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by Jason Snell & Dan Moren

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By Jason Snell

This is Tim: Apple’s CEO in his own words

Presented below, a transcript of what Tim Cook said on today’s call with analysts following Apple’s quarterly results….

The prepared statement

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 in total services revenue.

We also continued to defy the trend in declining global PC sales, with double-digit Mac unit growth in a market that IDC estimates contracted by 7 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, 35 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 6 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. Luca 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 card members in the U.S. 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 healthcare payment network announced acceptance of Apple Pay for its clients, so over 50 major hospitals across the country, including Stanford Healthcare 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 1,000 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 past weekend, Cedars-Sinai in L.A. 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 MyCSLink 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 from 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 the 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 $2 billion 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 for European developers since just 2008. We feel great about the economic contribution we have been able to make in Europe.

The two data centers we’re building will run on 100% 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% of Apple’s U.S. operations and 87% 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 Szechuan 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 a conservation fund to permanently protect more than 36,000 acres of working forest in Maine and North Carolina to offset the impact our packaging has on the world’s supply of sustainable virgin 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 two weeks ago, and we’re very happy with the reception we’re getting from customers. The New MacBook is our lightest, most compact notebook ever, and you really have to see it to believe it. It features a stunning 12” 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 launch HBO NOW, a standalone 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 TV users since its debut, and 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 to 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 as we head into our Worldwide Developer 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.

Questions from analysts

Switchers and new customers?

We continue to see a higher rate of switchers than we’ve 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, the revenue from emerging markets just for the March quarter was up 58 percent year on year. And a big piece of what is driving that is iPhone. Obviously, those results would have been higher without some of the foreign exchange headwinds.

Apple Watch supply and demand?

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 we’re 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 other costumers in versus what we had communicated to them previously. So I’m generally happy that we’re moving on with the ramp. It is a new product for us, and with any 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 don’t have product in stores and so forth, and we’re fulfilling orders completely online at the moment. The customer response from people that have gotten theirs over the weekend have been overwhelmingly positive, and we’re far ahead from where we expected to be from an application point of view.

To give you a comparison, when we launched the iPhone we had about 500 apps that were ready. When we launched iPad we had about 1000. So our internal goal was to be able to beat the thousand level, and we thought it would be great if we could do that by a little bit. And as I mentioned before, we now have over 3500 apps in the app store for the watch. So we couldn’t be happier with how things are going from that point of view.

We are looking 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. 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.

Growth?

If you look at the overall worldwide we grew iPhone 40 percent. And IDC’s estimate of the market for last quarter is 16 percent, so we grew two and half times. And if you look through at the different countries, in almost every country we grew at a multiple of the market. And as I’ve mentioned before, in emerging markets we did extremely well. And so I feel really good about where we are, and you can tell with the strong guidance that we 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.

How many have upgraded to 6/6 Plus?

Our current estimate is that about 20 percent of the active installed base has upgraded to a 6 or a 6 Plus, and as I look at that number, that suggests there’s plenty of upgrade headroom in addition to—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 very good right now.

Any forecast of future Apple Watch demand in your enthusiasm for the product?

I’m thrilled with it, Tony. I don’t want you to read anything I’m saying any way other than that. I’m not sure how to say it any clearer than that. In any situation, whether it’s the watch or in the past on iPad or 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 here, and so I don’t want to make any comment on the consensus numbers. Honestly, I haven’t even studied those. We had enough to think about here. I feel really great about it. The customer response, literally from what I’ve seen, is close to 100% positive. And so it’s hard to imagine it being better.

Why are Apple Watch margins lower?

We’re not going to give projections of gross margins outside of the current quarter. What we have right now, which a situation that’s not surprising to us, we knew that we would be here, 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 they would be, and so we must just be 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. And I’d also say, generally there’s cost breakdowns that come out around our products that are much different than the reality. I’ve never seen one that is 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.

The quarter in China.

It was an incredible quarter. We were up 71 percent year over year. We set a record in China for revenues. We did that 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 obviously is in the March quarter. iPhone led the way, was up over 70 percent year on year. And the current estimates from Kantar would mean that we would gain more than 9 points of share on a year over year basis. And so we, by everything I can see, did extremely well. The Mac also had an unbelievable quarter in China, and I’m particularly very happy with this. Mac unit sales were up 31 percent. And like most of the rest of the world, IDC is projecting that PC sales in China contracted by 5 percent last quarter. 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 percent year over year. And so you can see the iPhone, the Mac, and the App Store adding, and with the iPad in PRC (not in Greater China) it had its best quarter ever, higher than all the others, and also grew in a market that contracted. So really and 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 9 percent year on year. And 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 times year over year. You probably heard us say before, we’ve 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.

And so the net is, we’re investing a lot across the board in our infrastructure, in 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. And 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. That’s where the bulk of our sales are going. So we’re really proud of the results there and continue to invest in the country.

What will it take to accelerate the iPad?

Number one we have to stop having the situation 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, and 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. So I’m looking forward to see 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. Things like first-time buyer rates, the latest numbers from the U.S. are like around 40 percent, and when you look at China they’re almost 70 percent. These numbers are not numbers you would get if the market were saturated, so I continue to believe—even though I’ve seen different people write that—I think that theory is not correct. We also see usage numbers that are off the charts, so far above competition, it’s not even in the same planet. And we see customer satisfaction at or near 100 percent. So these kind of numbers, along with intent-to-buy numbers, everything looks fantastic. So my belief is that as the inventory plays out, as we make some continued investments in our product pipeline which we’re doing, that we’ve already had planned and have had planned for some time… I think still, I believe the iPad is an extremely good business over the long term. When precisely it begins to grow again I wouldn’t want to predict, but I strongly believe that it will.

Middle class in emerging markets?

If you look in the emerging markets, our revenues were up 58 percent year on year. And this accounted for just slightly less than 40 percent of the company’s revenue. If you look at BRIC within the emerging markets, BRIC countries were up 64 percent year over year. And so as I look at that without having market research data on the demographics that you’re asking, it’s clear to me that it has to be coming from the middle class. Because the upper income earners, there’s only so many of those, and you can’t grow those kind of numbers without getting significantly into the middle class. And so that I think that’s where we are, and I hope we’re also beyond the middle class, but I don’t have the data to suggest that’s the case or not the case. But it’s clear to me that the middle class statement is true.

HBO NOW and other opportunities?

It’s about giving the customer something they want, and giving it to them with Apple’s classic ease of use, and in the product environments and the user interface that they’re used to working in, in this particular case in Apple TV. So I think HBO in particular has some incredibly great content, and so we’re marrying their great content, our great product and ecosystem. And it’s clear from looking at the early returns, we’ve only been at this for a couple weeks or so, that there’s a lot of traction in there. And so where could it go? I don’t want to speculate. But 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 could be a part of that.

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