Source: Seeking Alpha
Apple Inc. (NASDAQ:AAPL)
Q3 2014 Earnings Conference Call
July 22, 2014 05:00 AM ET
Nancy Paxton – Senior Director of Investor Relations
Tim Cook – CEO
Luca Maestri – SVP and CFO
Katy Huberty – Morgan Stanley
Bill Shope – Goldman Sachs
Toni Sacconaghi – Sanford Bernstein
Steve Milunovich – UBS
Kulbinder Garcha – Credit Suisse
Ben Reitzes – Barclays
Ben Schachter – Macquarie
Good day, everyone, and welcome to the Apple Incorporated Third Quarter Fiscal Year 2014 Earnings Release Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead.
Thank you. Good afternoon, and thanks everyone for joining us today. Speaking first is Apple CEO, Tim Cook; and he will be followed by CFO, Luca Maestri, and then we’ll open the call for questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margins, operating expenses, other income and expense, taxes, future products.
Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s Form 10-K for 2013, the Form 10-Q for the first two quarters of fiscal 2014, and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.
I’d now like to turn the call over to Tim for introductory remarks.
Thanks, Nancy. Good afternoon, everyone. It’s been a very busy and exciting time at Apple and I’d like to review some of the highlights of our June quarter. We hosted our best ever Worldwide Developer’s Conference last month with over 20 million people from around the world watching our keynote session, which is the a record. We’ve had overwhelming response from customers and developers to the new features we previewed in OS X Yosemite and iOS 8. Yosemite has been redesigned with a fresh look and powerful new apps and iOS 8 is the biggest release since the launch of the App Store. With powerful continuity features, these upcoming releases will allow Macs and iOS devices to work together in even smarter ways.
Customers can start on activity like writing an email on one device and pass it to another, picking up where they left off without missing a beat. They will even be able to make and receive iPhone calls on their Mac with just a click. These are features that only Apple can deliver. With iOS 8, we have opened over 4000 APIs providing more flexibility and opportunity for developers than ever before. iOS 8 provides developers with amazing new frameworks, enables wide use of Touch ID to securely authenticate users within apps and lets developers further customize the user experience with major extensibility features such as third-party keyboards.
We have also introduced Swift, an innovative new programming language for both iOS and OS X. Swift is the result of the latest research on programming languages, combined with decades of experience within building Apple platforms. It makes writing code interactive and fun, eliminates entire classes of unsafe code and generates apps that run lightning fast. It’s easy to learn, allowing even more people to dream big and create whole new categories of apps. We believe our new OS releases, combined with Swift will result in a huge leap forward for the Apple ecosystem and we can’t wait to what developers will create with Yosemite, iOS 8 and Swift.
When we introduced iOS 7 years ago, it was a revolutionary operating system for iPhone. Over the years we’ve extended it to the iPod family with iPod Touch and later to a tablet form factor with iPad. An explosion of apps, accessories and services for these devices has created an incredibly vibrant ecosystem. 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. That includes a safe and intuitive user interface for driving, called CarPlay, which is being integrated by 29 major car brands including Audi, BMW, Ford, General Motors, Honda, Hyundai, Mercedes, Toyota and Volvo; and after-market systems like Pioneer and Alpine.
We’ve created a new tool for developers called HealthKit, which allows health and fitness apps work to together and empowers customers to choose what health data they share. We’re taking the first steps in this area in collaboration with the Mayo clinic, whose new apps can automatically receive data from a blood pressure app, for example and share it with a physician, or a nutrition app can inform fitness apps how many calories are being consumed each day. Our ARM health app will provide an easy to read dashboard of all health and fitness data.
We’re enabling new ways to control light and doors and thermostats and other connected devices around the house using Siri with the HomeKit feature of iOS 8. And in the Enterprise, we are including new security, productivity and device management features in iOS 8. We forged a relationship with IBM to deliver a new class of mobile business solutions to enterprise customers around the world. 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, we will collaborate to bring over 100 Mobile First apps to enterprise clients, each addressing a specific industry need or opportunity.
This is a radical step for Enterprise and opens up a large market opportunity for Apple but more importantly, it’s great for productivity and creativity of our enterprise customers. From the pocket to the car, to the workplace, home and gym, we have a very large vision of what iOS can be and we’re incredibly excited about our plans.
Turning to our financial results, today we are reporting record June quarter revenue, thanks to the very strong performance of iPhone, Mac and the continued growth of revenue from the Apple ecosystem. Our teams executed brilliantly during the quarter with earnings per share up 20% year-over-year, our highest growth rate in seven quarters.
We sold over 35 million iPhones, setting a new third quarter record. We generated healthy growth in our entry priced, mid-tier and lead iPhone categories. I’m especially happy about our progress in the BRIC countries, where iPhone sales were up a very strong 55% year-over-year.
We also had a record June quarter for Mac sales, with growth of 18% year-over-year in a market that is shrinking by 2% according to IDC’s latest estimate. Demand has been very strong for our portables in particular and we’ve have had a great customer response to the new higher performance, lower priced MacBook Air. It was another strong performance for the App Store and the other services contributing to the thriving Apple ecosystem.
In fact for the first nine months of this fiscal year, the line item that we call iTunes software and services has been the fastest growing part of our business. iTunes billings grew 25% year-over-year in the June quarter and reached an all-time quarterly high, thanks to the very strong results from the App Store. We’re continuing to invest in our incredible ecosystem, which is a huge asset for Apple and a very important differentiator of our customer experience. iPad sales met our expectations but we realized they didn’t meet many of yours. Our sales were gated in-part by a reduction in channel inventory and in-part by market softness in certain parts of the world. For example IDC’s latest estimate indicates a 5% overall decline in the U.S. tablet market, as well as a decline in the Western European tablet market in the June quarter.
But what’s most important to us is that customers are enjoying their iPads and using them heavily. In a survey conducted in May by ChangeWave, iPad Air registered a 98% customer satisfaction rate, while iPad Mini with retina display received an astonishing 100% customer satisfaction rate. The survey also found that among people planning to purchase a tablet within 90 days, 63% plan to buy an iPad and our own data indicates that more than half of customers purchasing an iPad are buying their very first iPad.
Another recent study by Castoro found that iPad accounts for 80% of all U.S. tablet based e-commerce purchases. We’re very bullish about the future of the tablet market and we’re confident that we can continue to bring significant innovation to this category through hardware, software and services. We think our partnership with IBM, providing a new generation of mobile enterprise applications, designed with iPad’s legendary ease of use and backed by IBM’s cloud services and data analytics will be one such catalyst for future iPad growth.
Looking ahead, we are very excited about our agreement to purchase Beats Electronics and Beats Music. We think its part of Apple’s DNA and we think the addition of Beats team will be great for music lovers. Beats provides Apple with a fantastic subscription music service, access to rare talent and a fast growing line up of products that we can build upon. Not counting Beats, we’ve completed 29 acquisitions since the beginning of fiscal year 2013 including five since the end of the March quarter and we have brought some incredible technology and more importantly some incredible talent into Apple in the process. We are hard at work and investing heavily on exciting opportunities across our business and we have an incredible pipeline of new products and services that we can’t wait to show you.
With that I would like to turn the call over to Luca to discuss our Q3 results in more detail.