updated 03:02 am EDT, Thu April 24, 2014
CEO delves into details to add color to Apple earnings announcements
Beyond the "big story" about Apple's analyst-beating earnings, profits and surprise stock split, financial analysts got a chance to ask some probing questions during Wednesday's Apple conference call discussing the company's fiscal Q2 results. In a Q&A session accompanying the announcements, Apple CFO Lucas Maestri and CEO Tim Cook revealed some details and their thoughts on diverse areas of the business, ranging from specifics on China to the changing US smartphone landscape.
Cook told Katy Huberty, an analyst at Morgan Stanley, that Apple can "monetize more than we are" in terms of iTunes software and services growth, which covers the various app, e-book and media stores. She had asked why iTunes growth seemed be slowing even though the company has hit a record 800 million account holders. Cook admitted the company could do more, "in current areas and new areas," but noted by way of contrast that the growth of the iTunes empire in China was "in the triple digits" from a year ago.
Maestri handled a question from a Goldman Sachs analyst about why the June guidance of $32-34 billion reflected such a drop from the $45 billion just reported for the March quarter, also typically a "slower" period outside its usually iOS device announcement window (fall) or its holiday quarter. Maestri said that factors included lower expections of favorable currency exchanges, "some loss of leverage" (a reference to the incoming Galaxy S5 and other competition-worthy smartphones), and "a less favorable mix" -- referring to a drop in highly-profitable iPhone and iPad sales -- "as we continue further away from the launch quarter," signalling that the next big iPhone and iPad announcements may again come in the fall.
Cook was asked if Apple was feeling some "pressure" on iPhone upgrade cycles in the US due to changes in the way carriers handle upgraders and in terms of subsidies. While he admitted to some concerns in the US market, he noted that the carrier changes -- which offer a mild financial penalty for frequent upgraders but lower average monthly bills, or allow frequent upgrades for bigger up-front phone costs -- were mostly confined to the US, which is not the iPhone's fastest growth market anymore (it makes up about 30 percent of Apple's iPhone business, however, and thus is still the largest single portion). Cook also said that some US consumers would be likely to upgrade more often than before under the changed plans, exchanging the modest increase in overall cost for more freedom to get the most recent models.
Cook also noted that Apple's iPhone sales will continue to grow simply because the entire smartphone market is still expanding -- it's "only" at a billion units at the moment, but will eventually replace all non-smartphones as well. "We can't attract all buyers at our top prices," Cook admitted, but said the company offers "entry-level" older iPhones that "get people into the eco-system," which leads to future purchases and other product buying. He further rattled off a number of countries and markets where iPhone sales are way up, saying that the company's sales in Brazil, Russia, India and China (the so-called "BRIC" developing markets) had all seen record growth in the March quarter. Vietnam, as an example, saw 262 percent growth from the year-ago quarter.
UBS analyst Steven Milunovich wondered if Apple would continue its recent trend of multiple acquisitions per year, given the amount of money it has and its ability to engineer high-quality products in several areas. Cook repeated the mantra from the Jobs era that the company prefers to focus on a few things and do them very well, but he did admit that the company currently "feels comfortable" looking at new categories. Reiterating that Apple will be bringing new products to market, Cook said that "when you care about every detail and getting it right, it takes a bit longer to do that."
Getting increasingly passionate, he went on to say that Apple "didn't ship the first smartphone, music player or tablet. We just shipped the first successful modern smartphone, tablet and music player. It's very important to us to get it right. Customers don't want 'first' from Apple, they want insanely great." To that end, he said Apple was "on the prowl" for "great people and great technology that fits with us culturally. We're not in a race to spend the most or acquire the most," he said, but added "we want to make the world's best products."
Shannon Cross of Cross Research asked Cook for his thoughts on the competitive landscape with smartphones. Cook said it had "a lot of moving parts" with "a lot of [competitors] giving up to some degree" -- a reference to Nokia's sale to Microsoft and Motorola Mobility's sale to Google. "It's mostly the same to us, though: we sell to the market of people who want the best smartphones, not just the premium market," noting that the company still carries the iPhone 4S.
Asked about the China market specifically, Cook noted the 28 percent growth, how Mac sales were also up sharply, and that nearly all of the switchers to iPhones there are coming from Android phones. He noted that Apple plans to triple the number of stores it has in China over the next two years, and wants to vastly increase the number of "points of sale" there, which number about 40,000 currently.
Addressing the modest drop in iPad sales again (following an explanation earlier in the call that corrected the false impression generated by sell-in numbers), Cook said that "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," indicating that he was not worried about the relatively flat performance of the iPad in the March quarter, or that it signalled a decline or saturation of the tablet market.