Ondrej Holzman Apple announced its financial results yesterday he announced a record quarter, the largest in its history so far, but paradoxically, the responses were not particularly stunning, as analysts expected even more iPhones, iPads and Macs sold. However, CEO Tim Cook explained the reasons and much more to shareholders in a traditional conference call.
iPhone outside the United States
Compared to the September quarter, we increased sales by 70 percent. Therefore, we could not be more satisfied with these results. In terms of geographic distribution, we saw the biggest growth in China, where triple-digit numbers fell. So we are very pleased in this regard.
iPhone screen size
iPhone 5 brings a new, four-inch Retina display, which is the most advanced display on the market. No one else comes close to matching the quality of the Retina display. At the same time, this larger display can still be operated with one hand, which users welcome. We thought a lot about the screen size and we believe we made the right choice.
iPhone demand in the last quarter
If you look at sales throughout the quarter, we had limited inventory of the iPhone 5 for most of the time. Once we started producing more units, sales went up as well. The iPhone 4 also faced limitations, but it too maintained a high standard of sales. So this is how the sales process looked for the past quarter.
But let me make one more note on this point: I know there's been a lot of speculation about order cuts and things like that, so let me address that. I don't want to comment on any specific report because if I did I wouldn't be doing anything else for the rest of my life, but I would rather suggest that the accuracy of any speculation about production plans be sufficiently questioned. I'd also like to point out that while some of the data was real, it's impossible to judge exactly what it means for the overall business because the supply chain is very large and we obviously have multiple sources for different things. Revenues can change, supplier performance can change, warehouses can change, in short there's a very long list of things that can change, but they don't say anything about what's actually going on.
Apple's philosophy versus maintaining market share
The most important thing for Apple is creating the best products in the world that enrich customers' lives. This means that we are not really interested in returns for the sake of returns. We could put the Apple logo on a lot of other products and sell a lot more stuff, but that's not why we're here. We want to create only the best products.
So what does this mean for market share? I think we're doing a great job here with iPods, offering different products at different price points and getting a fair share of the market. I wouldn't see our philosophy and market share as mutually exclusive, however we want to make the best products, that's what we focus on.
Why are fewer Macs being sold?
I think the best way to answer that question is to look at last year's quarter, where we sold about 5,2 million Macs. We sold 4,1 million Macs this year, so the difference is 1,1 million PCs sold. I will try to explain it to you now.
Year-on-year sales of Macs fell by 700 units. As you remember, we introduced the new iMacs at the end of October and when we introduced them, we announced that the first new models (21,5-inch) would be delivered to customers in November and we also shipped them at the end of November. We also announced that 27-inch iMacs would go on sale in December, and we started selling them in mid-December. That means there were only a limited number of weeks where these iMacs counted toward the last quarter.
There was a shortage of iMacs during the past quarter, and we believe, or rather know, that sales would have been significantly higher had these restrictions not existed. We tried to explain this to people back on the conference call in October when I said things like this would happen, but I can see that it still comes as a surprise to some.
The second thing: If you look at last year, as Peter (Oppenheimer, Apple's CFO) mentioned in the opening remarks, we had 14 weeks in previous quarters, now we only had 13. Last year, in one week sold an average of 370 Macs.
The third part of my explanation has to do with our inventory, where we were over 100k fewer devices at the beginning of the quarter, which was because we didn't have the new iMacs yet, and that was a significant limitation.
So if you put these three factors together, you can see why there is a difference between this year's sales and last year's. In addition to these three points, I would highlight two things that are not so important.
The first thing is that the PC market is weak. IDC last measured that it was falling by perhaps 6 percent. The second thing is that we sold 23 million iPads, and obviously we could have sold more if we were able to produce enough iPad minis. We've always said that there's a certain amount of cannibalization going on here, and I'm sure the cannibalization was happening on the Macs.
But the three big factors mentioned that have to do with iMacs, the difference in seven missing days from last year, and other inventory, I think more than explain the difference between this year and last year.
Apple Maps and Web Services
I would start with the second part of the question: We are working on some incredible things. We have a lot lined up, but I don't want to comment on any specific product, however we are really excited about what we have lined up.
As for Maps, we've already made several improvements since its release in iOS 6 in September, and we have even more planned for this year. As I stated earlier, we will continue to work on this until the Maps meet our extraordinarily high standards.
You can already see many improvements as they relate to things like improved satellite or flyover views, improved sorting and local information on thousands of businesses. Users are using Maps much more now than when iOS 6 launched. As for other services, we're happy with how we're doing.
We've already sent out over four trillion notifications in the Notification Center, it's breathtaking. As Peter mentioned, over 450 billion messages have been sent through iMessage and currently over 2 billion are sent daily. We have over 200 million registered users in the Game Center, 800 thousand applications in the App Store with more than 40 billion downloads. So I feel very, very good about that. Of course, there are other options we can do, and you bet we're thinking about them.
A mix of iPhones
You're asking me about the mix of iPhones sold, so let me make the following three points: The average price of iPhones sold was virtually the same this quarter as it was a year ago. Additionally, if you focus on the iPhone 5's share of all iPhones sold, you get the same numbers as a year ago and the iPhone 4S's share of the rest of the iPhones. And thirdly, I think you asked about capacity, so in the first quarter we got the same results as in the first quarter a year ago.
Will there be as many new products introduced in 2013 as in 2012?
(Laughter) That's a question I'm not going to answer. But I can tell you that the number of new products was unprecedented and the fact that we introduced new products in every category is something that we have not had before. We are pleased to have delivered so many products before the holidays and our customers have certainly appreciated it.
China
If you look at our total profits in China, which includes retail there, we're getting $7,3 billion in the last quarter. That's an incredibly high number, representing more than a 60 percent year-over-year increase, and this last quarter only had 14 weeks instead of the usual 13.
We've seen extraordinary growth in iPhone sales, it was in the triple digits. We didn't start selling the iPad until very late in December, but even then it did well and saw sales growth. We are also now expanding our retail network here. A year ago we had six stores in China, now there are eleven. Of course we are going to open many more of them. Our premium distributors have grown from 200 to more than 400 year-on-year.
It's not quite what we need yet, and it's certainly not the end result, we're not even close to it yet, but I feel like we're making great progress here. I recently visited China, talked to different people and I'm really happy with how things are going here. It is clear that China is already our second largest region, and it is also clear that there is huge potential here.
The future of Apple TV
You ask me all these questions that I will not answer, but I will try to find some comment that will make some sense to you. As for the actual product that we sell today - Apple TV, we sold more of it in the last quarter than ever before. The year-over-year increase was almost 60 percent, so Apple TV's growth is significant. Once a bit of a side product that people fell in love with, it has now become a product that many more people love.
I have said in the past that this is an area of our continued interest, and that continues to be true. I believe it's an industry we can give a lot to, so we'll keep pulling the strings and see where it takes us. But I don't want to be more specific.
iPhone 5: New customers versus switching from older models?
I don't have the exact numbers in front of me, but according to the published results, we are selling a lot of iPhone 5 to new customers.
Future demand and supply of the iPad
iPad mini supplies were very limited. We didn't meet our target, but we believe we can meet the demand for the iPad mini this quarter. This would simply mean that we need to have more facilities available than we have now. I think that's a fair way to wrap things up. And it's probably also worth mentioning, just for the sake of complete accuracy, that last quarter sales of the iPad and iPad mini were very strong.
Restrictions, cannibalization of tablets and computers
I think overall our team did a fantastic job of introducing a record number of new products during the last quarter. Due to the huge demand for the iPad mini and both iMac models, we have had significant shortages in stock and the condition is still not ideal, that's a fact. On top of all that, iPhone 5 inventory was also tight through the end of the quarter, and iPhone 4 inventory was tight throughout the quarter. We believe we can balance demand and supply for both the iPad mini and iPhone 4 during this quarter, but demand is very strong. , and we're not sure we'll break even this quarter.
Regarding cannibalization and our attitude towards it: I see cannibalization as our huge opportunity. Our main philosophy is to never be afraid of cannibalization. If we were afraid of her, then someone else would just come with her, so we never fear her. We know the iPhone cannibalizes some iPods, but we're not worried. We also know the iPad will cannibalize some Macs, but we're not worried about that either.
If I'm talking about the iPad directly, we have a lot of options because the Windows market is much bigger than the Mac market. I think it's clear that there's already some cannibalization going on here, and I think there's a huge amount of potential here. As you know, I've been saying for two or three years that the tablet market will one day overtake the PC market, and I still believe it. After all, you can see this trend in the growth of tablets and the pressure on PCs.
I think there is one more positive thing for us, which is that when someone buys an iPad mini or an iPad as the first Apple product, we have significant experience with the fact that such a customer then buys other Apple products.
That's why I see cannibalization as a big opportunity.
Apple's pricing policy
I will not discuss our pricing policy here. But we are pleased that we have the opportunity to supply our customers with our products and that a certain percentage of these customers then buy other Apple products. This trend can be observed both in the past and now.
I was amused by one of Tim Cook's last sentences. Apple products have one interesting feature. They are basically like viruses. Once you get one, sooner or later they start breeding suspiciously in your home. :-)
I confirm. My first product was an iPhone, in 4 months I bought an iPad2 and now I'm thinking about an iMac :)
I had a similar experience, but on a leapfrog – the first product was an iPad, then a MacBook, and now it will be an iPhone. Once you try it, you can't do anything else :)
I'm also thinking about the fact that from the second iPad the virus will start to spread towards the iMac, but after all, those who have weaned themselves from a PC are bothered by the weaker graphics and the inability to replace them. So still confused whether to get a new PC or an iMac. The iPhone hasn't appealed to me yet. I miss mass storage USB, although it is true that I stop using it. I don't miss it much on the iPad, but I would also like some kind of central storage to prevent multiple copies in applications. Otherwise, Tim explained it nicely and I'm looking at iOS7.