Tim Cook spoke at length at Monday's second quarter 2015 earnings call about Apple's earnings, Apple Pay, HealthKit, and more. Here's our transcript of his remarks and Q&A responses.
Tim's opening remarks
Good afternoon, everyone, and thanks for joining us. We have a lot of great news to talk about, so I'll jump right in. Today, we're reporting our strongest March quarter ever, with 27 percent revenue growth, and 40 percent earnings per share growth year over year.
We're seeing fantastic results for iPhone, with revenue growth of 55 percent year on year, and we're seeing a higher rate of switchers than we've experienced in previous iPhone cycles. The success of iPhone has been extremely strong in emerging markets, where unit sales were up 63 percent year on year. The app store had its best quarter ever, with a record number of customers making purchases, driving a new record for revenue, and 29 percent year on year growth. We also reached an all-time quarterly record of 5 billion dollars in total services revenue.
We also continued to defy the trend of declining global PC sales, with double-digit Mac unit growth in a market IDC estimates contracted by seven percent.
We're now halfway through fiscal 2015, and our year-to-date results have been simply staggering. We've sold over 135 million iPhones, 34 million iPads, and 10 million Macs in the first six months of the year. Our revenue has grown by 28 percent, to over 132 billion; net income has increased 36 percent, to over 31 billion; and EPS has grown by 44 percent.
We're making many strategic investments in Apple's future, in research and development, in our supply chain, and in our infrastructure, and we've made 27 acquisitions in the last six quarters. We're in the very fortunate position of generating more cash than we need to run our business and keep making these important investments. So today, we're announcing another significant update to our capital return program, expanding its size to 200 billion dollars through March of 2017 to reflect our strong confidence in what lies ahead for Apple. [Apple CFO] Luca [Maestri] will go into this in more detail in a moment.
We're also making great progress in many other areas. The Apple ecosystem continues to expand in exciting ways. We're seeing great momentum with Apple Pay: Discover announced today that its cardmembers in the United States will be able to make contactless payments in participating stores through Apple Pay beginning this Fall. And last month, we said that the number of locations accepting Apple Pay has tripled, and we continue to see great progress with merchants. Best Buy, which has been a longtime strong partner of ours, has just announced that it's now offering Apple Pay in-app, and later this year will offer Apple Pay in all of their U.S. stores.
And merchants aren't the only ones jumping on board. Earlier this month, a leading health care payment network announced acceptance of Apple Pay for its clients, so over 50 major hospitals across the country — including Stanford Health Care and Aspen Valley — will accept Apple Pay this year for co-pays and bill payments at registration and check-in.
We're also incredibly inspired by the momentum we're seeing in health-related solutions. Since we released HealthKit with iOS 8 last September, over 1000 apps have been developed to transform how people track, manage, and interact with their health, and they're now available on the App Store.
Just this weekend, Cedar Sinai in Los Angeles turned on the largest HealthKit integration to date, giving more than 87,000 patients the ability to share their health and fitness data seamlessly with their MyCS Link app, which syncs with their electronic medical records. And last month, we announced ResearchKit, an open-source software framework that helps doctors and scientists gather data for medical research participants more efficiently and accurately using iPhone applications.
The response so far has been simply amazing, far exceeding our expectations. The first research apps developed using ResearchKit study asthma, breast cancer, cardiovascular disease, diabetes, and Parkinson's disease, and have enrolled over 60,000 iPhone users in just the first few weeks of being available on the App Store.
Over 1000 researchers have contacted us expressing interest in performing studies through ResearchKit. We think these types of solutions have the potential to revolutionize medical studies in life-changing ways, and we're proud that Apple is helping make this possible.
Last quarter, we also announced a major economic investment in Europe, where we will spend two billion dollars to build data centers in Ireland and Denmark. These will be our largest data centers in the world. Apple is now responsible for creating over 670,000 jobs across the European continent. Most of them have grown out of the success of the App Store, which has generated more than 7.5 billion dollars for European developers since just 2008. We feel great about the economic contribution we've been able to make in Europe.
The two data centers we're building will run on 100 percent renewable energy from day one. This is just part of the work we're doing to protect the environment and leave the world better than we found it. Today, 100 percent of Apple's U.S. operations and 87 percent of global operations are powered by renewable energy. Just before Earth Day, we announced our plan to move to renewables in China. We're undertaking a groundbreaking partnership with several companies to build a 40-megawatt solar farm in Sichuan Province that will generate far more than the amount of energy used by all of our offices and retail stores in China combined.
We also announced an innovative new partnership with the Conservation Fund to permanently protect more than 36,000 acres of working forest in Maine and North Carolina to offset the impact of our packaging has on the world's supply of sustainable version fiber. Apple is deeply committed to these initiatives and will continue to make them a priority.
The June quarter is off to an exciting start with great new products and services. Three of them in particular are giving our customers a glimpse of the future, and we are very happy with the reception that each of them is receiving.
First, the all-new MacBook began shipping just over two weeks ago, and we're very happy with the response we're getting from customers. The new MacBook is our lightest, most compact Mac notebook ever — and you really have to see it to believe it. It features a stunning 12-inch Retina display, a new Force Touch trackpad, all-day battery life, and a revolutionary new keyboard. We believe — and I think most everyone agrees — this is the future of the notebook.
Second is the new streaming service from HBO, which is available on Apple TV and iOS. We teamed up with HBO last month to help launch HBO Now, a stand-alone service that lets customers stream the content they love from HBO on the devices they love from Apple — all without requiring a subscription to cable.
HBO Now has been incredibly popular with Apple users since its debut, and it has been one of the top-downloaded apps on the U.S. App Store as well.
And third, of course, is Apple Watch. It's been really great to see the reaction of customers since their Watches began arriving on Friday morning. All around the world, we've seen the excitement on social networks as people start using their Apple Watch. The response has been overwhelmingly positive.
Adding to the surprise and delight of Apple Watch are the more than 3500 apps that are already available. Our developer community has already seen the potential in this new category, and put some of their best thinking into what wearable technology can do. We can't wait to see more of the inspiring apps developers dream up for Apple Watch as we head into our Worldwide Developers Conference six weeks from now.
I'd like to thank all of those developers, and our hundreds of millions of customers, for their loyalty and support. I'd also like to thank all of the Apple employees around the world for their creativity, tireless effort, and passion for delivering the very best products in the world.
On those customers new to iPhone
We saw — we continue to see a higher rate of switchers than we have seen in previous cycles, and so we're extremely excited about that. We also continue to see a reasonable percentage of first-time buyers, particularly in some of the emerging markets. And if you look at emerging markets in general — I think Luca covered of some of this — the revenue from emerging markets just for the March quarter was up 58 percent year on year.
And so, y'know, and a big piece of what is driving that is iPhone. Obviously, those results would have been higher without some of the FX headwinds that Luca mentioned earlier.
On the Apple Watch's supply contraints
Let me talk about supply and demand, and sort of separate those two. Right now, demand is greater than supply. So we're working hard to remedy that. We've made progress over the last week or so, and were able to deliver more customers an Apple Watch over the weekend than we had initially anticipated. We're going to keep doing that, and so we've already sent some notes out today, with moving over customers, and versus what we had communicated to them previously. So I'm generally happy about the — that we're moving on with the ramp.
It is a new product for us, and with any kind of new product, you wind up taking some time to fully ramp. Having said that, I think we're in a good position, and by sometime in late June, we currently anticipate being in a position that we could begin to sell the Apple Watch in additional countries. And so that's our current plan.
From a demand point of view, it's hard to gauge when you're — when you don't have products in stores and so forth, and so we're filling order completely online at the moment. The customer response from people that have gotten theirs over the weekend [has] been overwhelmingly positive, and we're far ahead of where we expected to be from an application point of view.
To give you a comparison, when we launched the iPhone [App Store in 2008], we had about 500 apps that were ready; when we launched the iPad we had about 1000. And so, our internal goal was to be able to beat the 1000 level. And we thought it would be great if we were able to do that by a little bit, and as I've mentioned before, we now have over 3500 apps in the App Store for the Watch. And so we couldn't be happier about how things are going from that point of view.
We are learning quickly about customer preferences between the different configurations. There's a much larger breadth of possibilities here for customers than in our other products, and in some cases, we called that well, in some cases we're making adjustments to get in line with demand. But I'm really confident that this is something we really understand how to do and will do.
And so, I'm really happy where we are currently, and happy enough that we're looking forward to expanding into more countries in late June.
On the growth of new iPhone switchers
If you look at the overall [numbers] worldwide, we grew iPhone 40 percent, and IDC's estimate of the market for last quarter was at 16 percent, so we grew two and a half times. And if you kind of look through at the different countries, in almost every country we grew at a multiple of the market. And as I'd mentioned before, in emerging markets we did extremely, extremely well. And so I feel really good about where we are, and you can hopefully tell with the strong guidance [for Q3] that we've provided that we're very bullish on the current quarter as well.
And so, I think things look very very good. We're also pleased in addition to the switcher number that we're doing fairly well with first-time buyers, which is also a key metric for us. And so it's tough to find something in the numbers not to like.
On users upgrading older iPhones
Yeah, sure. Our current estimate is that about 20 percent of the active install base has upgraded to a 6 or a 6 Plus. So as I look at that number, that suggests, y'know, there's plenty of upgrade headroom in addition to, y'know, we want to keep inviting over as many switchers as we can.
So between both of those and the first-time buyers as well, it seems really really good right now.
On Cook's demure Watch comments regarding supply and demand
I'm thrilled with it, so I don't want you to read anything I'm saying any way other than that. So, I'm not sure how to say that any clearer than that. And in any situation, whether it's the Watch or in the past on iPad, or on iPhone — when demand is much greater than supply, it's difficult to gauge exactly what it is. And so, as you know, we don't make long-term forecasts on here, we make forecasts for the current quarter.
And so I don't want to make any comment about the consensus numbers. Honestly, I haven't even studied those. We've had enough to think about here. [laughs] I feel really great about it. The customer response to me, literally, from what I've seen, is close to 100 percent positive. So it's hard to imagine it being better.
On why Q3 Apple Watch margins may be smaller than people outside Apple expected
Tony, we're not going to guide to or give projections of gross margins outside the current quarter. And so what we have right now which is a situation that's not surprising to us, we knew we would be here, is that the watch gross margins for the current quarter that we've included in the guidance that Luca's provided in the aggregate are lower than the company average. And so, that to us, is intuitive that it would be. We must be just looking at it through a different lens than you are.
In the first quarter of any kind of product you would always have learning and these sorts of things. We've had this with every product we've ever done. And so, again, we're not guiding to what it will be over time. We're talking about what it is now. I would keep in mind that the functionality of the product that we're making is absolutely incredible, the power of it. I haven't even seen those, but generally there are cost breakdowns that come out around our products that are much different than the reality. I've never seen one that's anywhere close to being accurate. And so, if that's the basis of your comment, I'd really dig on the data if I were you.
On China, consumers, carriers, demand, and opportunity
It was an incredible quarter. We were up 71% year-over-year. We set a record in China for revenues. We did that now in a quarter that included Chinese New Year so we had the help of a strong holiday season. Much like the U.S. has a strong season in December, China's is obviously in the March quarter. iPhone led the way. It was up over 70% year-on-year. The current estimates from Kantar are that we would gain more than 9 points of share on a year-over-year basis. By everything I can see we did extremely well.
The Mac also had an unbelievable quarter in China. I'm very happy with this — Mac unit sales were up 31%. Like most of the rest of the world, IDC is projecting that PC sales in China contracted by 5% last quarter. So, once again bucking the tide. Also in China, consistent with the company, but at a much different rate, the App Store had a record quarter and grew over 100% year-over-year. So you can see the iPhone, the Mac, and the App Store adding — and with the iPad in the PRC, not in greater China but in PRC, iPad had its best quarter ever, higher than all the others, and also grew in a market that contracted for the overall market. So really truly, everything you look at in China was extremely good.
We have been working significantly on expanding our ecosystem there, so we added Union Pay as a payment option for customers. We increased the iPhone point-of-sales to over 40,000 during the quarter. That's up about 9% year-on-year. More importantly than the total number, we are in many more cities than we were before. We worked significantly on our online store and our online store revenue was up over three time year-over year. As you probably heard us say before, we opened several stores in China recently. We're now at 21 in Greater China and we're on track still to achieve 40 stores by the middle of next year. The online store will also be expanding from around 319 cities to where they can hit two day delivery to 365 cities. So adding about 50 new cities by the end of this quarter.
So the nut is, we're investing a lot across the board, in our infrastructure, on our products, on partnering with different companies. The Chinese developers are coming on in significant numbers. We've now made payments to developers in Greater China of almost $5 billion, over half of which was in the last 12 months. So, you can see this enormous momentum building in the developer community there as well. And so lots of positive things. As you probably heard me say before, I've never seen as many people coming into the middle class as they are in China, and that's where the bulk of our sales have been going. So we're really proud of our results there and continue to invest in the country.
On what it would take to re-accelerate iPad sales
Number one, we have to stop having the situations where we sell through more than we sell in. Where we don't have to have an inventory correction. That was over a million units. Two, have we had cannibalization? The answer is yes. We're clearly seeing cannibalization from iPhone and, on the other side, from the Mac. Of course, as I've said before, we've never worried about that. It is what it is. That will play out. At some point it will stabilize. I'm not sure precisely when but I'm pretty confident that it will.
The IBM partnership I think is in its early stages in terms of bearing fruit here. But everything I see I like on it. I'm a big believer in the ability for iPad to play in a major way in enterprise. I'm looking forward to seeing that play out as we move forward.
When you look at the underlying data it makes you feel a lot better than the sales do. And so things like first time buyers rates — the latest numbers from the U.S. are somewhere around 40%. If you look at China they're almost 70%. These numbers are not numbers you'd get if the market was saturated. And so I continue to believe, even though I've seen different people write that, I think that theory is not correct and do not see that.
We also see usage numbers that are off the charts, so far above competition it's not even on the same planet. And we see customer satisfaction at or near 100%. So, these kinds of numbers along with intent to buy numbers, everything looks fantastic, the e-commerce numbers. So my belief is, as the inventory plays out, as we make some continued investments in our product pipeline — which we're doing, that we already had planned and have had planned for a long time — between that, the inventory playing out, the enterprise starting to take over, I believe the iPad is an extremely good business over the long term. When precisely it starts to grow again I wouldn't want to predict, but I strongly believe that it will.
On whether new customer and switcher numbers have been growing year-over-year
I don't have the comparisons in front of me. I don't know the answer to that off the top of my head. As I look at the number, my point for bringing it up is that there are a lot of people that haven't upgrade to 6 and 6 Plus. As I look at that it screams that there's significant opportunity there. And that's before thinking about switchers and first time buyers.
On the middle class in China and emerging geographies
f you look at the emerging markets, our revenues were up 58% year-on-year, and this accounted for just slightly less than 40% of the company's revenues. If you look at BRIC within the emerging markets, BRIC revenues were up 64% year-over-year. As I look at that, without having market research data on the demographics you're asking, it's clear to me that it has to be coming from middle class. Because the upper income earners, there's only so many of those. You can't grow those kinds of numbers without getting significantly into the middle class. So I think that's where we are. I hope we're also beyond the middle class but I don't have the data to suggest that that's the case or not the case. But it's clear to me the middle class statement has to be true.
On HBO Now and similar services as a revenue opportunity or device driver
It's about giving the customer something that they want, and giving it to them with Apple's classic ease of use. In the product environment and the user interface they're used to working in — in this particular case the Apple TV. I think HBO in particular has some incredibly great content. So we're marrying their great content, our great product and ecosystem. And it's clear from looking at the early returns — you know we've only been at this for a couple of weeks or so — that there's a lot of traction in there. Where could it go? I don't want to speculate. You can speculate probably as good as I can about where that can go.
I think we're on the early stages of just major, major changes in media that are going to be really great for consumers and I think Apple can be part of that.