This is Tim: Cook on Apple's record 2015 first quarter

Ed: Tim Cook spoke at length during today's 2015 Q1 financial call on Apple's historic numbers, the billionth iOS device sold, and so much more. Here's a transcript of his opening remarks as well as his answers to questions from analysts.

Tim Cook's opening remarks

Today we're reporting a historic quarter, and I'm incredibly proud of everyone who contributed to the amazing results you're about to hear. Interest in Apple products is at an all-time high, with over a half-billion customer visits to our physical and online stores during the quarter.

On the iPhone's record sales

Demand for iPhone has been staggering — shattering our high expectations — with sales over 74 million units, driven by the unprecedented popularity of iPhone 6 and iPhone 6 Plus. This volume is hard to comprehend. On average, we sold over 34,000 iPhones every hour, 24 hours a day, every day of the quarter.

The execution by all of our teams to achieve these results was spectacular. By the end of the quarter, our new iPhones were available in 130 countries around the world, making this our fastest and most successful rollout ever.

On App Store and Mac records

Additionally, the App Store and the Mac each set new records for quarterly revenues. Mac units were up 14 percent to 5.5 million, while the rest of the PC market continued to decline. App Store revenues were up a remarkable 41 percent.

Demand was strong around the world. Flurry estimated that Apple products accounted for over half of all mobile device activations globally from the 19th to the 25th of December.

On the billionth iOS device sold

It was truly a momentous quarter for iOS. On November 22nd, we shipped our one billionth iOS device. It was a Space Grey 64GB iPhone 6 Plus, which we've saved here at Apple. One billion devices is an almost unfathomable milestone, and we are all incredibly proud to be a part of it.

Apple's mission is to make the greatest products on earth and enrich the lives of others. Through the success of iOS, we have provided hundreds of millions of people with powerful personal technology that is simple and fun to use. Our customers are using Apple products to transform education, discover new ideas for business, and express their creativity in ways that no one could have imagined when we sold the first iPhone less than eight years ago.

It's amazing to watch, and it reminds us that people and great ideas are the reasons we make the things we make.

On earnings

Our strong overall performance in the December quarter resulted in total company revenue of 74.6 billion and earnings of 18 billion. Both of these numbers are all-time records for us, with revenues up 30 percent, and earnings up 38 percent over last year. And due to our very large capital return activities, earnings per share were up even more, at 48 percent to $3.06, also an all-time quarterly record. Our results would have been even stronger absent fierce foreign exchange volatility.

On Swift

We've also made great progress on a number of very exciting new initiatives to further strengthen our ecosystem. We've been blown away by the reaction to Swift, our new programming language. Inventing a new programming language is something very few companies can do, and we believe it will have a profound effect on our ecosystem. Swift became available in September as part of the Xcode tools, and in the first month, those tools were downloaded over 11 million times. A recent report from Redmont showed that Swift has had unprecedented growth, and is quickly climbing the list of the most popular programming languages.

We've seen many of our developers choosing Swift as they build significant new projects, and we are seeing fantastic work with Swift going on in education. Very recently, Stanford University released their Developing iOS 8 Apps with Swift course, which was posted to iTunes University, making this amazing resource available to everyone in the world.

On HealthKit

There's also been incredible interest in HealthKit, with over 600 developers now integrating it into their apps. Consumers can now choose to securely share their health and wellness metrics with these apps, and this has led to some great, new, and innovative experiences in fitness and wellness, food and nutrition, and healthcare.

For example, with apps such as American Well, users can securely share data such as blood pressure, weight, or activity directly with physicians, and leading hospitals such as Duke Madison, Stanford Children's, and Penn Medicine are integrating data from HealthKit into their electronic medical records so that physicians can reach out to patients proactively when they see a problem that needs attention.

With HealthKit and the iOS Health app, we believe we're just at the beginning of amazing new health and wellness solutions for our customers.

On HomeKit and CarPlay

Our extensions of iOS in the home with HomeKit and in the car with CarPlay [have] also continued to progress, and this year, we are looking forward to amazing HomeKit-enabled products from several companies, and CarPlay-enabled vehicles from over 30 automotive brands.

On Apple Pay

Also, as you know, we introduced two new categories in the Fall, and we're making great progress on both of them. Apple Pay is off to a very strong start, and the feedback that we're getting from both individuals and institutions is extremely positive. Today, about 750 banks and credit unions have signed on to bring Apple Pay to their customers, and in just three months after launch, Apple Pay makes up more than two out of three dollars spent on purchases using contactless payments across the three major U.S. card networks.

In merchants who already accept Apple Pay, the rates are even higher. Panera Bread tells us Apple Pay represents nearly 80 percent of their mobile payment transactions, and since the launch of Apple Pay, Whole Foods Market has seen mobile payments increase by more than 400 percent.

You can use Apple Pay up and down Main Street to pick up a prescription at Wallgreens and Duane Reade, get office or school supplies at Office Depot and Staples, and shop for groceries at national and regional stores from coast to coast, including Buy Low, Harvey's, Save Mart, Wegman's Food Markets, Whole Foods, and Winn-Dixie, among others.

More merchants are excited to bring Apple Pay to their customers, and adoption is strong. Just today, USA Technologies announced they made Apple Pay available at about 200,000 places where everyday payments happen, including vending machines in businesses, airports, and schools; commercial laundry machines in colleges, universities, and laundromats; and parking meters and payment kiosks in lots across the country.

Point of sale suppliers tell us they are seeing unprecedented demand from merchants, and all of our partners and customers simply love this new service. With all of this momentum in the early days, we are more convinced than ever that 2015 will be the year of Apple Pay.

On the Apple Watch (shipping in April)

Development for Apple Watch is right on schedule, and we expect to begin shipping in April. Developers are hard at work on apps, notifications, and information summaries that we call Glances, all designed specifically for the Watch's user interface. The creativity and software innovation going on around Apple Watch is incredibly exciting, and we can't wait for our customers to experience them when Apple Watch becomes available.

On Apple's IBM enterprise partnership

We're also making great progress in our partnership with IBM, and our collaboration is winning over new customers. In December, we delivered the first ten mobile-first iOS apps for banking, retail, insurance, financial services, telecommunications, governments, and airlines, making iPhone and iPad even more productive for enterprises by providing apps and cloud services with IBM's big data and analytics capabilities.

Another 12 apps will be released this quarter, including three new industries: health care, energy and utilities, and industrial products. This will bring us to a total of 22 apps, and we're on track to have over 100 by the end of 2015.

In just over a month, more than a dozen enterprise customers have signed on as foundation clients to transform their companies with iPhone, iPad, and IBM mobile-first solutions, including Miami-Dade County, the seventh largest county in the United States by population; and American Eagle Outfitters, which operates more than 1000 retail stores and ships to over 80 countries worldwide. And the list of new customers is expanding rapidly.

IBM is engaged with more than 130 additional companies looking to empower their employees with mobile-first for iOS solutions, and the list keeps growing. We couldn't be more pleased with this partnership.

On Apple's charity initiatives

In addition to the contributions we make to humanity through our products, we made great progress on imported projects during the quarter including ConnectEd, and Product RED.

With ConnectEd, we're focused on making a difference for students and communities who need it the most. We recently chose 114 schools across 29 states to receive an Apple ConnectEd grant. Despite their economic challenges, all of these schools share a vision of what their students' lives would be like with Apple technology, and we're proud to help them bring that to life.

And in December, we undertook our largest-ever initiative to help Product RED achieve the goal of an AIDS-free generation. To commemorate World AIDS Day, we worked with some of our developer partners to create and donate the proceeds from 25 special apps, and we also contributed a portion of sales at our retail and online stores on two of the year's busiest shopping days. As a result, Apple's donation set a new record.

Delivering the results we're reporting today reflects months and years of focus and determination from teams across Apple, as well as our amazing developers and business partners. I'd like to thank all of them for their commitment and performance, and I'd also like to thank our incredible customers for their ongoing loyalty and enthusiasm.

On teasing future products

In addition to all these initiatives, we have a robust product and services pipeline that we are very excited about, and we look forward to sharing more about them with you throughout the year.

On the 6 Plus's success in the market this last quarter

It's Tim. We don't report out the precise mix, but what I can tell you is that iPhone 6 was the most popular iPhone last quarter. But obviously to sell 74.5 million, they were really all popular, and all did well.

There's clearly a geographic preference difference where some geo[graphic market]s would skew much higher on their preference to iPhone 6 Plus than other geos. And so it's something that is not consistent around the world. But both [models] did incredibly well, and we're really proud of them along with the iPhone 5s and 5c as well, which continues to be in the lineup.

On the iPhone and iPad's channel inventory

From an iPhone point of view, as I think [CFO] Luca [Maestri] covered, our channel inventory decreased from the beginning of the quarter by 200,000 units, and that left us outside of our target range on the low side — outside the low end of the range, to be specific. We, uh... just recently, we became in supply/demand balance on the 6 and 6 Plus in January; we were not able to reach a balanced state during our fiscal Q1.

On iPad, we increased channel inventory by 1.1 million units from beginning of the quarter to end of the quarter; that compares to the previous year where we increased to 2.1. Obviously, that inventory was required because of all the new products that we announced on iPad — with the iPad Air 2 and the iPad mini 3 in the October timeframe during the quarter. At the end of the quarter, we were within the target range of channel inventory on iPad.

In terms of growing channel inventory — in particular on iPhone where we're outside of it — we wouldn't expect to see a large step function increase. We would expect it to occur more gradually over time than sort of an all-at-once type of thing. But we don't guide to channel inventory specifically, as you know.

On the sustainability of strong iPhone demand into 2015

You can see from the March guidance that we've given that we're incredibly bullish about iPhone going forward. We believe that it's the best smartphone in the world, our customers are telling us that, the market is telling us that. We're doing well in virtually every corner of the world, and so we're very bullish that it does have legs.

I would point out that only a small fraction of the install base has upgraded. And so there's a lot more people within the install base, but I would also point out that we had the highest number of customers new to iPhone last quarter than in any prior launch, and also that the current iPhone lineup experienced the highest Android switcher rate in any of the last three launches, in any of the three previous years. We didn't look back to the other years, so I don't know about those.

And so, we see that we're appealing to new customers, both new to smartphone, and new to iPhone, and people switching. We're very bullish on the product, and getting great feedback about the quality of the products we're shipping, and so we're very, very bullish.

The emerging markets, which has been a source of great questions over time, the growth was absolutely stunning. In Brazil, and mainland China, more than doubling year over year, which is 3x to 4x what those markets were doing according to IDC. And so we entered the quarter with quite a bit of momentum.

On Apple Watch expectations

My expectations are very high on it. I'm using it every day, and loving it, and I can't live without it. And so I see that we're making great progress on the development of it. The number of developers that are writing apps for it are impressive and we're seeing some incredible innovation coming out there.

And just to clarify, what we had been saying was early 2015, and we sorta look at the year and think of "early" is the first four months, "mid" is the next four months, and "late" is the final four months. To us, it's sort of within the range, so it's basically when we thought.

But most importantly, we're going to be thrilled to start shipping it, because we've got a lot of customers that are wanting to get one.

On the China momentum and sustainability

The local competition was obviously there this quarter, and it has been there for many quarters before, and so the local competition isn't new. I think we did really well there; I'm very proud of how we're doing.

I was there in — right after the launch [of the iPhone] in October, and the excitement around the iPhone 6 and 6 Plus were absolutely phenomenal. And you can see that in the results with mainland China being up 100 percent year on year, despite not having a full quarter of sales since we launched in the second half of October.

You can tell that we're a big believer in China with looking at our investment: We're growing the number of stores; we'll hit 20 soon, and we're doubling that by mid-2016. As [SVP of Retail and Online Stores] Angela [Ahrendts] said earlier, and Luca said in his prepared comments as well, we're also growing the channel there; our online store has expanded to over 350 cities now, and in fact our online revenues in China last quarter were more than the sum of the previous five years.

And so it's an incredible market; I think people love Apple products and we're going to do our best to serve the market.

On the iPad's declining sales

I am still very optimistic and bullish on iPad over the long run, as I've indicated before. When you measure it in these 90-day clips, as we do, in the short run, I don't think you're going to see a miraculous change in the — or improvement in the year over year.

But here's what I see when I look at it, the [first] time buyer rates are very high. And so by very high, I mean that if you look in some of the developed markets like the U.S., Japan, the U.K., you would find that 50 percent of the people are buying an iPad for the first time. If you look in China, it's over 70 percent. And so when you have that kind of first-time buyer rates, you don't have a saturated market.

When I look at the customer sat[isfaction] on iPad, it's literally off the charts — in some cases 100 percent, which is unheard of in surveys to get these kinds of customer sat ratings.

When I look at the usage, the usage is six times our nearest competitor. The usage as defined, as measured in Web browsing is like 71 percent of total tablets, as I think Luca covered earlier. Also the commerce taking place across the iPad is enormous. Essentially, over 80 percent of the commerce on tablets are taking place on iPad.

And so when I back up and look at all of these, and I believe that over the long arc of time, that the iPad is a great business. I also have visibility obviously to what's in the pipeline and feel very, very good about that. That said, I'm not projecting — to be clear with everyone — I'm not projecting something very different next quarter or the next. I'm thinking over the long run.

In terms of what I think is going on: I think what you said is absolutely true, that the upgrade cycle is longer. It's longer than an iPhone, probably between an iPhone and a PC. We haven't been in the business long enough to say that with certainty, but that's what we think.

There's probably some level of cannibalization that's going on — with the Mac on one side, and the phone on the other. And so you probably have a little bit of that that is shaking out.

How much — very hard to tell in the early going, particularly since we just shipped the new phones a few months ago. And so, I think there's some things like that that are going on.

On the other side, I think the partnership with IBM and the work that we have going on in the Enterprise is profound. I think we're really going to change the way people work. I'm really excited about the apps that are coming out, and how fast the partnership is getting up and running. And so I think that can move the dial there.

So I'm not predicting the 90-day clips and so forth, but over the long arc of time, I really believe that iPad is a great space, a great product, and with the — also coupled with the product innovation we've got, I think there's a very bright future for it.

On Apple TV's future

On Apple TV, we had a solid quarter with the existing product; we've sold over 25 million Apple TVs now. Y'know, at the sake of repeating myself, it's something that we continue to look at and work on and find a way that we can make an even greater contribution than what we're doing.

On Apple Pay's future

On Apple Pay, both the contactless payment and the in-app are both important; I think they're both huge opportunities. I think they'll play out differently in different geographic regions as to which one is larger than the other, and will likely — the mix of those things will change over time as more and more commerce flows across apps, and so forth.

In terms of how it evolves, I think we're in the first inning on it, and we haven't even completed the first inning yet.

There's tons of things on our roadmap of adding functionality to it, we're obviously — we're just in the U.S. right now and so there's tons of countries to go to, and there's not a day that goes by that I don't get notes from many businesses outside the U.S. wanting Apple Pay — banks and merchants.

And of course we still have a lot of merchants left in the US, but I have to tell you that given that we launched in October, I'm actually unbelievably shocked — positively shocked — at how many merchants were able to implement Apple Pay in the heart of their holiday season, because generally most people sort of lock down and don't do very much. But we were able to get this into a lot of different merchants and I give them a lot of credit for that.

But I think that we're just on the front end, and I think that this is the year of Apple Pay. And some of the things you mentioned, and others are all things we're looking at and in many cases, working on in terms of where it can take us.

On iPhone upgrades

It's a small fraction. It's a number that in the mid-teens — that's barely in the teens. And so when I look at that, I say that there's an enormous amount left.

And given there are a fair amount of Android units out there, there's also an enormous amount of Android customers that could switch.

And I'd also remind you that there's a lot of people that have not yet bought a smartphone. And I know it doesn't feel like that when you're sitting in the United States, but from a worldwide point of view, there's still lots of them. And so I see all three of those groups there, and y'know, I'm very excited about all of them, and serving all of them.

On the IBM/Enterprise app partnership

We think that — well, we know that if you look at the Fortune 500 as an example, we're in essentially all of the Fortune 500 companies.

But the issue — so the issue is not that, and it's not a market share number, because our market share is extremely high. The issue is that enterprises, generally speaking, are only deploying iPads to a small percentage of their workforce. And so the real opportunity is to bring mobility into the enterprises, and change how people work.

In order to do that, you obviously need apps that are written to specific jobs — not just apps that are general productivity apps like word processors and spreadsheets and presentation tools, et cetera. And so that's what — that's one of the things that working with IBM provides us; it's both that and the knowlege of the verticals, which y'know, they bring a significant amount of knowledge on all of the verticals that I mentioned earlier.

And so, where can we take that to? I think if we can really change the way people work, I think the opportunity is enormous. We're not hanging numbers out there to be measured on at this point, but we don't do a lot of big partnerships, as you probably know.

And so when we do one, it is significant and it's because we really believe in it. And we really believe in this one and what it can do for customers.

On the number of iPhone to Android switchers

At this point in the — just shortly after the quarter — we don't have all of our research in from all of the people that bought [iPhones] last quarter yet, but in the aggregate, as I've mentioned before, we saw more new customers to iPhone than we had ever seen before, and we had a higher rate of Android switchers than we had in the three previous launches, and it's not that we had more in the fourth one — I don't know what those numbers are, it wasn't something we were looking at.

And so between the switchers and the people that are just new to smartphones and selected an iPhone, and our upgrades — which we're very happy with but represent a small fraction of our install base — we feel really great about what's in front of us.

On international Apple Pay rollouts

Each is a different implementation, and so in some ways, like, y'know, there's a different set of carriers in every country, there's a different set of banks in a lot of the countries; some of the processes with the merchants are different.

And so it's an area where there's quite a bit of difference, country to country to country, and so there's clearly heavy lifting involved to scale. However, it's not something that scares us or that's preventing us from viewing it as a big opportunity.