the one-handed ease of use that our customers love. We put a lot of thinking into screen size and believe we've picked the right one.

iPhone demand in the quarter

If you look at the iPhone sales across the quarter, we were very constrained for much of the quarter on iPhone 5. As we begin to produce more and ship more, sales went up with the production. iPhone 4 was actually in constraint for the entire quarter, and sales remained strong. And so that's how sales progress across the quarter.

Let me make one additional point on this: I know there's been lots of rumors about order cuts and so forth, and so let me just take a moment to make a comment on these. I don't want to comment on any particular rumor, because I would spend my life doing that, but I would suggest it's good to question the accuracy of any kind of rumor about build plans. And I'd also stress that even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business, because the supply chain is very complex, and we obviously have multiple sources for things. Yields might vary, supplier performance can vary, the beginning inventory positions can vary, I mean there's just an inordinately long list of things that would make any single data point not a great proxy for what's going on.

Apple's philosophy versus market share preservation

The most important thing to Apple is to make the best products in the world that enrich customers' lives. That's our high order bit. That means that we aren't interested in revenue for revenue's sake. We can put the Apple brand on a lot of things and sell a lot more stuff, but that's not what we're here for. We want to make only the best products.

And so what does that mean for market share? I think we've had a great track record here on iPod, doing different products at different price points, and getting a reasonable share for doing that. I wouldn't view those things as mutually exclusive as some might. But the high order bit is making a great product that enriches customers' lives and so that's what we're focused on.

Why the Mac decline?

I think the best way to answer this is if you look at the previous year['s quarter], our Mac sales were about 5.2 million. This year, they were 4.1 million, and so the difference is 1.1 [million]. Let me try to bridge that.

iMacs were down by 700,000 units year over year. As you remember, we announced the new iMacs late in October. And when we announced those, we announced that they would ship--the first one, the 21.5-inch--in November, and we did ship it at the end of November. We announced that the 27-inch would ship in December, and we did ship that in mid-December. And so there were limited weeks of ramping on these products during the quarter.

We left the quarter with significant constraints on the iMac. And we believe--we know--that our sales would have been materially higher if those constraints would not have existed. We tried to tell people this on the conference call in October; I think I said that we would have significant constraints on iMac. But I recognize to some folks, this may be a surprise.

Number two: If you look at last year, as Peter went through in his opening comments, we had 14 weeks in the quarter, we had 13 weeks in the quarter this year. Last year, in the average week, we sold 370,000 Macs.

The third part of the bridge here would be that our channel inventory was down from the beginning of the quarter by over 100,000 units, and that's because obviously we didn't have the iMacs in channel inventory and it was in significant constraint.

So if you just take these three factors, they bridge more than the difference between this year's sales and last year's sales. Now in addition to these three points I would point out two other things, and these are lesser things than the total of these other three, obviously.

One, the market for PCs is weak. IDC's last estimate, I believe, was around -6 percent. Two, we sold 23 million iPads and we obviously could have sold more than this because we could not build enough iPad minis to come into a demand balance. And so we've always said there's some cannibalization there, I'm sure there was some cannibalization of Macs there.

But the three large factors, the aggregated total of the three large--the iMac; the difference in seven days of the previous year; and the channel inventory--I think more than explains the difference between this year and the previous year.

As a side-note, if you looked at our portables alone, they were in line with IDC's projections of market growth.

Apple's Maps and web services

Let me start with the second part of this: We're working on some incredible stuff. The pipeline is chock full, I don't want to comment about a specific product, but we feel great about what we've got in store.

In terms of Maps, we've made a number of improvements to Maps since the introduction of iOS 6 back in September, and we'll roll out even more improvements across the rest of the year. We're going to keep working on this as I've said before until it lives up to our incredibly high standards.

You can already see many of these improvements, because they include things like improved satellite and flyover imagery, and improved categorization, improved local information for thousands of businesses and so forth. The usage in Maps is significantly higher than it was prior to iOS 6. In terms of other services, we feel fantastic about how we're doing.

In Notification Center, we've now sent over four trillion notifications, and this is mindblowing. As Peter mentioned in his opening comments, for iMessage, we've now sent over 450 billion and are currently sending over 2 billion per day. With Game Center, we've got over 200 million registered users. We have 800,000 apps in the App Store with over 40 billion downloads. And so I feel really, really great about it. There's obviously more stuff we can do and you can bet we're thinking about all of it.

iPhone mix

Your question on iPhone mix, let me bring up three points: One, the [average selling price] for iPhone was essentially the same year-over-year in the quarter that we just finished. Underneath that, if you looked at the mix of iPhone 5 to total iPhone, and then in the previous year you look at [iPhone] 4S to total iPhone, those mixes are similar. And then thirdly, I think you asked about capacities; in Q1, we saw similar results as we saw in Q1 of the previous year.

Will the 2013 refresh cycle turn over as much as 2012?

[Laughs] That's a question I won't answer. The 80 percent was an unusually high percentage for us. I don't know exactly what the historic numbers on that. But I can tell you that the number of ramps were unpredecented and the fact that we had new products in every category is something we have not done before. We feel great to have delivered so many products for the holiday season, though, and our customers have certainly expressed joy over it.

On China

If you look at our total Greater China, which would include our retail stores in China, our revenues were $7.3 billion in the quarter. So this is incredibly high, it's up over 60 percent year-on-year, and again that's comparing 13 to 14 weeks, and so it's really, the underlying growth is higher than that.

We saw exceptional growth in iPhones, into the triple digits. We shipped iPad very late in the quarter in December, and despite that, saw very nice growth. We are expanding in Apple retail there: In the year-ago quarter, we had six stores; we now we have 11. We obviously have many more to open there. In our premium resellers, we went over 400, up from a little over 200 in the previous year. And we increased iPhone point-of-sales from 7000 to over 17,000 there.

Now, this isn't nearly what we need, and it's not the final by any means, we're not even close to that, but I feel that we're making great progress. I was just over there recently and talking to a lot of different people, and I'm very happy with how things are going. It's clear that China is, it's already our second-largest region as you can see from the data that we've given you, and it's clear that there's a lot of potential there.

The Future of the Apple TV

You're asking me all the questions I won't answer, but let me see if I can find some comment to make that's productive. In terms of the product that we sell today, Apple TV, we sold more last quarter than we've ever sold before, eclipsing 2 million during the quarter. It was up almost 60 percent year-on-year, and so there's actually very good growth in that product. What was a small niche at one time of people that loved it is a much larger number that love it.

I have said in the past this is an area of intense interest for us, and it remains that. And I tend to believe that there's a lot we can contribute in this space, and so we continue to pull the string and see where it leads us. But I don't want to be more specific.

iPhone 5: New customers vs upgrades?

I don't have those specific numbers in front of me. But the iPhone 5 obviously with the numbers that we're selling, we're selling to a lot of new customers.

Future iPad supply and demand

iPad mini was very constrained. We ended underneath our target channel inventory range, which Peter had commented on earlier. We believe that we can achieve supply/demand balance on iPad mini later this quarter. That would likely mean that we'd need more units in the channel than we have today. I think that would be a fair conclusion to draw. It's probably worth pointing out, just to be totally clear, for last quarter, we had strong sales of iPad and iPad mini.

Constraints, tablet/computer cannibalisation

I think overall our team did just a fantastic job ramping a record number of new products during the quarter. We did have significant shortages due to robust demand on both iPad mini and both models of the iMac that persisted the entire quarter, and we are still short of both of those today, as a matter of fact. Additionally, supply of iPhone 5 was short to demand until late in the quarter, and iPhone 4 was short for the entire quarter. We believe that we can achieve a supply/demand balance on iPad mini during this quarter, and on iPhone 4 during this quarter. On iMac, we're confident that we're going to significantly increase the supply, but the demand here is very strong, and we are not certain we'll achieve a supply/demand balance during the quarter.

In terms of cannibalisation and how we think about this: I see cannibalisation as a huge opportunity for us. One, our base philosophy is to never fear cannibalisation. If we do, somebody else will just cannibalize it, and so we never fear it. We know that iPhone has cannibalised some iPod business, it doesn't worry us that it's done that; we know that iPad will cannibalise some Macs - it doesn't worry us.

On iPad in particular, we have the mother of all opportunities here, because the Windows market is much, much larger than the Mac market is. And I think it is clear that it's already cannibalizing some, and I think there's a tremendous amount of more opportunity there and as you know I've said for two or three years now that I believe the tablet market will be larger than the PC market at some point and I still believe that. And you can see by the growth in tablets and the pressure on PCs that those lines are beginning to converge.

I think the other thing for us--maybe not for others but for us--is that if somebody buys an iPad mini or an iPad, and it's their first Apple product, we have great experience through the years of knowing that when somebody buys their first Apple product, that a percentage of these people wind up buying another type of Apple product. If you remember what we had termed the "halo effect", for some time with the iPod with the Mac, we're very confident that that will happen and we're seeing some evidence of that on the iPad as well.

And so I see cannibalisation as a huge opportunity.

iPhone futures

The thing to consider on iPhone is that in the year-ago quarter, we built 2.6 million units of channel inventory, [for one thing] because we did the China launch in the March quarter, instead of in the previous quarter. And so the underlying sell-through from the year ago quarter was 32.5 [million]. The sell-in was 35 [million] as you can probably see on the sheet in front of you.

And so, in thinking through the number of iPhones to predict, we looked at the 32.5 number as a baseline. And we clearly believe that we're going to grow year over year, but I don't want to be more specific than that because Peter's already given you some top-level guidance and that's how we guide, in the aggregate instead of at the product level.

LTE buildouts and how they affect the iPhone

Today, we have 24 carriers around the world that provide LTE support for iPhone 5. Those are in countries like the US, Korea, the UK, Germany, Canada, Japan, Australia, and a few others. Next week, we're adding 36 more carriers for LTE support, and these carriers will be in countries that are currently not supporting LTE, so the LTE coverage now, as of next week is in Italy, Denmark, Finland, Switzerland, Philippines, also several Middle Eastern countries.

And so if you look at the total of all of these, and the incremental subscribers that are in those countries, it's over 300 million. That's the next range of LTE rollouts that I'm pleased to tell you about today.

Also, as you know, iPhone 5 also supports other ultrafast networks, like HSPA+, and with downloads up to 42mbps, which is three times the speed of the iPhone 4S. We feel very good about the situation that we're in, particularly with the adds next week.

Apple's pricing strategy

I'm not going to go into our pricing strategy. But we feel great about the opportunity of getting products to customers and a percentage of those buying other Apple ,products and we've obviously seen evidence of that through history and continue to see evidence of that today.

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