During Apple’s fiscal third quarter earnings call this week, CEO Tim Cook gave some hints about where the company is going and why.
First, the quarterly numbers:
- Revenue: $37.4 billion, up 6 percent year over year, but down from Q2’s $45.6 billion.
- Net profit: $7.7 billion, up 11.6 percent year over year.
- Earnings per share: $1.28, compared to $1.07 a year ago.
- iPhone: 35.2 million sold (up 13% compared to a year ago; an expected decline from Q2), accounting for $19.7 billion of the quarter’s revenue (up 9 percent compared to a year ago.
- iPad: 13.2 million units, down 9% compared to a year ago, and 19 percent from the Q2, for revenues of $5.9 billion
Here’s are four key points that emerged from what Cook had to say in his prepared remarks to analysts and in fielding their questions [full transcript via SeekingAlpha, free registration required to view].
-1 iPhone 5C leads iPhone growth rates
Cook used terms for the first time to create a consistent nomenclature for the iPhone product tiers: entry priced, mid-tier, and lead iPhones. Today, those terms refer respectively to the iPhone 4s, the iPhone 5c, and iPhone 5s.
Cook was asked to break out product growth in each tier. He declined to be specific, but he did compare the year-over-year growth rates of the 5c and of last year’s mid-tier phone, the iPhone 4s. “The growth in that sector [the mid-tier] was the highest growth during the quarter we just finished,” he said.
“Of the three tiers?” he was asked.
“Of the three tiers,” Cook confirmed. “And so we are extremely happy with how it performed last quarter.”
This is the latest evidence that the 5c has been a successful extension of the iPhone brand, contrary to widespread Internet meme [see “The iPhone 5c is a mistake, a failure, a disaster, a flop, a dud: The iOSphere speaks out, freaks out”]
-2 iPhone sales are benefitting from new carrier trade-in and installment programs
Most iPhones are no longer sold on the “traditional” carrier subsidy model, as carriers experiment with a range of new trade-in and installment plans. Contrary to what many might expect, iPhone sales are benefitting from that shift, according to Cook.
“[L]ast quarter, as we estimated (and this is subject to estimating) but we're estimating that less than one out of four iPhones were sold on a traditional subsidy plan,” Cook said. “And so that number is markedly different than it would have been two years ago.”
One analyst asked him about the impact of new installment plans introduced in some carriers in 2013.
“The installment plan that you're speaking about, which gives the customer the right to upgrade SAP [ASAP?] or faster than a usual two-year cycle, we think that plays to our customer base in a large way,” Cook continued. “And so that makes us incredibly bullish that customers on those plans would be very likely to upgrade when we announce a new product.”
The new trade-in programs are also a positive change and seem to be cannibalizing very few new iPhone sales, according to Cook.
“What I think is happening in the aggregate if you look across the world is that trade-ins are actually hugely beneficial for our ecosystem because people wind up -- we have more people that are able to join the party…,” Cook said. “[P]robably the prime example [is] someone else within the family or in the example that has become more common in the last year, someone trades it in and then that [traded-in phone] goes to either somebody else in that country that is very price sensitive or somebody in a different country and I see all of this as good.”
One reason for that, he said, is that iPhones and iPads “command a much higher resale value” than rival products, which encourages people to trade-in since they can use that money to offset the costs of a new iPhone. The lower-priced trade-ins encourage buyers to try an Apple product. “[I]f we get somebody to try an Apple product and then buy an Apple product, the likelihood [is] that they begin buying other Apple products that may be in different categories or upgrading to one in that category…,” he said.
-3 iOS will be everywhere
“We’re extending iOS in even more dimensions as customers around the world make iPhones and iPads an essential part of their lives, at home, at school, at work and on the go. We’re putting a huge effort into delivering the best experience to our customers wherever they use iOS.”
These efforts include: the new UI for driving, CarPlay, which is being adopted by 29 car brands; HealthKit, to let health and fitness apps work to together, and let users share selected health information; and HomeKit, with Siri, to control a wide range of networked devices in the home.
With iOS 8, Apple has opened some 4,000 APIs, giving developers an unprecedented opportunity to exploit the software as a platform for always-and-anywhere-connected personal computing.
“[W]e have a very large vision of what iOS can be and we're incredibly excited about our plans,” Cook said in his opening prepared remarks.
-4 Lots of iPad innovation ahead
“We still feel that category [i.e., tablets] as a whole is in its early days and that there is also significant innovation that can be brought to the iPad and we plan on doing that. When I look at the top level numbers, I get really excited when I see that more than 50% of the iPads that we're selling are going to someone who is a first time tablet buyer.”
iPad sales have dropped for two consecutive quarters overall. Cook pointed out that Apple has sold 225 million of them, that current owners report very high satisfaction with the product. It’s interesting to speculate on what Cook means by “significant innovation.” Does that cover evolutionary changes such as making the iPad thinner and lighter? Or does he have in mind something more radical (and, yes, evolutionary changes over time can result in something radically different from the starting point)…and, if so, what would that be?
He also made clear that a big market for future iPad growth is the enterprise. Cook noted that while 99 percent of the Fortune 500 have at least some iPads, “the penetration is business is low: it’s only 20%.” Penetration means the number of users actually working with an iPad or iPhone. By contrast, notebook PC penetration is over 60% , he said. That represents a big iPad opportunity with a “substantial upside” in the business market, according to Cook.
Which brings us to….
-5 Start thinking of Apple as, also, an “enterprise” company
“And this [substantial upside] was one of the thinkings [sic] behind the partnership with IBM that we announced last week,” Cook said. “We think that the core thing that unleashes…is a better go to market, which IBM clearly brings to the table, but even more importantly apps that are written with Mobile First in mind. Not all but many of the enterprises apps that have been written for iPad have been essentially ports from a desktop arrangement and haven’t taken full advantage of mobile.”
Mobile First is IBM’s comprehensive plan to help enterprise customers marshal the resources to design, deploy, manage and operate a mobile business, ranging from point apps, through redesigned business processes, to “business transformation.”
In his opening statement during the earnings call, Cook said “We forged a relationship with IBM to deliver a new class of mobile business solutions to enterprise customers….We are working together to provide companies access to the power of Big Data analytics, right on every employee's iPhone or iPad. Using Swift [Apple’s new programming language], we will collaborate to bring over 100 Mobile First apps to enterprise clients, each addressing a specific industry need or opportunity.”
It’s interesting that Cook focuses on what he sees as one the main failing, and hence opportunity, for enterprise mobility: apps that have not yet fully exploited mobility – the ability to engage with customers and partners, and with enterprise data and systems, anytime and anywhere. Apple seems to be betting that iOS can become the enterprise mobile standard to the degree it can improve the way people work today.
Later in the discussion, Cook added: “And we win if we can drive that penetration number I spoke about from 20% to 60%. That would be incredibly exciting here. The walls would shake. And so that’s what I hope for.”