updated 11:06 pm EST, Thu February 6, 2014
Cook eager to show investors that company is confident in future
Just two weeks after it reported its fiscal Q1 2014 results -- which set records in many areas but disappointed iPhone-focused investors -- Apple CEO Tim Cook has revealed in an interview that the company has repurchased another $14 billion of its own stock , on top of over $40 billion spent on buybacks over the past year. Some $12 billion of the new purchase was part of the regular buyback program, with another $2 billion bought separately on the open market.
Cook told the Wall Street Journal that he was "surprised" by the eight-percent decline in the company's shares following its Q1 results. Though sales in nearly all areas had grown ahead of the industry as a whole, iPhone sales did not quite meet analysts projections -- even though Cook took pains to point out that some deferred revenue from sales meant that it actually did move about the number of units expected. Investors were also spooked by lower-than-expected forecasts for the current quarter, in which it was thought the first results of the China Mobile deal might offset normally-lower Q2 revenues.
In an interview with the newspaper, Cook said that the company has now returned more than $40 billion to investors through the share buyback program in just the past 12 months (and an apparent total of some $55 billion through the program since its inception) -- the largest amount ever spent on repurchasing stock over such a short time period. Apple had originally committed to buying back a total of $60 billion in shares by 2015, but expanded the goal to $100 billion following pressure from some investors.
Activist investor Carl Icahn, who has been trying to get Apple to buy back an additional $50 billion in its own shares on top of the expanded program and is bringing a proposal on the matter to the shareholder's meeting at the end of this month, told the paper he was pleased with the unexpectedly aggressive acceleration of the buyback program. Cook said he was "really confident on what we are doing and what we plan to do," and Icahn replied "so am I" when asked for comment. Icahn currently holds about $4 billion in AAPL at present.
Asked about the surprise investments, Cook said that "it means that we are betting on Apple ... [and] we're not just saying that. We're showing that with our actions." He referred to wanting to be "aggressive" and "opportunistic," taking advantage of the fall in AAPL price to save the company money long-term (as retired stock pays no dividends) as well as help make the stock more attractive. After once reaching the realm of $700-plus per share, investors worried that Apple's success could be a fad and bailed on the stock, sending it plummeting down below $400 a share before it eventually stabilized in recent months between $500 and $550 a share.
Cook is likely to have more to share soon, as he has already promised "updates" to the company's plans for investors in either March or April. For the most part, the board and the executive team at Apple have asked investors to trust them in the handling of Apple's enormous $160-plus billion cash hoard, which the company continues to grow even with the increased payouts thanks to its phenomenal sales worldwide. One issue for the company is that most of its profits -- about two thirds -- are overseas rather than domestic. Apple borrowed to fund the repurchase program, figuring it would save billions compared to the cost of "repatriating" the foreign profits under current US tax law (versus the interest cost on the loans needed to pay for the program).
The board and Apple's executive team have urged shareholders to vote against Icahn's proposal, saying that while it might benefit investors in the short term, the company preferred a slower and more deliberate program of financial management, with a minimum of debt. Prior to borrowing for the buyback program, Apple was essentially debt-free -- and would have to take on much more debt to finance Icahn's proposal if passed. Traditionally, shareholders have trusted Apple management on questions like this, even to their short-term detriment: between 1987 and 2012, Apple didn't pay dividends on its stock at all.
Cook has said on various occasions that while he does worry about the stock price, from a financial point of view he is mainly concerned about "the long-term interest of the shareholders," and wants to be able to adjust investment opportunities "not for the short-term shareholder, not for the day trader," a potentially veiled reference to investors like Icahn, who have a history of running up stock prices and then dumping most of their investment for quick profit without necessarily considering the harm it may do to a company over the longer term.
Among the opportunities Cook refers to are buyouts and acquisitions, something Apple has become more aggressive at doing lately. While it very rarely makes big acquisitions, over the past 15 months the iPhone maker has snapped up 21 small and medium-sized companies. Its only really large purchases have been in its own stock -- unlike rivals such as Google and Microsoft, both of which have received intense criticism of their multi-billion-dollar acquisitions.
"We've looked at big companies," said Cook on the question of whether Apple would be willing to make a large purchase or merger. "We have no problem spending 10 figures for the right company, for the right fit that's in the best interest of Apple in the long-term ... we may see a huge company tomorrow that we want to acquire, or something may happen in the stock market that's unpredictable," Cook said in pressing the case for more discretion in how to distribute or withhold Apple's earnings strategically.
While investors have complained that Apple has not reinvented a market with a truly innovative new product since 2010's iPad -- conveniently forgetting that the iPod, iPhone and iPad were produced an average of about five years apart from each other -- Cook reiterated that Apple has firm plans to enter a "new product category" this year. "We're not ready to talk about it, but we're working on some really great stuff," he said. Asked whether a "new product category" could refer to refinements, additional products within existing lines (like a third iPhone model) or new services rather than hardware, Cook declined to specify.
He also addressed the criticism that Apple is willing to sacrifice marketshare for what it considers to be "the best" products in a given category, saying that while the company's focus was on better products, it did not mean he would not fight for marketshare against rivals. He pointed out that when one excludes "smartphones that are used as feature phones" because of their low quality or limitations -- a direct reference to the majority of Android and chief rival Samsung's sales base -- Apple is either first or second in nearly every country.
"In the other places where we are number two, I'd rather be number one. And you can bet that we're working on that," he said. "I don't view that as being satisfied with being small or however you want to define it. I just want to say that the macro thing for us is making a great product, and we must do that. If we can't do that, we're not going to force ourselves to hit a price point that makes us produce a product that we're not proud of because we lose who we are in that. We're not going to do that."