Six takeaways from Apple CEO Cook's earnings call

Tim Cook talks iTunes growth, iPad weakness, and strength for the iPhone in emerging markets, among other topics.

Apple CEO Tim Cook has big plans for 2014.
Apple CEO Tim Cook has big plans for 2014. James Martin/CNET

It's a good day for Apple CEO Tim Cook.

Apple on Wednesday posted better-than-expected quarterly results, said it would return more cash to shareholders, and announced a 7-for-1 stock split. The Cupertino, Calif., tech giant said it sold 43.7 million iPhones, much higher than the expected 38 million and a record for the March quarter. The company also reported a surprise return to earnings growth -- its highest rate in the past six quarters -- and better revenue and gross margins than analysts and Apple had anticipated.

Cook noted Wednesday during a conference call with analysts that the strong iPhone sales "were broad-based, both from a product point of view, with demand for each of our three iPhones stronger than its predecessor, and from a geographic standpoint."

That's not the only thing that made him cheery. Here are some other tidbits from Cook's call with analysts:

1. Emerging markets -- especially China -- were big for Apple in Q2
Apple has been making a big push into emerging markets for some time, and the fiscal second quarter benefited from sales in those regions. Apple generated nearly $10 billion sales in China alone, benefiting from its recent partnership with China Mobile, the world's biggest wireless carrier. In 2011, Apple made only $12.5 billion from China the entire year. The year before, it made only $2.8 billion. The second quarter of 2014 marked an all-time record for iPhone sales in BRIC countries, Cook said, referring to Brazil, Russia, India, and China.

"I think that this quarter, if you were unsure, hopefully this quarter demonstrates to you that we can do well in a number of geographies from emerging markets to developed markets. Some of the numbers that we've experienced just to quote some of the more historic prepaid market through the first half of 2014; Brazil was up 61 percent, Russia was up 97 percent, Turkey was up 56 percent, India was up 55 percent, Vietnam was up 262 percent.

I could go on, but the point is that there's a number of markets out there where we are beginning to really catch on to a number of customers, and I am particularly proud of the results in these markets because these have not been historic strong points for Apple. We've been working at China for a while and have learned a lot and I'm very proud of what we've done there. But I think some of these other numbers I just read demonstrates that we're beginning to have really nice success outside of there as well."

As for greater China, Cook noted that iPhone sales were up 28 percent in the region, Mac units were up 13 percent, and iTunes software and services revenue more than doubled.

2. Apple has a lot of iTunes subscribers -- and it's looking at other ways to "monetize" those users
iTunes was no slouch during the second quarter. Cook revealed that there are now almost 800 million iTunes accounts, most of them with credit cards on file. That's up from 575 million at the time of Apple's developer conference last June. Second-quarter iTunes software and services revenue grew 11 percent from the previous year to $4.6 billion, to an all-time quarterly record.

"Tunes software and services revenue continue to grow at a double-digit rate, thanks to an incredible ecosystem and our very large, loyal and engaged customer base. With its strong momentum in growing profitability, iTunes is a very important driver of our business not only here in the United States, but around the world. We now have an almost 800 million iTunes accounts, most of these with credit cards. This is a staggering number," Cook said.

Apple already lets users buy music, books, and apps through an iTunes account. But recent reports have said the tech giant has plans to expand its mobile-payment efforts beyond the realm of digital goods to letting users pay for physical goods and services -- such as clothes or a taxi ride -- with an iTunes account.

"I do believe that we can monetize more than we owe from a services point of view in existing areas and in new areas. And I'm particularly encouraged that when I look at the App Store and how it's doing the strength was broad based. And in fact in China the growth was in the triple digits," Cook said.

3. Apple hasn't ruled out raising iPhone prices in the future
Some analysts have speculated that Apple may raise the price of the iPhone 6. Apple has long made good margins on its flagship device, but those have fallen in recent periods. Boosting the price would help its profits, and sales of the iPhone 5S have shown that consumers are willing to pay more to get the newest Apple device, as opposed to an older, cheaper version. Analyst Katy Huberty asked Cook if higher-than-expected iPhone 5S demand gives him confidence that Apple could charge more for "highly innovative products."

"We price things ... in such a way that we think it's a fair price for the value that we're delivering, and we make those [decisions] on each thing as it gets closer [to the] time to come to market," Cook said.

Sanford Bernstein analyst Toni Sacconaghi later asked Cook about the company's imperative to release great products that get people to upgrade but balance the margin pressure that comes from revolutionizing the iPhone from one generation to the next. Cook said:

"The most important thing, Toni, that we do is to make great products that really get our users excited to want the next one and that will always be the case. And you can bet that that's where the vast majority of all of our attention is on doing this thing. In terms of the [bill of materials] pressure of any new product, you have seen in the past that exists. I think you've also seen that we have a way of working down the cost curve. That was certainly very key in achieving the 39.3 percent gross margin from this past quarter. And as I said before, we price things at a level that is fair for the value that we are providing, and so we're certainly not stuck on certain price points. We price that values that are fair for the value that we are delivering"

4. Apple's working on new product categories, but it's not ready to reveal them yet
Cook on Wednesday again promised that exciting new products are ahead for Apple and that investors should be patient as the company perfects all the details. He noted that it takes longer for Apple to make products and enter new categories because it cares about getting every detail right.

"The key thing for us ... is to stay focused on things that we can do best and that we can perform at a really high-level of quality that our customers have come to expect. And so we currently feel comfortable in expanding the number of things we're working on. So we've been doing that in the background and we're not ready yet to pull the string on the curtain. But we've got some great things there. We're working on them. Very, very proud of and very, very excited about.

Apple's iPad Air.
Apple's iPad Air Josh Miller/CNET

But for us, we care about every detail and when you care about every detail and getting it right, it takes a bit longer to do that and that's always been the case, that's not something that just occur. As you probably know from following us for a long time, we didn't ship the first MP3 player, nor the first smartphone, nor the first tablet. In fact, there were tablets being shipped a decade or so before then, but arguably, we shipped the first successful modern tablet and the first successful modern smartphone and the first successful modern MP3 player. And so it means much more to us to get it right than to be first.

I think you can see so many examples out in the marketplace, where it's clear that the objective has been to be first. But customers at the end of the day don't care about that. That's not what they look for from Apple. They want great, insanely great and that's what we want to deliver, and so that's the way we look at it."

5. The iPad isn't selling as well as it used to
The only notable downside in Apple's fiscal second quarter was iPad sales, which were weaker than anticipated. Apple sold 16.4 million iPads compared with analysts' estimates for 19 million and versus last year's 19.5 million.

Cook attributed the shortfall to changes in channel inventory and said Apple met its internal estimates for iPad sales. He added that Apple has sold more than 210 million iPads since launching the first model and that the availability of Microsoft Office on the iPad should help boost sales. And Cook said high customer satisfaction levels, high numbers of people planning to buy an iPad, and substantial usage levels among iPad owners make him confident in the tablet's future prospects.

"When I back up from iPad, here's what I see. It absolutely has been the fastest growing product in Apple's history and it's been the only product that we've ever made that was instantly a hit in three of our key markets, from consumer to business including the enterprise and education.

And so, if you really look at it in just four years after we launched the very first iPad, we've sold over 210 million, which is more than we or I think anyone thought was possible at that period of time. And it's interesting to note that that's almost twice as many iPhones that we've sold in a comparable period of time, and over seven times as many iPods as we've sold in the period of time. So, I think it's important to kind of to put that in perspective. We've come a long way very, very quickly...

And so, when I back up from all of these, I feel great. That doesn't mean that every quarter, every 90 days is going to be a number that everybody is thrilled with. But what it means to me is that the trend over the arc of time that things look very, very good, that iPad has a great future. And of course the thing that drives us more than any of this are the next iPads if you will, the things that are in the pipeline, the things that we can do to make the product even better and there is no shortage of work going in on that nor any shortage of ideas."

6. Apple's going to keep returning cash to shareholders
Under Cook's leadership, Apple started returning some of its massive cash hoard to investors. Shareholders, such as activist Carl Icahn, have asked for even more, and Apple on Wednesday revealed a big increase to its dividend and share repurchase program. The company boosted the amount of cash that it's returning to shareholders by about $30 billion to more than $130 billion and said it would split its stock 7-to-1 to make its shares more accessible to investors. Cook said the company will update investors annually.

"We very much appreciate all of the input that so many of our shareholders have provided us on how the best to deploy our cash. We've continued to seek investor input going forward and we'll update you on our conclusions around this time each year.

This regular process allows us to continually evaluate return of capital in light of the most current information available and it enables us to be thoughtful about the size, mix and pace of the program. We continue to be in the fortunate position of being able to return significant capital to shareholders. We started doing so two years ago when we announced our first program of $45 billion and we more than doubled the program last April to $100 billion...

We think very deliberately about how much and in which way to return cash to our shareholders. We decided to continue to allocate the vast majority of the incremental capital return to share repurchases because we believe our current stock price does not reflect the full value of the company. The size of the share back increases the signal of the Board and the management team's strong confidence in the future of Apple.

We also understand the importance of the dividend to many of our investors and we are increasing it for the second time in less than two years. We believe this is a meaningful increase for those shareholders who value income and we are planning for annual dividend increases going forward."

 

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