Q4 2014 Earnings Call Transcript

This transcript is annotated! Click on the highlights to read what others are saying. If you'd like to add your own insights, comments, or questions to specific parts of the transcript, visit the transcript page on Genius, highlight the relevant text, and click on the button that pops up. Your annotation will appear both here and on Genius. Apple Q4 Conference Call October 20th, 2014 _______________________________________________________ Tim Cook (Apple CEO) Last month we introduced two new categories; the first is Apple Pay, an entirely new way to pay for things in stores and in apps. It makes mobile payments easier, more secure and more private. Apple Pay went live today and now making purchases and participating stores happens with just a touch of a finger. Paying within apps is as easy as selecting Apple Pay and placing a finger on Touch ID. Today Apple Pay supports credit and debit cards from the three major payment networks and the top U.S. banks and over 500 additional banks have signed on and will be supporting Apple Pay beginning this year and early next year. Apple Pay is being supported by many of the nation's top retailers and we continue to sign more retailers. The second new category is Apple Watch, our most personal device ever and one that has already captured the world's imagination. We can't wait to get Apple Watch to customers beginning in early calendar 2015. We'll be providing more details on Apple Watch as we get closer to the shipment day. Last week we launched the new iPad Air 2 and iPad Mini 3 with innovations that make them dramatically better than previous generation and the stunning new iMac with a Retina 5K display. We released iOS 8 last month and our customers are enjoying new ways to use their iPhone, iPad or iPod Touch with intuitive new features and groundbreaking security. Last week, we also released OS X Yosemite, with an all new design and continuity features that deliver an even more fluid experience across all of our iOS devices and Mac. These introductions reflect years of innovation and hard work by teams all across Apple and they demonstrate the seamless integration of hardware, software and services that provides unparallel user experiences for our customers. These are things that only Apple can do. We've also communicated and demonstrated our commitment to respecting and protecting users' privacy with strong encryption and strict policies that govern how our data is handled. Today we're also reporting very strong results for Apple's fourth fiscal quarter. We generated our strongest revenue growth rate in seven quarters far surpassing our expectations we communicated in July and establishing a new record for Apple's September quarter revenue. We're also reporting gross margin of 38% compared to 37% last year, leading to a very strong EPS growth of 20%. Fueled by the launch of iPhone 6 and 6 Plus and strong demand for our previous iPhone models, we set a new September quarter record for iPhone with revenue growth of 21% year-over-year. Demand for iPhone was strong across all geographies with global unit sell-through growth of 26% and we exited the quarter with significant backlog for both iPhone 6 and 6 Plus. We established an all-time quarterly record for Mac sales with revenue growing 18% year-over-year, thanks in particular to the very strong performance of our portables. We're especially proud of our Mac results considering the overall contraction of the global PC market this year and we achieved our highest quarterly market share since 1995. We also set an all time record for the App Store revenue, thanks to the tremendous momentum and ongoing success of our developer community. App Store revenue grew 36% over last year and cumulative app downloads have now topped 85 billion. These results bring to a close a record breaking fiscal 2014. Over the last four quarters, our products and services have generated a $183 billion in revenues, an increase of $12 billion over last year. We sold 243 million iOS devices and 19 million Macs, both all time highs. Our revenue from iTunes software and services reached $18 million, which was more than the annual sales of two thirds of the companies in the Fortune 500 and we generated $6.45 in earnings per share, which is 14% higher than last year and also set a new record. _______________________________________________________ We brought tremendous new talent and technology into Apple through 20 acquisitions in fiscal '14 including seven alone in the September quarter. We closed the Beats transition in July and we're off to a great start with some wonderful plans we'll share with you in the future. Our strong results continue to generate significant cash and we're extremely happy that this has enabled us to make substantial investments in Apple's future, while retaining -- while returning cash to our shareholders. We had executed aggressively against our share repurchase program, spending $17 billion in the September quarter alone and $45 billion in the last year. In addition to Apple's strong business performance over the past four quarters, I am incredibly proud of all of our work to protect the environment, to advance human rights, to improve working conditions in the supply chain and to change the way teachers teach and students learn. I'd like to thank all of our customers, employees, developers and business partners for making fiscal 2014 Apple's best year yet and I'd like to thank all of our shareholders for their continued support. I could not be more excited about the road ahead in fiscal 2015. _______________________________________________________ Luca Maestri (Apple SVP and CFO) During the September quarter we generated record revenue of $42.1 billion, an increase $4.7 billion or 12% year-over-year. These results exceeded our guidance range due to better than expected sales of iPhones and Macs for which customer demand grew strongly year-over-year in all our segments. Gross margin was 38% at the high end of the guidance range, operating margin was $11.2 billion representing 26.5% of revenue. Net income was $8.5 billion, a new September quarter record translating to diluted earnings per share of $1.42, a 20% year-over-year increase. Cash flow from operations was very strong, a $13.3 billion, also a new Q4 record. For details by product, I will start with iPhone. We sold 39.3 million iPhones, an increase of 5.5 million over last year or 16% growth. Underlying demand was even stronger with sell-through growth of 26%. iPhone sales grew across both developed and emerging markets. Unit sales in the U.S. grew 17% year-over-year, and in Western Europe they were up 20%. We saw even stronger growth in Latin America and the Middle East with sales up more than 50% and in Central and Eastern Europe where sales more than doubled. We increased iPhone channel inventory by just under one million units during the September quarter this year, significantly less than the 3.3 million unit increase in the September quarter a year ago. __________________________________ Luca Maestri (Apple SVP and CFO) We sold 5.5 million Macs, an increase of almost a million over last year. That represents 21% growth year-over-year and an all-time quarterly record. We saw great demand in the back-to-school season for both desktops and portables with especially strong growth for MacBook Pro and MacBook Air. We achieved double-digit Mac growth across most markets around the world, with particularly impressive performance in emerging markets where Mac sales were up 46%. These results are truly remarkable given the contraction in the global PC market and we now gain market share for 33 of the last 34 quarters. We ended the quarter with Mac channel inventory slightly below our four to five week target range. Turning to iPad, we sold 12.3 million units compared to 14.1 million in the September quarter last year. In anticipation of our October new product announcement we reduced iPad channel inventory by 500,000 from the end of the June quarter, which left us within our target range of channel inventory on a look-back basis. __________________________________ Steven Milunovich (Analyst - UBS) Okay. And then regarding the strength in Mac and the weakness in iPad I guess, what's the message from the market that you take away from that and does that perhaps at all affect your view of doing a convertible type product which in the past has not kind of an Apple's approach, you tend to like to do very focused products there might be that there is something in between that could be quite successful? Tim Cook (Apple CEO) Let me comment on both the Mac and the iPad. On the Mac it was just absolutely blow-away order. Our best ever, it will result in our highest market share since 1995. It's just absolutely stunning. Get back-to-school season voted and the Mac 1 and carried the day and we're really proud of that. I'm proud of the Mac team. It's clear that the -- all the work that we've put into our Notebooks, on the hardware and the software side is resonating with our customers and I think if you went out to college campuses about now, you will see a lot of Mac and there are lot of new Mac Notebooks there based on the sales. And so that feels fantastic being up 21% in that market that's shrinking it just -- it doesn’t get better than that. For iPad, if I take a step back on iPad, and I know that there is a lot of negative commentary in the market on this, but I have a little different perspective on it. Here's sort of my simple perspective. If you look at, instead of looking at this thing each 90 days, if you back up and look at it, we've sold 237 million in just over four years. That's about twice the number of iPhones that we sold over the first four years of iPhone. If you look at the last 12 months of iPad, we sold 68 million in '13, in fiscal year '13 we sold 71 million. So we were down, but we were down 4% on sell in and the sell-through was a bit better than the negative 4 because we took down channel inventories. And so, to me I view it as a speed bob, not a huge issue. That's said, we want to grow. We don’t like negative numbers on these things and so, looking further in the data, I know that there is a popular view that the market is saturated, but we don’t see that. I can't speak to other people but I do look at our data deeply. And in the last market research data we have is in the June quarter, and let me give you some of this -- the real data that we've got. is that if you look at our top six revenue countries, in the country that’s sold the lowest percentage of iPads to people who had never bought an iPad before that number is 50%. And the range goes from 50 to over 70. And so when I look at number, our first time buyer rates in that area, it is saturated, that's not a saturated market. You never have first time buyer rates at 50% and 70%. What you do see is that people hold on to iPad longer than they do a phone. And because we've only been in this business four years, we don’t really know what the upgrade cycle will be for people. And so that's a difficult thing to call. What we do know is that people always respond for us doing great products and we feel really great about what we introduced last week. We also know that the deeper the Apps go in the enterprise, the more it opens up avenues in enterprise and that's a key part of the IBM partnership and what I think customers will get out of that, which is more important than our selling is changing the right people who work. And so I see catalyst going forward. There are obvious cannibalization; things that are occurring. I'm sure that some people looked at the Mac and iPad and decided on a Mac. I don’t have research to demonstrate that, but I am sure that will be just looking at the numbers and I am fine with that by the way. I am sure that some people will look at an iPad and an iPhone and decide just to get an iPhone and I'm fine with that as well. But over the long arc of time, my own judgment is that iPad has a great future, healthy individual 90-day clicks workout, I don’t know, But I'm very bullish on where we can take iPad over time and so we're continuing to invest in the product pipeline.