This week Apple is reporting their financial Q2 earnings with monumental numbers across the board including a $11.6 billion dollar profit and 35.1 million iPhones sold. These numbers were analyzed soon after the earnings call was complete with a Question and Answer session headed by Apple and lead investors. Questions mostly rang in about the future of Apple and their financial greatness, but also hit upon products and services.
Q: Can you describe the iPhone momentum?
Tim Cook: We were thrilled with the 37 million iPhones we sold. This is substantially above our 20 million unit previous record. We would attribute it to a phenomenal customer reception. We made a very bold bet on demand, and it turns out we were short of supply throughout the quarter and ended with a significant backlog. We’re still short in key geographies. People were anticipating a new iPhone. I think we made the right decision to go with a broad range of iPhones. I think the 14th week was a big part of this, but everyone knew that. But we could not be happier — we thought we were setting bold bets, but it turns out we didn’t bet high enough.
Q: As we’re doing the math here, it seems like the average selling price is up on the iPhone, is that more iPhone 4S sold?
Cook: The iPhone 4S was the most popular iPhone. We typically see a higher mix at launch.
Q: Can you talk about the pent up demand and whether it’s in places like the US and Japan that had the phone all quarter, or places where they just got it?
Cook: I don’t want to comment on current sales trends, but given that we just launched in China, I’ll say the demand there has been very staggering. We’re not currently selling through our retail store and demand is off the charts. The other countries we launched in earlier this quarter were smaller, we’ll see how the supply and demand goes. We did make progress, but we’ll see how we do. Generally speaking the component environment is favorable, that let us over achieve on margin. Exception is hard drives, which is affected by tragic situation in Thailand. We didn’t have a supply issue, but we’re paying more for drives.
Q: Can you give us more detail on the hard drive situation? Is there an impact on Mac sales?
Cook: No material supply or cost impact on any of the product lines in December quarter. March quarter, we’re expecting a cost increase.
Q: You saw some declines in flash and DRAM pricing, can you talk about how favorable you expect pricing to be next quarter?
Cook: Last quarter we did receive better cost than we expected, particularly on displays and NAND DRAM, and we expect supply will exceed demand for the industry. The big exception is the hard drive, which is constrained across the industry, and I believe we can navigate the supply issue, but we’re paying more for them.
Q: On the iPad, did you see any impact from the lower price tablets, and how do you think about competition from Amazon?
Cook: We’re really happy with the 15.4 million iPads that we were able to sell. This is consistent with our long term belief that we’ve had since before we launched the iPad that this is a huge opportunity for Apple. I believe that there will come a day that the tablet market will be bigger than the PC market. IDC’s recent data shows that tablet sales exceeded desktop PC sales in the US. There is significant momentum in this space. In terms of competitiveness, the iPad ecosystem is in a class by itself. We now have 70k apps, compared to a few hundred for the competition. People really want to do multiple things with their tablets, and we don’t see these limited function tablets and e-readers in the same category. We don’t think people who want an iPad will settle for limited function. Last year was supposed to be the year of the tablet, and most people will agree it was the year of the iPad. We’re going to continue to innovate like crazy in this area.
Q: Can you talk about the iPhone 3GS in the post and prepaid market?
Cook: Each of the iPhone models were important in achieving the 37 million total units sold, so we’re glad to cover the broad range. But the iPhone 4S is the most popular. In the postpaid market there’s a much smaller difference in what the customer pays than the prepaid, so it’s too soon to tell. But we’re thrilled with the early results.
Q: What are these active discussions of using your cash? Is that different than in the past, or is that a big nothing?
Peter Oppenheimer: We’ve always talked about our cash, we know it’s growing. I would characterize our discussions as “active.”
Q: Is there a time frame that you’ll tell us that you’ve finished those discussions?
Oppenheimer: When we have something to announce, we’ll announce it.
Q: Can you give us an update on where you are with total distribution for the phone, and what your prospects are like in China?
Cook: We’re not at over a 130,000 points of sale in the world, we’re adding points of distribution. That’s us, carriers, key retailers. We added carriers last quarter: KDDI in Japan, Sprint in the US. We are extremely pleased with both companies, while the incumbents did incredibly well. [We have] nothing to announce on China expansion, but it’s important market and we continue to look at how to grow it farther.
Q: You started the quarter with strong iPhone demand and a backlog, why would you predict revenue be down next quarter?
Oppenheimer: We think iPhone will be up year over year but down from this quarter. Same with the iPad and Mac. Five reasons we’ll be down greater sequentially: One, 14th week. Two, that extra week was in a different place last year. Three, last year we increased iPhone channel inventory in the quarter, so that benefitted the comparable. Four, significant pent up demand for the 4S headed into the quarter, year ago was the second full quarter of the iPhone 4. Five, the US dollar is strengthened.
Q: Can you talk about the Anobit acquisition?
Oppenheimer: We have done acquisitions of small and medium companies that have great talent and a great start on a product or technology that we’d like to bring into Apple. We tend to do several a year, and our track record is strong.
Q: Can you talk about how they’re integrated in — do you run them as standalone, or are they integrated?
Cook: We don’t believe in lots of divisions, we run the company as one. The semiconductor team under Bob Mansfield does the hardware engineering for the whole company. Bob is integrating that team. We’re fortunate to have Anobit join us.
Q: You’re at 230 mobile carriers, there are 500 carriers in the world — what’s the plan? When will you aggressively enter India and Russia with a retail presence?
Cook: We’re selling in Russia through reseller and carrier partners, same in India. I’ve tried to be clear in the past that we have a ton more energy in China today. That doesn’t mean there’s a lack of effort or focus on the others, there’s just lest investment. The next country on the list is Brazil, there’s a huge opportunity there. I don’t envision Apple Retail going there in the near term. India, where we’re small, revenue went up 3x, but that’s a small base. We have to understand how we get to a large revenue figure. We have been adding carriers, I think we’ll add more carriers. We’re looking at the same list you are. In terms of major carriers, the number is much smaller, and the same thing with countries.
Q: Obviously the iPhone is doing well, but the iPad growth really outpaced expectations. Do you think Apple benefitted from the reduced-cost competition? Do you see that happening with the MacBook Air and Ultrabooks?
Cook: When I looked at the data, particularly in the US, after Amazon launched the Kindle Fire, there wasn’t an obvious effect plus or minus. I’ve heard from some customers that that occurred, whether that’s happening on a larger basis I don’t know. But looking at the data in the US, there was no change in the data. There is cannibalization of the Mac by the iPad, but we think there’s more cannibalization of Windows PCs by the iPad. We love that trend. You can see the iPad begin to appear everywhere. The enterprise has adopted it, we sold twice as many iPads into education as we did Macs. Of course the consumer has moved in a huge way to iPad. It’s winning market by market by market, consumers who look at it and think about the ecosystem and the overall experience, we’ll win a fair number of those. We couldn’t be happier. It’s remarkable we’ve sold 55 million iPads and we’ve only been in the business since April 2010.
Q: Are you seeing an accelerated refresh rate as people buy more things faster?
Cook: We’ve seen the iPhone be a catalyst. The iPad follows, and the Mac follows that. One product pulls another. On a macro level, it’s hard to put a finger on it, but many customers are pointing that out. We’ve seen this before with the halo the iPod created for the Mac. It’s not a phenomenon that is new to us.
Q: Android against iPhone, is this a two horse race similar to Mac vs Windows, and how do you see the sustainability of integrated model?
Cook: I wouldn’t compare it to Mac and Windows. The Mac has outgrown the market 20 quarters in a row but still has single digit market share. We’ve sold over 315 million iOS devices, and over 62 million were in the last quarter alone. I don’t have comparable numbers on Android, I’ve found it hard to get crisp quarterly reporting that is transparent. I think on the iPad, we all inherently believe that iPad is way ahead and there’s no comparable product to the iPod touch out there. I wouldn’t say it’s a two horse race, there’s a horse in Redmond that always suits up and always runs. There are always other players. We’ll just innovate and focus on making great products. We ignore how many horses there are, we just want to be the lead one.
Check out the rest of our Q2 Apple earnings call posts in the timeline below!