Apple CEO Tim Cook took to the phones today to talk with analysts about Apple's third-quarter results for 2015, along with Apple Watch, iPhone, China, and more. Follow along below with our live-updating transcript of his remarks.
Tim's opening remarks
Thanks, Nancy. Good afternoon, everyone, and thanks for joining us. It's been a busy and exciting quarter, and I'm delighted to talk to you about the highlights.
Revenue and numbers
Today, we're proud to report record June quarter results with revenues of 49.6 billion dollars, and earnings of 10.7 billion. Our year-over-year growth rate in the fiscal third quarter accelerated over the first half of fiscal 2015. Revenues were up 33 percent, our fastest growth rate in over three years, and earnings per share were up 45 percent.
We achieved these incredibly strong results despite reducing channel inventories across our product lines by over 1 million units, and despite the challenging FX environment. Revenue exceeded the high end of our guidance by 1.6 billion dollars as we topped our internal expectations for sales of iPhone, iPad, Mac, and Apple Watch.
We had another stellar quarter for iPhone, establishing a new June quarter record. iPhone unit sales grew 35 percent, which is almost three times the rate of growth of the smartphone market overall, and we gained share in all of our geographic segments. iPhone revenue grew even more strongly, up 59 percent.
The strong iPhone results were broad-based in both developed and emerging markets, and we experienced the highest switcher rate from Android that we've ever measured.
Most importantly, iPhone customer metrics are tremendous. ChangeWave's most recent survey of U.S customers found that iPhone has the highest customer satisfaction rate of any smartphone brand by a wide margin, and that among iPhone owners planning to purchase a new phone, 86 percent plan to purchase another iPhone. That compares to 50 percent repurchase intent for the next-highest brand measured.
We also had a tremendous record quarter for Mac, continuing to defy the industry trend with unit growth of 9 percent, in a market that IDC estimates contracted by 12 percent. Growth was fueled by great response to our new MacBook, and we're working hard to catch up with customer demand.
We generated over 5 billion dollars in services revenue, setting a new all-time record. Within services, the App Store produced its best quarter ever, with revenue growing 24 percent.
Our results from greater China were outstanding, with revenue growth of 112 percent, and iPhone unit growth of 87 percent. This is particularly impressive given IDC's estimate of only 5 percent growth for the greater China smartphone market.
We also achieved our highest-ever PC market share in the segment, with Mac sales growing 33 percent over last year. And our ecosystem in China continues to grow at a very fast pace, with App Store revenue more than doubling in the quarter. [CFO] Luca [Maestri] will go into more detail on our product and financial results in a moment.
A major highlight of the past quarter for all of us here at Apple was the launch of Apple Watch in April. As you know, we've been very excited to get this revolutionary product to customers.
We started taking pre-orders in nine countries on April 10, and demand immediately exceeded supply by a wide margin. To prioritize those first orders and to deliver the best experience for our customers, we delayed the availability of Apple Watch in our own retail stores until mid-June.
We made huge progress with a production ramp across the quarter, and near the end of the quarter, expanded into six additional countries. And in just the past few days, we've been able to catch up with demand, enabling us to expand Apple Watch availability to a total of 19 countries currently, with three more countries to be added at the end of this month.
The feedback from Apple Watch customers is incredibly positive, and we've been very happy with customer satisfaction and user statistics. Market research from Wristly measured a 97 percent customer satisfaction rate for Apple Watch, and we hear from people every day about the impact it's having on their health, their daily routines, and how they communicate. Our own market research shows that 94 percent of Apple Watch owners wear and use it regularly if not every day.
Messaging and activity features are among the most popular, and social networking apps including Twitter, WeChat, and Line are seeing the most usage among third-party apps.
We believe that the possibilities for Apple Watch are enormous, and that's been reinforced in just the first few weeks since it became available to customers. For example, doctors and researchers at leading hospitals in the U.S. and Europe are already putting Apple Watch to work in improving patients' lives.
Nebraska Medicine, the latest hospital to adopt Apple Watch, has rolled out new apps that facilitate communication between patients and doctors, and provide quick access to important charts and dosage information.
Ochsner Health System of Louisiana is using Apple Watch with hypertension patients to gather important information like daily activity and blood pressure levels.
And leading cancer centers like London Kings College Hospital are incorporating Apple Watch into trials for ongoing care and monitoring of cancer patients.
Great Apple Watch solutions go well beyond health care: Users are tracking their fitness, getting breaking news alerts, following their investments, connecting with friends, and living a healthier day.
The user experience for Apple Pay and Siri is nothing short of incredible, and customers are enjoying countless other features through the over 8500 third-party apps available for Apple Watch.
This is just the beginning of what this new platform can deliver. With Apple watchOS 2, developers now have the ability to build richer and more powerful native apps for Apple Watch, taking advantage of the heart rate sensor, the Digital Crown, accelerometer, and more, ushering in a whole new class of apps designed specifically for the wrist.
It's a rare and special privilege to launch a new platform with such promise and potential, and I know I speak for everyone at Apple when I say that we can't wait to see what our developers and customers do with it.
We hosted a fantastic developers' conference in June, with thousands of attendees from 70 countries coming together with Apple engineers to share in the excitement of our three operating systems: OS X, iOS, and watchOS. We've been working hard to make our products even more intelligent, more powerful, and more meaningful in all aspects of our customers' lives, while adding new Continuity features to make the experience across our devices more seamless than ever, and preserving the security and privacy our customers deserve.
Public betas of OS X El Capitan and iOS 9 are available now, and customer versions of all three updated OSes are on schedule and will be available in the Fall.
We're very excited about our News app, coming to iPhone and iPad with iOS 9. We believe that it will be the best news-reading experience on any mobile device, combining a beautiful magazine layout with real-time customized digital media content. News will follow over a million topics, and pull relevant stories based on the user's specific interests without compromising their privacy.
We've already signed 25 leading publishers representing more than 75 of the world's most influential news, sports, business, and magazine titles—including CNN, the New York Times, the Financial Times, ESPN, Bloomberg Business, Conde Nast, Hearst, Reuters, Time Inc, and the Daily Telegraph.
The September quarter is off to an exciting start. We're thrilled by the response to Apple Music, which launched in over 100 countries on June 30. Apple Music is a single, immersive app that combines the best ways to enjoy music, all in one place. It's an incredible streaming music service, a pioneering worldwide live radio station broadcasting 24 hours a day, and a great place for music fans to connect with their favorite artists.
Customers and reviewers love the human curation features of Apple Music and the way it's helping people discover new music. Millions and millions of customers are already experiencing the new service using the three-month trial period, and the numbers are growing substantially every day. Over fifteen thousand artists have signed up to post on Connect, where we are already seeing great original content including a world-premiere video by Drake.
Millions of listeners around the world are tuning into Beats 1, the first of its kind worldwide radio station featuring some of the most talented and passionate music lovers on the planet. This all adds up to a renewed sense of excitement around music, which we love and expect to continue as Apple Music gets traction with customers.
Last week, we launched Apple Pay in the U.K., bringing customers our easy, secure, and private way to pay. On day one, we had an incredible roster of over a quarter of a million locations and major credit and debit cards from many of the U.K's most established banks supporting Apple Pay.
Customers are using Apple Pay to ride the London Underground, as well as the overground system of transports for London, and we hope this will be a model for other public transportation systems around the world.
In the U.S., we've seen fantastic support from merchants of all sizes. We're excited to see this momentum continue with the new Square reader, coming this fall. It will bring Apple Pay to even more neighborhood businesses where you pay every day—from your corner coffee shop to your local farmers' market—bolstering the 80,000 small and medium-sized businesses we're already adding every month.
American Express will add Apple Pay support for its robust portfolio of corporate cards next month, offering businesses and their employees a new way to make easy and secure payments.
And as we head into the school year, 700 universities and colleges across the U.S. will accept Apple Pay, such as Auburn University, the University of California Irvine, Colorado State University, the University of Kentucky, and the University of Oklahoma, among many others.
We're on track for Apple Pay acceptance at over 1.5 million U.S. locations by the end of 2015. I'd like to thank our customers, developers, business partners, and employees for another record-breaking quarter. We're very hard at work on our exciting pipeline of new hardware, software, and services, and we're continuing to expand our global reach into new markets.
And we're passionately committed to leaving the world better than when we found it. With that, I'll turn the call over to Luca.
On iPhone's sequential unit decline
Katie, it's Tim. As Luca mentioned, the channel inventory did go down 600,000. We sold more units than we thought we would, and so that was a part of that.
The other part of it is that we always run with just the amount of inventory that we think we need, and so to do the degree that sales are distributed in the countries with disproportionately with shorter supply chains, or the standard deviation demand is less, we would always choose to have less.
And so in this particular quarter, we were able to end—to basically, right at the bottom end of our range. And we view that as a good thing, not a bad thing.
Obviously, the revenues could have been much higher if we would've expanded the channel, but if you don't need to do that, that's not how we think about the business. We run the business for the long-term, not the 90-day clock.
In terms of the... what's going on with iPhone: The 35 percent growth [year-over-year] is almost three times the market and if you look at it at a little narrower regional level, western Europe grew 30 percent versus a market of 7 [percent] so four times market; Japan grew over five times market; we doubled in Korea versus a market that was shrinking; and in India we grew at 93 percent. And this is on top of the greater China numbers that we've already covered that grew 87 percent during the quarter against a market of five percent.
And so we did exceptionally well, I think, in any way that you look at it. In terms of our—the percentage of customers that have upgraded to a 6 and 6 Plus versus those that have not upgraded, it's 73 percent, meaning that 27 percent of the install base of customers prior to the launch of 6 and 6 Plus have now upgraded.
And so we view that as a very bullish sign on the future, that there's a lot of headroom left for upgraders. We also are incredibly happy to see the highest Android switcher rate that we've observed. And so, from our point of view, the iPhone is doing outstanding.
On where iPhone growth is going from here
Katie, we purposely just give guidance for the current quarter. We've done that, and obviously the kind of numbers that have indicated growth in the revenue means that iPhone would have another stellar quarter.
And so we're very confident that this quarter's going to be great; how the future looks, we'll take it one quarter at a time.
But as I back up from it and look at it from more of a macro point of view, the thing that makes me very bullish is the 27 percent number I just quoted; the fact that we are seeing the highest Android switcher rate; the customer satisfaction that we have on the iPhone versus the competition—it's a huge margin; the loyalty rate that we have versus competition, an enormous gap there.
I also look at the first-time iPhone buyers, and we're still seeing very very large numbers in the countries that you would want to see those in, like China and Russia and Brazil and so forth.
I also see a market that over a five year horizon, if you look at the IDC numbers, is projected to grow from 1.3 million in 14 to over 1.9—this is billion, rather, billion in 2019.
And so it's an incredible market. I think everyone's going to own a smartphone. And I think we've proven that we can compete for a fair number of those as you can see from our results.
On the Watch and no sales numbers
Gene, this is Tim. Let me talk about the Watch some. As you know, we made a decision back in September—quite several months ago—not to disclose the shipments on the Watch. And that was not a matter of not being transparent, it was a matter of not giving our competition insight. That's—it's a product we've worked really hard on.
However: Let me give you some color, so to avoid reaching sort of a wrong conclusion. If you look at the other products category, and look at the revenue in this category, it would not be an accurate thing to just look at the sequential change, or the year over year change, and assume that [was] the total Watch revenue. Because the aggregate balance of that category, both sequentially and year over year, is shrinking. Obviously, iPod is a part of that, but there are other things in there—accessories and so forth—that are shrinking.
Secondly, to provide a bit more color: Sales of the Watch did exceed our expectations and they did so despite supply still trailing demand at the end of the quarter.
And to give you a little additional insight, through the end of the quarter, in fact, the Apple Watch sell-through was higher than the comparable launch periods of the original iPhone or the original iPad. And we were able to do that with having only 680 points of sale. And as you probably know, as I had reviewed earlier, the online sales were so great at the beginning we were not able to seed inventory to our stores until mid-June. And so those points of sale, pretty much, the overwhelming majority of the low numbers of sales were not there until the last two weeks of the quarter.
And so as I look at all of these things, we feel really great about how we did. Now, our objective for the quarter wasn't primarily sales; beyond the very good news on sales, we're more excited about how the product is positioned for the long-term because we're starting a new category. And as I back up and look at this: With 8500 apps, we've already announced the next operating system, watchOS 2. It will bring native apps, which are going to be killer, to the watch. Even though the store layout was delayed, we've learned a lot about the buying experience. Based on that experience, we're now planning to expand our channel before the holiday, because we're convinced that the watch is going to be one of the top gifts of the holiday season.
Now, most importantly of all of this is that the customer sat[isfaction] is off the charts. Because we've constantly seen that if you can get the customer sat off the charts, you can wind up doing fairly well over time. We've also learned a lot about managing quite an assortment [of bands and cases], and so forth.
And so, I sort of back up and look at this, and I feel fantastic about what the team has done and delivered, and I know I never go anywhere without the watch. And it's not because I'm the CEO of Apple—I'm that attached to it. I get lots of notes from a lot of people that feel the same way.
And so that's how I look at the watch.
On grabbing market share despite high product price points
Tony, it's Tim. We look at it a bit differently than you do. We look at it as our job is to grow our products, regardless of the price, which means that we need to convince, in some cases, people to move from one price band to the other.
We think that if we do a great job with the product, that people will be willing to spend more because they get so much more out of it. And I think you can look at the results on the iPhone and see that in action. I mean, we grew 87 percent in China, we grew 90+ percent in India, emerging markets are growing 65 percent. These numbers are unbelievable, and they're done in an environment where, y'know, this is not the best of conditions.
So, that's how we look at it. We don't do the MBA analysis of "There's only X people buying in a price band and therefore we can only get X-Y percent," that's not the way we've ever looked at it. If we did, we wouldn't be shipping any products.
[Q: Is the strength and the dramatically above-market growth because you're taking share in that high-end category and how far along are you there, or can you point to proof points that you've actually expanded the size of the market for products of your price point?]
Oh, I think there's no doubt, if you look at it, we're expanding the market size in those areas. It's also true that there are some people that are switching from comparable price points to the iPhone and that's great too. But I think the answer is that both of those things are happening, and it's key that we do both and not just one.
On the iPhone replacement cycle
The 86 percent also seems low to me, but I was quoting a third-party source and not our own data. Our own data would look better than that. But the numbers are only comparable if I quote the third-party source for both, so that's what I'm doing.
On the upgrade cycle, what we're seeing is not remarkably different. However there are a number of plans that people began signing up for in the last year that could change it. These are upgrade-any-time kind of plans, they may be one year leases, that could actually help the upgrade rate. I think it'll be interesting to see how that plays out over the next horizon. Generally speaking I see positive vectors there and not negative in the aggregate.
On relying on the iPhone for revenue growth
We think the—Jim, it's Tim—we think the phone has a lot of legs to it. I mean many, many, many, years. There's tons of innovation left on the phone. I think we're in the early innings of it and not the late innings. I think the market rate of growth over the long haul will also be impressive. So I think there will be multiple winners here.
In terms of the other things that we're doing, we have some great capabilities and great teams within Apple. So we can do more than one thing. So we have other things we're working on as well, but at the aggregate level we still remain very focused.
If you look at our size versus to the number of projects we have going, it's much smaller compared to most. But that's how we do things, and that's how we get the level of quality that we want out of each one of those. So the other things that you named, whether it be Apple Music or Apple Pay, both of these are very important to us.
And things you didn't mention: the Mac continues to perform very well. I am still bullish on iPad. We've gotten, with iOS 9, there are some incredible productivity enhancements coming in with Split View and Slide Over and Picture in Picture, these things are incredible features.
The enterprise business is clearly picking up. More and more companies are either contracting for or writing apps themselves. And, I believe, the iPad consumer upgrade cycle will eventually occur. Because as we look at the usage statistics on iPad it remains unbelievably great. The next closest usage of the next competitor, we're six times greater. These are extraordinary numbers. It's not like people have forgotten iPad. It's a fantastic product.
I see a lot of runway. As I look geographically, where we've being doing really good in emerging markets, our share is still not high in any of them. So there's a lot of headroom there as well, as there is in most developed markets as well. I look around and see opportunity left and right. That's what we're focused on.
[Chinese market volatility is a] very good question. We remain extremely bullish on China. We're continuing to invest. Nothing has happened to change our fundamental view that China will be Apple's largest market at some point in the future.
It's true, as you point out, that the equity markets have recently been volatile; this could create some speed bumps in the near-term. But to put it in context, which I think is important, despite that volatility in the Chinese market, they're still up 90 percent over the last year, and they're up 20 percent year to date. These kinds of numbers are numbers I think all of us would love.
Also the stock market participation among Chinese households is fairly narrow, and the stock ownership is very concentrated in a few people who put what appears to be a smaller portion of their wealth in the market than we might. So, I think generally, this has been—or at least as we see it, maybe it's not true for other businesses—that this worry is probably overstated.
So we're not changing anything. We have the pedal to the metal on getting to 40 stores by mid-next year. As we talked about before, we're continuing to expand the indirect channel as well. As you point out, and I think this is a major point that many people miss, the LTE penetration in China is only at 12 percent, and China doesn't possess the level of fiber that some other countries do. So, in order to get the great video performance, et cetera, raising that penetration is really great. I think that really plays to an incredible smartphone future there.
Also, and I can't overstate this, the rise of the middle class there is continuing and it is transforming China. I saw a recent study from McKenzie that's projecting the upper middle class to grow from 14 percent to 54 percent of households over the ten year period from 2012 to 2022. So we're within that period at this moment. And you can see, for those of us that travel there so much, with every trip you can see this occurring.
So I think we'd be foolish to change our plans. I think China is a fantastic geography with an incredible, unprecedented level of opportunity there and we're going to be there.
On iPhone switchers
I'm very familiar with the [Not an iPhone] ads. In certain geographies, the way that we win is to get switchers. In other geographies, the way that we win is to get people to buy their first smartphone. In other geographies, the way that we win is to get people to upgrade from their current iPhone.
All of those are very important for us. In many geographies it's two of those. In some, it's all three of those. All of those are important. We're very focused in growing iPhone around the world—not just one geography—and getting our message out there through ads is one way to do that.
On geographic slowdowns throughout the quarter
Maybe the best way to talk about this is sort of at the product level. On the Watch, our June sales were higher than April or May. I realize that's very different than some of what's being written, but June sales were the highest. The Watch had a more of a back-ended kind of skewing.
The phone itself followed what I would call normal seasonal kind of pattern. And if you look at the... it sounds like you're honing in on the greater China results themselves. There's no obvious impact from last quarter in the greater China numbers. And obviously with the aggregate or the consolidated number being 112 percent, it's hard to find a lot of bad things in the numbers.
Rene Ritchie contributed to this transcript.