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By Jason Snell

Tim Cook transcript: What Apple’s CEO said to analysts

Tim Cook is very excited about Apple’s growth in China.

Another quarter gone, another set of records fall, and another phone call between Apple executives and financial analysts.

Presented here, via my fast typing fingers, is a transcript of Apple CEO Tim Cook’s statements on the analyst call. Now you can read all about it rather than listening.

Prepared statement

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 half a billion customer visits to our physical and online stores during the quarter.

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 roll-out ever. Additionally, the app store and the Mac each set new records for quarterly revenues. Mac units were up to 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 product activations globally from the 19th to 25th of December.

It was truly a momentous quarter for iOS. On November 22nd, we shipped our one billionth iOS device. It was a Space Gray 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’ve 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 reason we make the things we make.

Our strong overall performance in the December quarter resulted in total company revenue of 74.6B and earnings of 18B. 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, to 48 percent, also an all-time quarterly record. Our results would’ve been even stronger absent fierce foreign exchange volatility.

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 Redmonk 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 new work going on with Swift in education. Very recently, Stanford University released their Developing iOS 8 Apps With Swift course, which was posted to iTunes U, making this amazing resource to everyone in the world.

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 Medicine, 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. Our extensions of iOS in the home with HomeKit and in the car with CarPlay also continue 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.

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 we are 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 2 out of 3 dollars spent on purchases using contactless payment 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 Walgreen’s or 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 Bi-Lo, Harveys, Wegmans Food Markets, Save Mart, 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 business, 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.

Development for Apple Watch is right on schedule, and we expect to be 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.

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 10 mobile first for iOS apps for banking, retail, insurance, financial services, telecommunications, governments and airlines, making iPhone and iPad even more productive for enterprises by providing app 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 and American Eagle Outfitters. And the list of new customers is expanding rapidly… We couldn’t be more pleased with this partnership.

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.

In addition to the contributions we make to humanity through our products, we made great progress on important projects to the quarter including ConnectEd and Product Red. With ConnectEd, we’re focused on making a difference for students in communities who need it the most. We recent 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 will be like with Apple technology, and we’re proud to help 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 results 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.

Analyst Q&A

iPhone sales?

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 is clearly a geographic preference difference, where some geos would skew much higher on their preference to iPhone 6 Plus than other geos. So it’s something that’s not consistent around the world. But both did incredibly well and we’re really proud of them, along with the iPhone 5S and C as well, which continues in the lineup.

Channel inventory?

From an iPhone point of view, our channel inventory decreased from the beginning of the quarter by 200k units, and that left us outside of the low end of our target range. We just recently came in supply-demand balance in the 6 and 6 Plus in January. We were not able to reach a balance state during our fiscal Q1.

On iPad, we increased channel inventory by 1.1M 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 were announced, the iPad Air 2 and the iPad mini 3, in the October time frame. 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 kind of thing. But we don’t guide to channel inventory specifically, as you know.

How do you feel about iPhone going forward?

You can see from the March guidance that we’ve given that we’re incredibly bullish about iPhone going forward. We believe 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 installed base has upgraded, so there’s a lot more people within the installed 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, I don’t know about those.

And so we see that we are appealing to new customers, those that are new to smartphones 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 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 a 3-4x what those markets were doing according to IDC. And so we enter the quarter with quite a bit of momentum.

Watch expectations?

My expectations are very high on it. I’m using it every day, and love it, and I can’t live without it. And so I see that we’re making great progress on the development on 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 is early 2015, and we sort of look at the year and think of early as the first four months, mid as the next four months, and late’s the final four months. And so to us, it’s within the range. 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 who are wanting to get one.

Sustainability of China market?

The local competition was obviously there this quarter and has been there for many quarters before. And so the local competition isn’t new. I think we did really well there, I’m really proud of how we’re doing. I was there right after the launch in October, and the excitement around the iPhone 6 and 6 Plus were absolutely phenomenal. You can see that in the results, with mainland China 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, we’re looking at our investment, we’re growing the number of stores, we’ll hit 20 soon and we’re doubling that by mid 2016. 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.

iPad future?

I’m 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 or improvement in the year over year.

But here’s what I see when I look at it, and the reason I’m so optimistic: I see that the first-time buyer rates are very high. By “very high,” I mean that if you look at some of the developed markets, like the US, Japan, the UK, 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 on iPad it’s literally off the charts, in some cases 100 percent, which is unheard of in surveys to get these kind of customer sat ratings. When I look at the usage, the usage is six times our nearest competitor. Usage measured in web browsing is like 71 percent of total tablets. Also the commerce taking place across the iPad is enormous. Essentially over 80 percent of the commerce on tablets is 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, 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 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 that the upgrade cycle is 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’s 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 that partnership is getting up and running, so I think that can move the dial there. So I’m not predicting the 90 day clips, but over the long arc of time I really believe that iPad is a great space, a great product, and also coupled with the product innovation we’ve got, I think there’s a very bright future for it.

What’s the future of Apple TV? What about Apple Pay? And could it become a broader consumer-to-consumer payment platform?

We had a solid quarter with the existing product. We’ve sold over 25 million Apple TVs now. It’s something that we continue to look at and work on to find a way to make an even greater contribution than what we’re doing.

On Apple Pay, I think it’ll play out differently in different geographic regions as to which one is larger than the other, and 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 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 in the US, but I have to tell you that given that we launched in October, I’m actually unbelievably 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 that we’re looking at and in many cases working on in terms of where it can take us.

What are you seeing in terms of users upgrading iPhones 6 or 6 Plus so far?

It’s a small fraction, it’s a number that’s barely in the teens, and so when I look at that I say that there’s an enormous amount left. And given that 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 I’m very excited about all of them, and serving all of them.

IBM/Enterprise opportunity?

We know that if you look at the Fortune 500 as an example, we’re in essentially all of the Fortune 500 companies. 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 work force. 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, etc. And so that’s one of the things that working with IBM provides us, is both that and the knowlege of the verticals, which 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 we really believe in this one and what it can do for customers.

More color who’s buying iPhones?

At this point, just shortly after the quarter, we don’t have all of our research in from all of the people that bought last quarter yet. But in the aggregate, as I’ve mentioned before, we saw more new customers to iPhone than we’d 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, it’s that I don’t know what those numbers are. 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 installed base, we feel really great about what’s in front of us.

Apple Pay international roll-out?

Each is a different implementation and so in some ways, 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.

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