Tim Cook on iPad Sales, Cash Plans and Why Apple Believes It Is Undervalued
Apple reported a mixed bag of financial numbers on Wednesday, with overall sales and earnings ahead of estimates thanks to strong iPhone sales. However, its sales guidance calls for a significant sequential dip this quarter and iPad sales were not what analysts had been hoping for.
The company will make its case to Wall Street in a conference call set to begin in five minutes. Re/code will have live coverage here.
Amazingly upbeat, the conference call hold music that is.
First off, let’s have some charts.
Call getting under way with Tim Cook, soon-to-retire CFO Peter Oppenheimer and other executives.
Tim Cook: Revenue ahead of expectations and strongest non-holiday quarter ever. Says underlying business performance even stronger given inventory changes and impact of foreign exchange. Would have seen double digit growth excluding those two factors.
Apple gained phone market share in a number of areas including US, UK, Canada, Greater China and a bunch of other places, Cook said, with iTunes service revenue growing strongly and increasing profitability. “iTunes is a very important driver of our business.”
Cook notes Mac business gained share in the PC market as it grew in what is overall a contracting markets.
Cook says iPad sales were actually ahead of Apple’s internal estimates but said he knows it was below what Wall Street was counting on.
“We believe almost all of the difference can be explained by two factors.” A year ago the company increased inventory while reducing it this year. Last year there was a substantial backlog of iPad mini demand, while there was no such backlog this year.
Cook on cash policy.
Cook says innovative products still No. 1 focus and ail invest in R&D, stores, new categories. “We are not going to underinvest in this business.”
Apple has acquired 24 companies in the past 18 months.
“We will continue to seek investor comment going forward,” he said, saying investors should expect capital return plan update around this time each year.
Cook says a lot of Apple’s cash return policy focused on share buyback as company believes it is undervalued. However, dividend also got an 8 percent boost.
Now speaking is finance exec Luca Maestri, who is set to take over as CFO later this year.
Maestri says Mac share gains came on strength of laptop sales, reiterates Mac has gained share in 31 of the last 32 weeks and inventory slightly below target range.
On iPad, Maestri reiterates that inventory issues accounted for much of perceived iPad weakness.
Now giving usual quarterly anecdotal evidence on iPad and iPhone use in business and government. Eli Lilly and US Department of Veterans Affairs get shout-outs.
Apple ended quarter with $150.6 billion in cash, Maestri notes, down a bit amid accelerated stock repurchases.
The number of iPads purchased by consumers during the quarter was only down 3 percent versus a year ago (17.5 million v. 18 million a year ago, according to analyst Carolina Milonesi.)
Cook giving a big thank-you to Peter Oppenheimer, who is retiring at end of September. Notes Apple never missed earnings guidance in 10 years (Of course it basically sandbagged for nine of those years)
On to Q and A
Does strength of iPhone 5s mean Apple could actually charge more for high-end products? “We price them in such a way we think is a fair price for the value we are delivering,” Cook says.
On potentially lengthening smartphone upgrade cycle:
Some of the programs that the carriers are running may serve to increase the upgrade cycle (early upgrade programs like T-Mobile’s Jump). Some changes may lengthen cycle by removing subsidies.
“How these balance are very difficult currently to conclude,” Cook says.
On the fact that new products tend to cost more to make.
Most important thing Apple can do is continue to make great products, Cook says. Lots of new products cost more when they start out. Typically can lower cost over course of product’s lifecycle.
Can iPad sales re-accelerate? Will Office for iPad help?
Cook: It absolutely has been the fastest growing in Apple’s history. Only product that was instantly a hit in consumer, business and education. Sold over 210 million, which is more than we or I think anyone thought was possible. Almost twice as many as Apple sold iPhones in a comparable time and seven times as many iPods in same initial time period.
Growth still to come in schools and businesses.
“My belief is the match has been lit,” Cook said. “I’m confident we’ve got a really great start in education.”
Office, I believe, does help, Cook says. How much is unclear. Would have helped Microsoft more had they done that earlier. “Office I do see is still a very good franchise in enterprise,” Cook said. Says “wholeheartedly” welcomes them.
Lots still to come with iPad. “I can’t help but still be extremely excited about where we are,” Cook said.
On acquisitions: A bunch recently. “That shows we are on the prowl, you could say.” No rule against big ones either “We will spend what we think is a fair price.” But in no race to spend the most or buy the most.
Cook notes Apple will keep purchases quiet when it can, but that sometimes that isn’t possible…
On iPhone strategy — The part of the market we are interested in are people that want the best smartphone. Cook says doesn’t necessarily mean only high-end, noting that the company did well in prepaid and in emerging markets.
Cook says company’s strength in Greater China was more than China Mobile deal, also did better than expected in tablets and other areas.
Lots of people buying iPhone 5c and iPhone 4s this quarter were Android switchers, too.
Cook asked to explain comment from shareholder meeting on why Apple TV is no longer a hobby.
“When you look at sales of the Apple TV box itself and you look at the content that was bought directly off of Apple TV… [it is] over $1 billion. It didn’t feel right to me to refer to something that is over $1 billion as a hobby.”
We continue to make the product better and better.
Apple has sold about 20 million Apple TV devices so far. “I’m feeling quite good about that business and where it can go,” Cook says.
And that’s it…