Notes from Apple’s Q4 2014 earnings call

Apple’s conference call after announcing its Q4 2014 financial results kicked off with Apple CEO Tim Cook discussing the iPhone 6 and iPhone 6 Plus, Apple Pay, Apple Watch, iPad Air 2, iPad mini 3, the new iMac with a Retina 5K Display, iOS 8 and OS X Yosemite.

Getting to the financial results, Cook announced that Apple saw its strongest growth rate in seven quarters, with a new record for Apple’s September quarter revenue. “Fuelled by the launch of iPhone 6 and 6 Plus and strong demand for previous iPhone models, we set a new September quarter record for iPhone,” Cook said. He also noted that they set an all-time record for App Store revenue, which grew 36% since last year, and cumulative app downloads have now topped 85 billion.

Cook spoke with enthusiasm about the landmark partnership Apple forged with IBM to bring its Mobile First solutions to enterprise customers, with solutions launching across six sectors next month: banking, government insurance, retail, travel, and telecommunication.

Apple CFO Luca Maestri talked about how Apple exceeded its guidance range due to better than expected sales of iPhones and Macs due to customer demand growing year-over-year. iPhone sales grew over both developed and emerging markets, with 17% growth year-over-year in the U.S., and growth of over 50% in Latin America and the Middle East. Maestri went on to note that iPhone demand in the enterprise market remains strong, with 75% of surveyed corporations planning to purchase iPhones in the coming quarter. Referring to lower iPad sales, Maestri indicated that channel inventory was reduced in anticipation of the new iPad releases, and sales were consistent with Apple’s expectations, and sales increased in Japan year-over-year. iPad also continues to lead in the education market with a 90% share.

Apple also announced that it would be changing how it reports revenue categories beginning in Q1 2015, with the new categories being iPhone, iPad, Mac, Services, and Other Products. Apple Pay revenue will be reported under “Services” alongside iTunes content and App Store apps. iPod and Apple Watch revenue will now be grouped into “Other Products” alongside the Apple TV and iPhone, iPad, Mac, and other accessories manufactured by Apple.

Responding to questions about whether Apple views the business model for Apple Pay as a way to sell devices or a service unto itself, Tim Cook responded saying “What we wanted to achieve with Apple Pay was first and foremost to have this incredible consumer experience…..We also wanted to focus on security and privacy.” Cook went on to note that Apple sees “huge issues with the security of the traditional credit card system,” stating that “people who have entered mobile payments are doing so in a way that they want to monetize the data they collect from the customers and we think that customers in general do not want this.” Cook summarized stating that the goals for Apple Pay were ease of use, security, and privacy, and that by focusing on these goals, “we think we will sell more devices because we think it’s a killer feature. We see Apple Pay as an incredible service that is the most customer-centric mobile payment system that there is. We’re very proud of if and we can’t wait to sign up more retailers and extend it around the world.”

When asked about the mix of repeat buyers versus first-time iPhone customers, Tim Cook noted that in countries like China over 80% of the people that Apple sold the iPhone 4S to were buying their first iPhone ever, while in the U.S. that was over 60%, talking about first-time ownership at the entry level iPhone model. Comparing it to the iPhone 5s, in China almost half of purchasers were buying for the first time, as compared to about a quarter of the U.S. population. Going forward Cook notes that he still sees a fairly large opportunity in people buying their first iPhone ever, and that with the new iPhone 6 and 6 Plus this opportunity increases. Cook also notes that he believes the upgrade market is huge for folks that were waiting for the iPhone 6 and 6 Plus, and that this will go on for some time due to upgraders being on contract with either previous iPhone models or other devices.

Commenting on the mix of iPhone 6 to iPhone 6 Plus sales, particularly in light of different geographic markets, Cook noted that it’s difficult to provide information that’s particularly accurate as Apple is presently selling every iPhone unit that it’s making. Cook notes that he believes that there will be a difference by geography in terms of preference, but it’s impossible to say until the supply chain is no longer constrained and supply actually exceeds demand to give consumers enough opportunity to choose their preferred model.

Asked about the Apple Watch being placed in the “Other” category with the new reporting segments, Tim Cook noted that it says nothing about Apple’s expectations for the product, and that the categories were formed based on current “today” revenue, and that Apple would lump everything that wasn’t an iPhone, an iPad, a Mac, or a service into a single category, and that in the future Apple may decide something different, but since they’re not shipping any Apple Watches yet, it seems appropriate to start it that way. Cook also noted that he’s not anxious to report specific numbers for the Apple Watch as that’s what competitors are looking for.

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