The latest Apple Watch has a blood oxygen sensor which measures the wearer's oxygen saturation (SpO2). Oxygen saturation is the fraction of oxygen-saturated hemoglobin relative to total hemoglobins in the blood. If the level is below 90% it is considered low and is very dangerous. An alert is issued in that case.
The Watch also monitors (periodically but consistently) the wearer's heart rate and can warn of abnormal rates. It can also detect patterns of irregular heart rhythms and atrial fibrillation.
The Watch can also provide VO2 max or the maximum rate of oxygen consumption measured during exercise. This measurement provides a quantitative value of endurance fitness and reflects cardiorespiratory fitness.
The Watch can also generate an ECG or electro cardiogram which is a graph of voltage versus time of the electrical activity of the heart using electrodes placed on the skin. The ECG can be generated as a PDF and sent to a physician for analysis.
The Watch also monitors sound levels providing a warning of when the wearer is exposed to dangerous sound levels and should consider protecting their hearing.
The Watch can also detect a fall and summon emergency services even if the wearer is unconscious. It can also be used to summon assistance with a push of a button.
The Watch uses machine learning to track sleep and can monitor the vital signs listed above during that time.
The Watch has an always-on altimeter which is working to help with tracking effort by the wearer.
The Watch can detect hand washing and provide a timer so you do it well enough.
The Watch can track all physical activity and provide motivational reminders to meet daily goals.
The Watch can monitor exercise with precision and provide data that helps you improve your performance.
The Watch can also be used to pay for your groceries at the register.
The reason the Watch can do all these things is because it's a computer. A computer with a dual core processor based on the A13 bionic chip also used in the iPhone 11, a retina display that is always on(!) and displaying at least 500nits at all times. It has on-board storage for music, WiFi, Bluetooth and a touch screen.
But although being a computer allows the Watch to do all this and more, no PC can do even one of these things. Nor does a PC have GPS, or Cellular connectivity or NFC and is certainly not swimproof. You don't wear a PC in bed and it does not stay with you 24x7.
The Watch is among a class of devices that have emerged less than five years ago that do many things that PCs can't. They also do many things phones can't.
Biometric sensing (SpO2, ECG, Afib detect, sleep tracking, fall detection, etc.) were not features that were even requested from phones or PCs (or tablets.) Nor did PC users ask for iPhone or tablet features like taking selfies, gesture-based gaming and Lidar.
The Watch has taken on the job of health monitor and health preserver. It isn't a job any other computer would have even attempted.
The story of phones, tablets and wearables is a story of creating new markets, not substituting for old ones. In so doing the new markets are greater than their putative substitutions would allow. This is happening over and over again but it still seems to go largely unnoticed. Keep an eye out for a lot more of this.
At time of writing (December 12, 2019) AirPods Pro delivery wait time is over 4 weeks. It's been like this since they shipped. I tried stores in several countries and although units can make an appearance on a shelf, they sell out immediately.
AirPods are part of the "Wearables & Home" category for Apple which used to be called Other Products and include also the Watch, iPod, Apple TV, Beats and HomePod (among other items.) iPod revenues were broken out as recently as 2015 but as the graph below shows, there have been no specifics on any product in "Wearables & Home" since then.
Wearables, Home and Accessories in a historic perspective with the iPod.
It therefore falls upon us to estimate how much of the entire category is any one product. It's been very difficult as the only clues lie in growth rates, sometimes cited for the Apple Watch and sometimes for "Wearables" alone. As far as I can tell from the available clues, the split is roughly as shown between the Orange and Green areas. Orange reflects estimate for Watch and Green everything else.
This analysis helped me conclude the Apple Watch overtook the historic "peak iPod" which occurred in the fourth quarter of 2007 at $4 billion. My Watch revenue estimate was $4.2 billion in the fourth quarter of 2018. This conclusion was confirmed by statements from the Company.
The problem lately has been that AirPods have become huge unto themselves. There is literally no information about AirPods sales as a product category. The only option is to guess Watch and subtract it from Wearables and then guess again the portion of "non-Watch Wearables & Home" that is AirPods.
Looking forward to the next quarter, I am expecting a 51% increase y/y for Wearables and 24% growth in Watch. This results in a Watch revenues about $5.2 billion and non-Watch $5.7 billion. Now if we assume $1.7 billion for non-Watch-non-AirPods (i.e. Apple TV, HomePod, Beats, iPod, other) then this quarter AirPods will have overtaken peak iPod.
Remember that iPod was the phenomenon which reset all expectations for Apple. It caused Apple to cease calling itself Apple Computer. It (at least psychologically) laid the foundation for iPhone and everything else that followed. In 2005 and through 2007 Apple was "the iPod company". I remember people working in a large search engine company calling Apple "that media company" as a result of over-intellectualizing iTunes.
(One more footnote on the AirPods Pro is that at $250 a pair and $300 for Apple Watch, throwing in a case puts these attached accessories for an iPhone at roughly the same average selling price for the iPhone of a few years ago.)
For the AirPods to overtake the iPod highlights just what a phenomenal category Wearables has become. In combination with Home and other accessories the category is going to decidedly overtake the Mac, having already passed the iPad.
And so it goes, something dismissed as inconsequential–"does not move the needle"–ends up becoming a massive force of change. The iPod was that, the original Apple II, the Mac and yes, also the iPhone. It's the asymmetry of humility that this happens over and over again.
To hear more about the profundities of AirPods Pro tune in to the next Critical Path podcast.
The Apple Watch is now bigger than the iPod ever was. As the most popular watch of all time, it's clear that the watch is a new market success story. However it isn't a cultural success. It has the ability to signal its presence and to give the wearer a degree of individuality through material and band choice but it is too discreet. It conforms to norms of watch wearing and it is too easy to miss under a sleeve or in a pocket.
Not so for AirPods. These things look extremely different. Always white, always in view, pointed and sharp. You can't miss someone wearing AirPods. They practically scream their presence.
For this reason wearers, whether they want to or not, advertise the product loudly. Initially, when new, they looked strange, even goofy. But the product's value to the wearer overcame any embarrassment and for those courageous enough to wear them, they became a point of pride. As all things distinctive enough, the distinction rubs on the user and that distinction begets new users and new distinction, and so on. So now we have a bona fide cultural phenomenon.
I have both my son and parents angling to get these things. I have not seen this universal appeal recently, even for the watch. You have to explain the watch. The AirPods explain themselves. The only thing which AirPods do remind me of is the original iPod. The iPod-and-white-earbuds had a similar signal/function ratio. Looks distinctive, works well, nails the job to be done and is self-describing. The "iconification" of white was the phenomenon of its decade.
One wonders how much of this behavior is by design or, more precisely, engineered by designers. Did Jony Ive's team plan on users "flexing" with their AirPods? Did they make them distinctive on purpose with the stalks pointing down vs,, for example, wrapping around the back of the ear for a more discreet look? Was it just good luck and the form followed function? It's hard to imagine that taste could be engineered but here we are.
Whether planned or not, the newest AirPods offer a functional upgrade with no visual upgrade. This is noteworthy because whatever they got right with the original design they decided not to mess with it. You can't tell if someone is wearing the newest AirPods or the originals.
As far as the added functionality it is typical Apple: faster connections due to a new chip, longer talk time, longer listen time, voice-activated Siri and wireless charging. Broadly speaking they are just better in ways that need to better and not better in ways they are good enough.
The product is part of the "wearables" category at Apple which includes watch and is growing almost 50%/yr. and not from a small base either. The following graph show the history of the segment since 2009 (before the iPod peaked).
As can be seen, Wearables and Home segment grew out of the iPod segment, through "Other" products and is now almost double what the iPod used to be alone.
It should be noted that the AirPods can be paired directly with the Apple Watch and used independent from the iPhone. If not from this point alone, culturally the iconic white AirPods and jewel-like Apple Watch embody the spirit of the iPod.
We want things to get better. The desire of improvement and an increase in performance is seemingly innate. The old adage goes that using the word "new" is the most effective way to increase sales. "New & Improved" if you want to be redundant.
For many in technology, New & Improved means faster with more of every measurable parameter. More memory, more pixels, more storage, more bandwidth, more resolution. In devices, the tendency has been to communicate "new & improved" through an increase in screen size. We are subject to this to such an extent that phones are becoming unusable with one hand, stretching screens to the edge of the device and then wrapping those screens around the edges and then even folding the screens so that we have to unfold or unroll to use the product. Maybe an origami phone is in the works.
But there is a parallel movement where "New & Improved" means smaller. This is the trend to miniaturization. Smaller is better because it's more portable, more conformable. Things sold by the ounce are better than things sold by the pound. The best computer, the best anything, is the one you have with you and having it with you is more likely if you can take it with you. So that which you can take with you is the best. QED.
Apple has had a great history of miniaturization. The original Macintosh was tiny compared with personal computers of its day. It had a handle so you could take it with you. Apple pioneered laptops with breakthroughs in utility and form which made them truly portable. The iMac followed with a degree of integration and portability which made it iconic. Of course the iPod and iPhone were marvels when they first appeared.
Over the years these products expanded into ranges with "good, better, best" type segmentation. The bigger being the best in performance and the smaller typically being the most convenient. However it seemed that the positioning was toward "bigger is better" for a lot of these products. The iPhones Plus, the iPads Pro, etc. As even the largest were getting thinner, the "mini" versions appeared to be neglected. You could get "good enough" portability from the larger products so why bother with the minis.
It came to a head when the iPhone SE was discontinued last fall. Its demise felt like the end of an era. I always considered the SE as the "Steve Edition". It was the last design Steve Jobs was involved in and it pained me to see it go. With it seemed to go the positioning around "mini".
But also last fall we saw a re-boot of another almost-forgotten mini: the Mac mini. For me the Mac mini was quintessentially Jobsian. I remember that he loved tiny products. His launch of the iPod nano was spectacular; reaching into his jeans' watch pocket to pull it out on stage. Holding the Mac mini up as if a tiny tray. Even the iPod shuffle was a quirky and lovable idea ((probably the first Apple wearable as you could actually pin it to your clothes)). And let's not forget the Mac Cube which made the iMac look huge.
When the Mac mini was released last fall in Brooklyn with a huge spec bump and a thunderous reveal I thought something was up. When the MacBook Air was also out at the same event I felt that the company was signaling something. Perhaps a re-dedication to the low end.
Also in parallel there is the wearables product line. The AirPods and the Apple Watch are jewelry. The essential qualities of products you wear are that they be small and beautiful. The smaller the better. Above all, both the Watch and AirPods are marvels of miniaturization. They pack so much in so little volume and that volume is shaped in such an aesthetically elegant way that they become daily essentials. I use my Apple wearables more than any other Apple product. Watch glances and time with AirPods exceeds the iPhone unlocks and iPhone use time. The fact that we don't even realize that the smallest Apple products are also the ones we use most is a testament to their conformability to us.
So the Mac mini that is suddenly the Mac Maxi in performance, the MacBook which is an extraordinarily small laptop, the wearables success, all pointed in a direction that the iPhone did not: that "mini" was back.
And now we see the iPad mini being re-launched with a huge spec bump. We should take the hint. The iPad mini is just charming. I have been trying it out for a few days and it has worked its way into my routine. I have an iPad Pro that I use on a desk to design presentations (and to deliver them). I use it with a keyboard for dealing with email on my lap or on a plane and take it instead of a laptop when going to meetings.
But the iPad mini worked its way to my nightstand. It the one I reach for when on a couch. It is like an iPhone but when you're at home it's better than the iPhone because you can linger on that new true tone screen. It works well one handed. It now has Pencil support so it can be used for sketching and doodling.
I am an analyst not a product reviewer but I sense how it fills a gap between iPhones and larger devices--in a home setting. Of course it can be used in an office. It is much easer to take with you if you carry a laptop in a bag.
Fundamentally explaining mini is pointless. mini is something that is felt more than it is perceived. You can see the attraction of a tiny product only when you come face-to-face with it. In a picture it's hard to get it--there is no frame of reference. What draws me to a MacBook or to a mini or a Watch is when it's touched and held and carried or worn. The experience of the product is not how it works but how it works with you. You have to be part of it. It's not asking "Does it look good?". It's asking "Does it look good on me?" mini means more personal.
That is the nature of mini and that is why I love the new minis: the iPad mini, the Mac mini, the MacBook (mini) and that is what I dare to hope that there is an iPhone mini coming.
The following is a transcript of the comments from Tim Cook (CEO) and Luca Maestri (CFO) at Apple's Q1 2018 Earnings Conference Call February 1, 2018. I color coded my interpretation of the comments into four categories:
Grey: Background and promotional commentary
Red: Strategy and signals of what management considers important and may include data beyond the regularly reported numbers.
Green: Financial data
Black: Commentary.
Blue: My commentary, in brackets.
For a quick read of Apple's strategy, read the Red text. These comments are not repeated in financial reports. Highly recommended.
For a quick read of Apple's financial performance, read the green text (which are replicated in financial reports). Read this if you don't want to wade through the financial reports.
For marketing or product material, read the grey text.This is sometimes unique but also repeats product launch information.
---- Tim Cook: Thanks, Nancy and thanks everyone on the call, and welcome to everyone today. Before we dive into the quarter, I'd like to take a moment to talk about a significant milestone we recently crossed.
Apple's active installed base reached 1.3 billion devices in January and is at an all-time high for all of our major products. 1.3 billion devices represents an astonishing 30% growth in just two years. It speaks to the strength and reliability of our products and our ecosystem, as well as the loyalty, satisfaction and engagement of our customers. It's also fueling tremendous growth in our services business, which I’ll talk about a little later in the call. [This is probably Apple's most important number. For at least the next 20 years this is the key performance metric and it can be used to derive company's valuation. A summary of the history of active devices vs. units sold is shown in the graph below:]
Turning to the December quarter. We're thrilled to report Apple's biggest quarter ever, which set new all-time records in both revenue and earnings. We generated revenue of $88.3 billion, which is above the high-end of our guidance range, and it is up almost $10 billion or 13% over the previous all-time record we set a year ago.
It's also our fifth consecutive quarter of accelerating revenue growth with double digit growth in each of our geographic segments around the world. What makes us even more remarkable is that the quarter we're reporting today was 13-weeks long, while the year ago quarter was 14-weeks. When we look at the average revenue per week in the December quarter this year compared to last year, our growth was a stunning 21%. [The 13-week vs. 14-week year-on-year comparison is repeated several times. The summary differences are shown in the table below:]
Our growth was broad-based and a key driver was iPhone, which generated its highest revenue ever. iPhone X was the best-selling smartphone in the world in the December quarter according to Canalys, and it has been our top selling phone every week since it launched. iPhone 8 and iPhone 8 Plus rounded out the top three iPhones in the quarter. In fact, revenue for our newly launched iPhones was the highest of any lineup in our history, driving total Apple revenue above our guidance range. [The iPhone X is a huge hit. It drove the average selling price $100 higher y/y. This is not only unprecedented for Apple but for the entire Industry. The average smartphone sells for less than $300 while iPhones sold for $800. The gap is widening. The following graph shows the product mix and the average resulting price.]
I want to take a moment to recognize the tremendous amount of work that went into creating iPhone 10. Our teams carried out an extremely complex launch from both an engineering and operations perspective, executing an outstanding product ramp that required years of research and development; one that introduced innovative features like an edge-to-edge Super Retina Display and the TrueDepth Camera, which enables face ID. Our customers love these new features and the new gestures like simply swiping up from the bottom, which make using iPhone even more intuitive and enjoyable.
Our team has put the technology of tomorrow in our customers’ hands today, set a standard for the next decade of smartphones and we are very proud of their achievements.
It was another very strong quarter for services with revenue of $8.5 billion, up 18% over last year, and we’re on pace to achieve our goal of doubling our 2016 services revenue by 2020. The number of paid subscriptions across our services offerings passed 240 million by the end of the December quarter, that’s an increase of 30 million in the last 90 days alone, which is the largest quarterly growth ever. [Services has been growing relentlessly for over a decade. This steadiness of growth makes is a juggernaut. Apple is increasingly speaking about subscriptions as the key metric and 240 million is reaching record territory. The rise of Services is shown below (both revenues and consumer spending.)]
We had an all-time record quarter for the App Store with our best holiday season ever. We’re seeing great excitement around augmented reality with customers now enjoying over 2,000 ARKit enabled app, spanning every category in the App Store. In December, when Pokémon GO released its new augmented reality features built with ARKit, it jumped the top of the App Store charts. Last week, on a stop in Toronto, I met developers who are hard at work on creative applications using ARKit from art appreciation to ecommerce, and I was very impressed with what I saw.
Just for months after ARKit launched to the public, we’ve already released ARKit 1.5 in beta to developers around the world, and the response has been tremendous. Augmented reality is going to revolutionize many of the experiences we have with mobile devices. And with ARKit, we’re giving developers the most advanced tools on the market to create apps for the most advanced operating system running on the most advanced hardware. This is something only Apple can do.
In addition to the App Store, several other services had their biggest quarter ever, including Apple Music, iCloud and Apple Pay, all of which saw growth in both active users and revenue.
Apple Pay has reached an important milestone in the U.S. As a result of 50% year-over-year growth in merchant adoption, it’s now accepted at more than half of all American retail locations, which includes more than two-thirds of the country’s top 100 retailers. Now available in 20 markets, global Apple Pay purchase volume more than tripled year-over-year and we’re delighted to be expanding to Brazil in the coming months. [There are no absolute data points on Apple Pay but we do have some scattered growth data. The US data is cited here but in my experience it's more popular in select countries like UK where users are using it habitually]
Today, you can use Apple Pay to take the subway in Guangzhou, China, see a concert at London’s Wembley Stadium or buy a souvenir in Yosemite National Park. In the U.S., we launched Apple Pay Cash in December, and it’s off to a terrific start. Millions of people are already using it to send and receive money with friends and family quickly, easily and securely; to split a bill, pay someone back, or send last minute gift right from the messages app.
It was our best quarter ever for the Apple Watch with over 50% growth in revenue and units for the fourth quarter in a row and strong double-digit growth in every geographic segment. Sales of Apple Watch Series 3 models were also more than twice the volume of Series 2 a year ago. Apple Watch is the most popular, smart watch in the world and gained market share during the quarter based on the latest estimates from IDC. [Apple Watch is growing consistently. The following graph shows my estimates of volume (total 42 million to date) and revenues (total $15 billion) based on all available data and commentary from management.]
It was the third consecutive quarter of growth for iPad revenue, thanks to the strength of both iPad and iPad Pro. Based on the latest data from IDC, we gained share in nearly every market we track with strong outperformance in emerging markets.
Worldwide, almost half of our iPad sales were the first-time tablet buyers are those switching to Apple, and that’s true in some of our most developed markets, including Japan and France. In China, new and switching users made up over 70% of all iPad sales.
For Mac, we launched the all new, iMac Pro in mid-December. It’s an entirely new product line designed for our Pro users who love the all-in-one design of iMac and require workstation class performance. It's the fastest, most powerful Mac ever, delivering incredible computational power, for simulation and real time 3D rendering, immersive VR and complex photography audio and video projects. Worldwide, 60% of our Mac sales were the first time buyers and switchers and in China, that number was almost 90%.
We're looking forward to getting HomePod in customers’ hands beginning next week. HomePod is an innovative wireless speaker, which delivers stunning audio quality wherever its placed in the home, thanks to the advanced Apple engineered hardware and software.
Together with Apple Music, HomePod gives you instant access to one of the world's largest music catalogs. And with the intelligence of Siri, it’s a powerful assistant you control through natural voice interaction. We're very happy with the initial response from reviewers who've experienced HomePod ahead of its launch, and we think our customers are going to love this new product.
We believe one of the key issues of the 21st century is education. And because of that, we've strengthened our commitment and investment into initiatives like everyone can code. To find the innovators of the future, we need to nurture the students of today. Our App Development with Swift curriculum, which is available free on iBooks, has been downloaded more than 1.2 million times worldwide with almost half of those coming from here in the United States. It’s also being taught in dozens of community colleges across the country, putting practical skills in the hands of today’s jobs seekers.
I was in London two weeks ago as we announced that the program was expanding to more than 70 colleges and universities in Europe. Millions of students around the world will have the opportunity to add Swift to their coding vocabulary and gain skills that are essential for today’s economy.
This is an exciting time at Apple and with the best lineup of products and services we've ever had and a set of initiatives that show how business can be a force for good in the world. We could not be more excited about our future.
Now, for more details on the December quarter results, I'd like to turn over the call to Luca.
Luca Maestri: Thank you, Tim. Good afternoon, everyone. Our business and financial performance in the December quarter were exceptional, as we set new all-time records for revenue, operating income, net income and earnings per share.
Starting with revenue, we’re reporting an all-time record, $88.3 billion, up nearly $10 billion or 13% over the prior record set last year. It is our fifth consecutive quarter of accelerating revenue growth. As you know, the December quarter a year ago spanned 14-weeks compared to 13-weeks this year, which is important to consider as we have set the underlying performance of our business this year. When we look at average revenue per week, our growth rate was even higher at 21% with growth across all product categories for the third consecutive quarter.
Our results were terrific all around the world with double digit revenue growth in all our geographic segments, an all-time quarterly record in the vast majority of markets we track, including the U.S., Western Europe, Japan, Canada, Australia and Korea, as well as Mainland China, Latin America, The Middle East, Central and Eastern Europe, and India.
In Greater China, we were very happy to generate double digit revenue growth for the second quarter in a row and in emerging markets outside of Greater China, we saw 25% year-over-year growth.
Gross margin was 38.4% at the high end of our guidance range. Operating margin was 29.8% of revenue. Our net income was $20.1 billion an all-time record, and up $2.2 billion over the last year. Diluted earnings per share were $3.89 also an all-time record and cash flow from operations was very strong at $28.3 billion.
During the quarter, we sold 77.3 million iPhones, the highest number ever for a 13-week quarter. Average weekly iPhone sales were up 6% compared to December quarter last year with growth in every region of the world despite the staggered launch of iPhone 10. We established all-time iPhone revenue record in nearly every market we track with double-digit growth in all of our geographic segments. iPhone ASP increased to $796 from $695 a year ago, driven primarily by the launch of iPhone 10 and the success of iPhone 8 and 8 Plus.
We exited the December quarter towards the lower end of our target range of five to seven weeks of iPhone channel inventory with less than 1 million more iPhones in the channel compared to the December quarter a year ago, in line with our growth in average weekly unit sales. Customer interest and satisfaction with iPhone are very, very strong for both consumers and business users.
The latest data from 451 Research indicates U.S. customer satisfaction ratings of 96% or higher across iPhone models. In fact, combining iPhone 8, iPhone 8 Plus and iPhone 10, consumers reported an amazing 99% satisfaction rating. And among business customers planning to purchase smartphones in the next quarter, 77% planned to purchase iPhone. Our customers are also incredibly loyal with Kantar's latest U.S. research, reflecting a 96% iPhone loyalty rate, the highest ever measured. [Customer satisfaction is the second most important figure after active user base. Combining these two figures yields the recurring revenue value of the company. Remember what Deming said: the most important measurements for a company's value are the multipliers of a satisfied customer and a dissatisfied customer--these numbers never appear on any financial report but they are applied to all the numbers on every report].
Turning to services. We had a terrific quarter with revenue of $8.5 billion, up 18% year-over-year and up 27% in terms of average revenue per week; that is an acceleration to the 24% services growth run rate that we experienced in the September quarter.
The App Store set a new all-time revenue record. The Store’s all-new design is off to a fantastic start with quarterly store visitors, transacting accounts and paying accounts, reaching new all-time highs. During the week beginning December 24th, a record number of customers made purchases or downloaded Apps from the App Store, spending over $890 million in that seven-day period, followed by $300 million in purchases on New Year’s day alone.
And according to App Annie’s latest report, the App Store continues to be the preferred destination for customer purchases by a very wide margin, generating nearly twice the revenue of Google Play. Across all our services offerings, paid subscriptions reached $240 million with growth of 58% over last year and they were a major contributor to the overall strong growth in services revenue. [Apple has half the user base of Google Android. This is based on Google's May 2017 report of 2 billion active devices vs. the 1.3 billion that we just got from Apple. And yet these users collectively spend twice as much on apps. This ratio of "half the users, twice the spending" has been cropping up in individual developer anecdotes and can also be seen in other metrics of engagement and consumption. This should not be surprising as it conforms to the Pareto distribution of economic value.]
As Tim mentioned, it was our best quarter ever for Apple Watch. And when we add to this us from Beats and AirPods, our total revenue from wearables was up almost 70% year-over-year. In fact, wearables were the second largest contributor to revenue growth after iPhone, which is impressive for a business that started only three years ago. In total, our other products category set a new all-time record with quarterly revenue exceeding $5 billion for the first time. [Wearables now includes more than watches but watches are likely still the dominant product.]
Next, I’d like to talk about the Mac. We sold 5.1 million Macs during the December quarter, which translates to a 2% year-over-year increase in average sales per week. Mac performance was particularly strong in emerging markets with unit sales up 13% year-over-year and with all-time records in Latin America, in India, Turkey and Central and Eastern Europe. On a worldwide basis, the active install base of Macs was up double-digits year-over-year to a new record.
It was also another growth quarter for iPad. We sold 13.2 million units with average iPad sales per week up 8% over last year’s December quarter. iPad sales grew strong double-digits in many emerging markets, including Latin America, the Middle East, Central and Eastern Europe and India, as well as developed markets, including Japan, Australia and Korea. The active install base of iPad has grown every quarter since its launch in 2010, and it reached a new all-time high in December, thanks to extremely high customer loyalty and large numbers of first-time iPad users. [iPad is clearly recovering from a long decline. ASPs are rising as it's being positioned as a PC alternative. Its low end functions are being absorbed by large screen iPhones.]
NPD indicates that iPad had 46% share of the U.S. tablet market in the December quarter, up from 36% share a year ago. And the most recent surveys from 451 Research found that among customers planning to purchase tablets within 90 days, 72% of consumers and 68% of business users planned to purchase iPads. Customer satisfaction is also very high with businesses reporting a 99% satisfaction rating for iPad.
We are seeing great traction in enterprise as businesses across industries and around the world standardize on iOS. For example, Intesa Sanpaolo, one of Europe’s leading banks, has chosen iOS as the mobile standard for its entire 70,000 employee base in Italy; choosing iOS for its security, user interface, accessibility and reliability, Intesa Sanpaolo will deploy native apps to improve employee productivity in customer support, human resources, and marketing across the company.
And LensCrafters, one of the largest optical retail brands in North America, will be using over 7,000 iPad Pros to enable digital eye exams and digital optical measurements in a personalized and interactive experience. We’re also rolling out a new initiative, called Apple AtWork to help businesses implement employee choice programs more easily and offer Apple products company-wide.
Resources from both Apple and our channel partners will enable enterprise IT and procurement teams to buy or lease Apple products more efficiently, streamline the setup of iPhone, iPad, and Mac, and deliver a seamless onboarding experience for employees. We launched the program with CDW in the U.S. last week, and we would be expanding to more channels and regions later this year.
The December quarter was extremely busy for our retail and online stores, which welcomed 538 million visitors. Traffic was particularly strong during the four-weeks following the launch of iPhone 10, up 46% over last year. And across the quarter, our stores conducted over 200,000 today at Apple sessions, covering topics including photography, music, gaming, and app development, and art and design. Just last weekend, we opened our first store in Seoul, Korea and we’re looking forward to opening our first store in Austria in a few weeks. These newest openings will mark the expansion of our retail store presence to 21 countries.
Let me now turn to our cash position. We ended the quarter with $285.1 billion in cash plus marketable securities, a sequential increase of $16.2 billion. $269 billion of this cash, or 94% of the total, was outside the United States. We issued $7 billion in debt during the quarter, bringing us to $110 billion in term-debt and $12 billion in commercial paper outstanding, for a total net cash position of $163 billion at the end of the quarter. We also returned $14.5 billion to investors during the quarter. We paid $3.3 billion in dividends and equivalents, and spent $5.1 billion on repurchases of 30.2 million Apple shares through open market transactions.
We launched a new $5 billion ASR program, resulting in initial delivery and retirement of 23.6 million shares and we retired 3.8 million shares upon the completion of our 12th ASR during the quarter. We’ve now completed over $248 billion of our $300 billion capital return program, including $176 billion in share repurchases against our announced $210 billion buyback program with $34 billion remaining under our current authorization. [An updated look at Apple's cash is shown below]
Turning to taxes. Due to the recently enacted legislation in the U.S., we estimate making a corporate income tax payment of approximately $38 billion to the U.S. government on our cumulative past foreign earnings. This amount is very similar to what we had been accruing on those earnings in our financial results through fiscal year 2017, including the $38 billion payment. We will have paid over $110 billion of corporate income tax on our total domestic and foreign earnings during the last 10 years for a cash tax rate of about 26%. [Apple has paid more tax than any company in history, and is about the make the largest single payment to the US Treasury.]
Our tax rate of 25.8% for the December quarter was close to our guidance of 25.5% as the lower U.S. statutory rate from the new legislation was effective offset by the remeasurement of deferred tax balances.
As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward looking information that Nancy referred to at the beginning of the call; we expect revenue to be between $60 billion and $62 billion; we expect gross margin to be between 38% and 38.5%; we expect OpEx to be between $7.6 billion and $7.7 billion; we expect OI&E to be about $300 million; and we expect the tax rate to be about 15%.
Tax reform will allow us to pursue a more optimal capital structure for our company. Our current net cash position is $163 billion. And given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash neutral overtime. We will provide an update to our specific capital allocation plans when we report results for our second fiscal quarter, consistent with the timing of updates that we have provided in the past.
Finally, today our Board of Directors has declared a cash dividend of $0.63 per share of common stock, payable on February 15, 2018, to shareholders of record as of February 12, 2018.
The last time Apple reported iPod unit and revenues was for the third quarter of 2014. Thereafter the product segment called “Other Products” was used to include what was formerly the iPod segment and the “Accessories” segment. Exactly two quarters later Apple began to sell the Apple Watch. Apple Watch was not broken out as a separate product segment and remained a part of Other Products along with iPod touch, Beats, Apple TV, and Apple-branded and third-party accessories. Soon the HomePod will also join the Other products.
The combined iPod, Accessories and “Other” product sales are shown in the following graph. ((Two quarters include estimated iPod revenues: Q4 ’14 and Q1 ’15. The iPod contribution is estimated with a simple extrapolation using the previous four quarters’ average rate of decline))
Note that an attempt is made to estimate the contribution of Apple Watch to the mix. The method is simple: if you can estimate the non-Watch sales trajectory then the Watch is the difference between Other total and this trajectory.
If we discount the iPod, the non-Watch revenues come down to Apple TV and Beats, mainly. Note that the data shows the contribution of Beats (Q4 2010) but it’s hard to parse specifically the growth of Beats. Since the Watch launched we also saw the introduction of AirPods and new Apple TVs, both of which probably contributed to some growth to “Other excluding Watch.”
We can take a stab at the first 6 quarters of Watch by projecting Other with some nominal growth. Thereafter Watch can be modeled using growth assumptions. Apple stated that growth was above 50% during the past three quarters. There are a few quarters where we must make guesses but overall the picture that emerges, shown below, is fairly robust. Note that I’ve included estimates for the fourth quarter of 2017 assuming continuing 50% growth. This is driven primarily by the launch of the LTE-enabled Series 3.
The result is a cumulative sales value of $14.3 billion and a volume of 40 million units (based on average pricing assumptions).
But what most catches the eye is the transition from iPod to Watch. Watch entered nearly at the same time as iPod bowed out. Its contribution to sales seems to mirror the iPod as well. The interesting question then becomes if the Watch will eventually match and indeed exceed the revenues from iPod.
I’d say the better question is _when_ Watch will overtake iPod. From a revenue point of view, I believe next year’s fourth quarter will see the Watch generating higher revenues than the highest quarter for the iPod. ((That was in Q4 2007 when iPod managed $4 billion.))
In terms of yearly unit sales it may take longer. The biggest year for iPod units was 2008 when about 55 million iPods shipped. Watch is now running at about 16million. If it could sustain 30% growth then it would take until 2022. 40% growth would mean 2021 and 50% 2020.
It’s not easy to predict growth but my bet remains that Watch will get there eventually becoming the third most popular Apple product. Perhaps even second.
Overtaking the iPod is quite an achievement considering that the iPod was once synonymous with Apple itself. Although Watch may overcome iPod, Apple may never be known as the Watch company. That’s perhaps for the best. I’ve noted before that Apple was once seen as the Apple II company, became the Mac company then the iPod company. Now of course it is thought of as the iPhone company though it’s no more that than it ever was any of the other things.
Apple is now the biggest watchmaker in the world, overtaking Rolex during the last quarter. This achievement happened less than two and a half years after Apple entered the watch market. Rolex, on the other hand, was founded in 1905, 112 years ago at a time when watches were the avant-garde of technology. Given this revelation of sales, we can test the estimates I put forward on the Apple Watch sales, shown below:
We know that Rolex produces about 1 million watches a year and we also know that Rolex had sales of $4.7 billion in 2016. The average revenue per watch ((Includes services such as repairs)) was therefore about $4,700.
My estimate has been that Apple sold about 15 million Watches in the last 12 months at an average price of about $330. This puts the Apple Watch revenue run rate at $4.9 billion, indeed above Rolex.
They may be slightly high but the news makes me feel quite comfortable in my methodology. Note also that within the last quarter Apple said sales for the Watch increased by 50%. This is also reflected in my estimate of 3 million in Q2 vs. ~2 million for 2016 Q2.
Overall, about 33 million Apple Watch units have been sold since launch and they generated about $12 billion in sales. Coupled with a 95% customer satisfaction score, altogether, this has been a great success story. But only 2.5 years in, it's still act one.
To understand the long term trajectory, it's important to qualify this product as part of another, larger story. The Watch, even with LTE, is an accessory to the iPhone. It still cannot be activated without it. Even the coverage plan is an extension to an iPhone plan. The company is careful to address it as a companion product.
But how long will that last?
It used to be necessary to first attach an iPhone to a computer to activate it. That used to be cited as a reason for the iPhone not being a "proper computer", diverting attention from what it would inevitably become. Those who clung to that thin wire as a reason not to face the future were deceived. The iPhone and the iPad now stand alone of any PC or Mac. Will the Watch cut these familial links and stand alone some day?
I think this too is inevitable. The technology trajectories are easy enough to plot. Apple has invested enormously in the silicon that goes inside the Watch and has taken it to new levels of connectivity with LTE, 85% faster WiFi, and a 70% faster processor; all with 50% better power efficiency.
These enable independent voice entry, Siri everywhere, Find My Friends, Maps, music streaming. These breakthroughs are only possible with a new W2 processor which is more powerful than the first iPhone processors.
This comparison is apt: the Watch is effectively stealing usage from the iPhone. At first it took alerts, timekeeping, and basic messaging away. Now it's taking basic phone calls and music and maybe maps.
It's fitting therefore to remember how the iPhone was launched; as a tentpole troika: A wide-screen iPod, an Internet Communicator and a Phone. Today the new Watch is a small-screen iPod, an Internet Communicator and a Phone.
So not only is the Series 3 Watch more powerful than the original iPhone but it is also poetically capable of the same tentpole jobs. But it's not just a miniature iPhone. It has a new, completely orthogonal attack on non-consumption and market creation: fitness and health. This is a key point. The iPhone was born a phone but grew up to be something completely unprecedented, unforeseen by its creators and, frankly, undescribable in the language of 2007.
The Watch was born a timepiece but it is traversing through the early iPhone and pulling in a new direction all of its own. The fact that we are talking about "Resting Rate", "Arrhythmia" and "Atrial fibrillation" at a timekeeping launch event indicates that new behaviors will follow and so will the language we'll use to describe this child-like product once it grows up.
From the way Apple reports its revenues you might think that the company has several operating segments. There are the iPhone, the Mac, the iPad for which units and revenues are reported. Then there are Services and Other Products for which we have revenues only.
Services is a collection of all non-hardware revenues and is (finally) being recognized as a non-trivial business. With reported revenues of $26.6 billion in the last twelve months, it's big enough to be a Fortune 100 company and set to double in four years. ((Although a non-zero business, the valuation of Services continues to confound observers who cannot separate it from the hardware businesses it attaches to--which themselves are considered near commodity value--thus paradoxically valuing the overlying asset of Services near or precisely at zero. Incidentally, Facebook is Fortune 98 at $27.3 billion and it is also one of the top 5 largest business by market capitalization.))
That leaves "Other Products" which now becomes the revenue segment that is "most likely to be ignored." This segment had revenues of only about $11.5 billion in the last 12 months which would place it at only a Fortune 245 ranking, equivalent to a Toys "R" Us or Biogen. How should we value Other Products?
Other includes many hardware products including iPod, Apple TV, Beats, Apple Watch, AirPods and, soon, HomePod. Each is a significant product, with Watch probably the largest single contributor. But since we don't have specific unit numbers, we are left guessing at the contribution of each.
The Watch itself has been a point of scrutiny as it could be initially teased out of the mix through an observation of the before-and-after launch vs. trend-line as shown below:
This separation of Watch became harder to discern after the launch of AirPods. Though they are still very hard to obtain, they might be "moving the needle" by now with a contribution that would muddy the Other category further. Same with updated Beats headphones.
This separation will be harder still with the launch of HomePod later this year. This product is priced at a point similar to the Watch and the quantities sold will be very hard to estimate without Apple's revealing of actuals.
Fundamentally however, all the "Other products" will have a common relationship to the iOS and MacOS hardware: attachment to and integration with a "parent" platform. Apple TV might be stand-alone but I strongly doubt there are many sold into offices or households which don't have iOS usage.
This means that "Other Products" are very similar to "Services" in that there is a dependency on a primary platform and, as it has been argued, they are therefore fragile. If the core platform declines then the Services and Other Products decline as well.
Given this dependency it makes little sense to carve these categories out as separate businesses. They cannot stand alone. They are very much the "children" of the parent platforms.
This is why it's assumed that Services, (a Fortune 100 company) and Other Products (a Fortune 250 company) can be discounted to zero. By focusing attention on the iPhone one can capture all the essential value of Apple. This is in contrast to the "sum-of-parts" valuation that could be applied to a set of independent business units in other companies.
And yet I started this discussion with the point that you might be tempted to look at Apple on the basis of these reported revenue segments. The choice of what Apple reports is arbitrary. It could report no segment revenues at all and publish just one revenue number. This is roughly what Google Amazon and Facebook do. Or it could report segments in some other way. For instance, app store revenues and AirPods could be reported as part of "The iPhone Division". Or maybe it could bundle all iOS devices and services and accessories into another segment called "The iOS Group". Or it could create a "Devices group" and a "Personal Computing" group. Microsoft famously shuffles its revenues into creative segments based on various organizational structures or choice of what it wants to project as its focus.
There is no limit to the ways Apple could slice revenues into segments. The reason Apple does it the way they do is mostly due to historical reasons. The company used to report the iPod separately as a segment but it no longer does. It also used to report Software separately, because, presumably, it charged for it but now it no longer does. It also separated laptops or portables from desktops.
The current reporting system is tempting us to draw certain "business unit" conclusions. These boundaries are illusions because Apple does not have business units. It has only one Profit and Loss statement (P/L) and is organized functionally. There is no "head of iPhone" or "head of Mac" responsible for each siloed revenue and cost structure. Instead, the entire business should be seen as a whole because it is managed as a whole.
This is easily evident in how the products are designed and marketed and how they are engineered. The iPhone may spawn AirPods and AirPods may have no value outside the iPhone but the iPhone is valuable precisely because it has AirPods and Apps and Music and iCloud. And Apple TV, and HomePod and whatever comes next. The reason the iPhone can be sold at three times the price of competitor products is because of the Services and Other Products and iPad and Mac symbiosis. This integration drives the satisfaction, loyalty, price and brand value. There there are the Apple Stores and the launch events and the countless details that make up the ownership experience.
The fact is that you can't slice and dice Apple.
There is one Apple and it must be analyzed as a unitary entity. That analysis is therefore difficult. It is easy to pick up the numbers given and study them in isolation. The iPhone, the iPad, the Mac. We all do that.. However we miss a great deal in doing that.
The lesson is that data we obtain leads us to see something but it also blinds us by taking attention away from what we cannot see. All data lies by omission. That which is left unmeasured may be where all the truth lies.
In my quoting of the "Cook Doctrine" I cited the primary criteria for Apple to enter a new market:
We believe that we need to own and control the primary technologies behind the products we make, and participate only in markets where we can make a significant contribution.
These criteria, often repeated, were certainly in force when Apple chose to enter the watch market. Apple has sought and achieved a significant market share and did so while owning and controlling the primary technologies behind the product.
I now turn to the significant contribution criterion to study the possibility of Apple's entry into the car industry. ((Control of the primary technologies behind the product is a topic for another post.))
The significance test shifts the speculation from whether Apple would build a car, to how many cars is could build. Making a few cars is easy (see first commandment of The Entrant's Guide to the Automotive Industry). Making lots of cars is hard and hence significance in the automotive market (as in watches and phones) means achieving some degree of adoption, a higher degree of usage and a very high degree of profitability.
So what does being significant in the car business mean? Does it mean becoming the next Tesla? The next BYD or the next VW? How quickly?
Fortunately, we have something to compare an Apple entry to. Apple has made a "significant" market entry in phones and others have made entries in cars. If we contrast the rate of growth of Tesla, EVs, and Hybrids ((Of which Toyota has 70% to 80% share)) to the rate of growth of iPhones in their respective US markets, we obtain a test of significance:
The graph shows the percent of sales for the alternative car technologies (and Tesla) vs. the percent of US phone users using iPhones (comScore). Here are the conclusions:
Hybrid cars were introduced in 2000 in the US. They managed to gain 2.5% within 8 years but have not increased to a consistently higher level since.
Electric vehicle sales re-sarted in earnest in 2008 and have gained 0.4% share in eight years. They are still growing, partly helped by significant federal and state subsidies.
Between sales start in 2008 and 2015 Tesla achieved 0.15% share.
The iPhone ushered in a new paradigm within the phone market ((Incidentally the number of phones in use and cars in use in the US is comparable.)) in mid 2007. In the time since, Apple achieved the equivalent of about 35% share of unit sales. ((Significantly more in terms of sales value and over 90% of profitability.))
Between 2002 and 2015 the share of smartphones as a percent of all phones reached over 80%.
To summarize, the range for entrant technology share capture spans between 0.4% (EVs between 2008 and 2015), 2.4% (Hybrids between 2000 and 2015) and 80% (Smartphones between 2002 and 2015).
Within a similar time frame, the range for entrant company share capture spanned between 0.15% (Tesla as percent of US car market) and 35% (Apple iPhone percent of US phone market). ((Toyota's capture of 2% of the market with hybrids may or may not be considered entrant--I chose to consider Toyota an incumbent which took share from others with the Prius))
The differences thus span two orders of magnitude (>100x). Put another way, if Tesla's car entry was equivalent to Apple's iPhone entry they would have delivered about 5.5 million cars rather than the 50.5k they delivered in 2015.
This wide gap in the impact of entry in the two markets has much to do with how modular are the systems being engaged by the entrants. An electric automotive system requires new infrastructure, new user behavior, and, in the case of Tesla, new distribution network and new post-sales support network. Offsetting this partially is a government subsidy.
In contrast, the smartphone communications and computing system leveraged existing infrastructure ((And vice-versa)), consistent behavior, at least initially, and the same distribution and support network. In addition, smartphones benefited from significant hardware and software and services ecosystems which encouraged third parties to add value to the system.
The difference in collaborative development and conforming user experiences (i.e. modularity) between the two innovations allowed the speed of change to be two orders of magnitude faster. The result is what I would consider significance for the iPhone vs. insignificance for electric vehicles to date.
Which leads us back to the question of why Apple would enter this market. If the absence of modularity prevents rapid change, that implies Apple cannot achieve any significant impact from entry.
We could ask the question differently: If they do enter, they could achieve significance only if they change the degree of modularity in the system. Think of it as allowing infrastructure leverage, consistent user behavior, wide distribution, wide support network, ecosystems, and component architecture; allowing rapid scale production and lower costs, etc.
Therefore the only way that Apple could justify entry would be if they "rationalized" the system into a sufficiently modular alternative. Only if we assume that change is possible could we then target share above the 0.1% insignificant change that has been demonstrated. They might even perhaps aim at 1% impact within a few years of entry. 1% was the iPhone target within the first full year of sales.
If system-wide change could be brought about and made uniquely (through some form of sustainable asymmetry) then the foreseeable share possibility quickly reaches the 10% range.
The last time that happened was when Toyota changed the way cars are designed and built. ((VW before Toyota and GM before VW. Incidentally Toyota, GM and VW are now nearly tied as the top three automakers globally.))
Bernard Desarnauts had a great idea a few weeks ago: the world needs an event to discuss Apple Watch. After recovering from the shock of not thinking of it first and then from the shock that nobody else had either, I immediately agreed and along with Ben Bajarin and Farshad Nayeri, we quickly rallied to organize and anchor this event: Glance: A Deep Look at Apple Watch.
We had some big questions to answer:
What is the strategy for Apple Watch? Is it an object of beauty and desire, placing Apple in the "luxury sector" or is it a computer infiltrating what is otherwise a technology-free zone with utility in an asymmetric attack?
How can developers discover the killer jobs to be done? Beyond tentpoles what will the primary reasons people will use the watch? What does the data tell us so far? What can be observed from interviews?
Given the sales performance to date, what can we expect from the product? What is the addressable market? What will be the installed base? How quickly will it grow?
What is the platform strategy, especially with the cadence of OS releases? Is Apple treating this as a separate platform? Will it eventually become independent of the iPhone as the iPhone cast off its dependence on the Mac/PC?
What is the hardware strategy? What are the constraints from manufacturing, materials, battery life and screen space? What will be the replacement schedule? What is the role of modular internal designs?
We realized that we did not have the answers. So we recruited a great cast of participants to help us:
Bob Moesta, the founder and developer of the theory of jobs-to-be-done marketing agreed to do a live interview to understand what jobs watches, and in particular Apple Watches, are hired to do.
Josh Clark, the premier UX designer who wrote Designing for Touch will explore the question of user experience in glanceable space.
Liza Kindred is considered the top expert on fashion tech–she’s writing the book on the future of commerce–brings keen understanding of wearables.
Abdel Ibrahim the most prominent blogger and writer on the topic of Apple Watch. Has forgotten more about the Apple Watch than you will ever learn.
Carolina Milanesi one of the most respected technology market analysts, now at Kantar and often quoted on all things Apple.
Greg Koenig, product designer at Atomic Delights will educate us on the atoms that make up the Watch.
Investors who will participate in panel conversations:
Special guest: Jean-Louis Gassée, former head of Apple Engineering, current VC and everything in-between will have a fireside chat with Tim Bajarin Legendary technology analyst who has been around long enough to see furthest ahead.
We will explore Apple Watch as a very curious interaction between form and function, luxury and utility, exclusivity and ubiquity, tiny screens and big audiences, short attention spans, big data.
We have developers, designers, investors, marketers and analysts contributing to what could be the biggest leap in computing since the smartphone.
If you are interesting in becoming one of the innovators on this newest of platforms or planning a strategy to invest, or even (actually especially) if you are a skeptic, you can't miss this conference.
Katy Huberty (Analyst - Morgan Stanley): You've said in the past that the watch may take longer to ramp given the new category and new interface to customers. Is that, in fact, playing out? Is the watch ramping slower than past product categories?
Tim Cook (CEO): Katy, when you use the word ramp, do you mean from a -- I assume you're talking about supply?
Katy Huberty (Analyst - Morgan Stanley): Yes. Pre-orders and first week in sales and any other data points that you track in terms of interest versus, say, when the iPad launched in 2010?
Tim Cook (CEO): Let me talk about supply and demand and sort of separate those two. Right now demand is greater than supply. And so we are working hard to remedy that. ((This is still true today, three months later))
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. […] So I'm generally happy that the -- that we're moving on with the ramp.
It is a new product for us, and with any kind of new product, you wind up taking some time to fully ramp.
Having said that, I think we're in a good position. And by some time 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. ((This has been achieved according to plan.))
From a demand point of view, it's hard to gauge when you don't have product in stores and so forth. And so we're filling 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 of 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 1,000. And so our internal goal was to be able to beat the 1,000 level and we felt -- we thought it would be great if we were able to do that by a little bit.
And as I've mentioned before, we now have over 3,500 apps in the App Store for the Watch. And so we couldn't be happier about how things are going from that point of view.
We are learning 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 and 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. And 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.
[…]
Gene Munster (Analyst - Piper Jaffray and Co.): …question for Luca, in terms of any thoughts on what the margin impact from the Watch as that ramps over the next couple of years?
Luca Maestri (CFO): Apple Watch is, not only a new product, but it's a brand new category with a lot of new features, a lot of new innovative technologies. And Apple Watch margins will be lower than the Company average.
[…]
Toni Sacconaghi (Analyst - Bernstein): I just wanted to revisit the watch.
Tim, I think you said when you were talking about your new products, you said we're, quote, very happy with the reception. And in response to a previous answer you said, relative to demand, it's hard to gauge with no product in the stores.
I would say relative to other product launches where your commentary around demand was characterized by superlative after superlative, that assessment feels very modest. And part of the reason that I ask is, A, are we reading you right in terms of that? But if we look at consensus, consensus is expecting that Apple will ship more watches in its first two quarters than it did iPads, despite, as you said, very limited distribution in terms of only selling through your stores.
So I'm wondering if you can talk a little bit about putting those demand comments in context, given that they do seem different from how you've characterized product demand for other products. And how, if at all, we should think about the modeling demand in the context perhaps of the iPad, which was your most recent significant new category? And then I have a follow-up, please.
Tim Cook (CEO): I'm thrilled with it, Toni. So I don't want you to read anything I'm saying any way other than that. So I'm not sure how to say that any clearer than that.
And in any situation, whether it's the watch or in the past on iPad or on 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 on here. We maybe forecasts for the current quarter. And so I don't want to make any comment about the consensus numbers.
Honestly, I haven't even studied those. We've got 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.
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Excerpts from Apple Earnings Report: Q2 2015 Conference Call Transcript, April 27, 2015.
