Apple Q2: Cook explains the iPad lag; Office for iPad; ramping up its enterprise efforts

Apple Q2: Cook explains the iPad lag; Office for iPad; ramping up its enterprise efforts

Summary: iPhone sales are up, but iPad growth crumbled. Apple CEO Tim Cook explained more on its earnings call. Cook also explained the firm's greater push to reach the enterprise.

TOPICS: Apple, iOS, iPhone, iPad
(Image: CNET/CBS Interactive)

Apple's chief executive Tim Cook was forced to explain on the company's fiscal second quarter earnings call Wednesday why the company fell down on iPad sales, which were significantly below Wall Street estimates.

But thanks to a 17 percent growth in its iPhone unit, that helped to offset the company's iPad unit, which suffered a strong decline of 16 percent year-over-year. 

By the numbers (you can read more on the breakdown here):

  • iPhone year-over-year growth is up by 17 percent
  • iPhone makes up 57.1 percent of Apple's revenue; iPad makes up 19.9 percent
  • iPad year-over-year growth is down 16 percent
  • iTunes (software and services) had a record quarter
  • Apple bought 24 companies in 18 months
  • Profits were up from $9.5 billion to $10.2 billion, pegging profit margins at 39.3 percent
  • Close to 800 million iTunes accounts, most with credit cards

Despite the decline in iPad sales, Apple's stock was up by more than 8 percent in after-hours trading on the Nasdaq on Wednesday following the news. 

Cook, and new chief financial officer Luca Maestri — who replaces long-time executive Peter Oppenheimer, explained the results to investors and the media.

On declining iPad sales

iPad sales came in far below analyst expectations. Wall Street estimated the company would sell at least 19.2 million tablets, but landed in 16 percent below at just 16.35 million.

Cook explained that there were two factors behind this. In the same quarter a year prior, Apple increased iPad channel inventory, whereas in this quarter it was reduced. And secondly, Apple ended the first quarter, its main holiday season, with a backlog of iPad mini, which was subsequently shipped during the second quarter just ended.

"It's been the fastest growing product in Apple's history. It was an instant hit in business, education, and consumer," Cook said. "In just four years after we launched the first iPad, we've sold over 210 million — more than anyone thought was possible. That's almost twice as much during a comparable timeframe."

On enterprise sales

Maestri said the business customer is becoming increasingly important for Apple to focus on, with iPhone and iPad adoption in the enterprise up. He gave two examples:

"If you look at iPhone, our strength was broad-based. We gained share in a whole host of markets, including [Europe] and emerging markets." — Tim Cook

He said Deutsche Bank has nearly 20,000 iPhones and dozens of internal apps running on its networks, while Siemens has 30,000 iPhones and more than 50 internal apps running on its mobile devices. He said the company is "very happy" with the continued growth and strength of its mobile ecosystem.

He also said the US Dept. of Veterans Affairs is also deploying iPads to dozens of providers to help doctors and patient interact better. And in the education space, iPad has more than a 95 percent share of the US education tablet market.

98 percent of the Fortune 500 companies are using iPad in the enterprise, according to Cook, and about 91 percent of the tablet activations in the enterprise were iPad. 

Cook followed up in later comments, saying in the education market it was about penetration. "Student achievement is higher with iPad in the classroom than without it," he said. 

"Many of the apps are key proprietary apps for their business, and they're more productive as a result," Cook said. "We have to focus on deeper, broader penetration in the enterprise," he added.

On China growth

Cook trumpeted Apple's growth in China. He said the company saw all-time record growth in China, with iPhone sales up by 28 percent.

He said these beat all IDC estimates for the wider market. He noted that in China, 69 percent of first-time buyers bought the lower-cost iPhone 5c, and 62 percent switched from Android. With $19 billion of revenue from greater China, that makes the country its fastest-growing region — not least thanks to the fact Apple was able to score a deal with China Mobile, the world's largest cell carrier.

On the wider emerging markets

According to Maestri, the company saw all-time quarterly record sales in greater China, with more than 15.4 million iPhones in its China inventory. Sales of the iPhone in Japan were up by 50 percent year-over-year. Apple also established record sales in BRIC (Brazil, Russia, India, China) nations, and saw significant market share gains in Vietnam and Indonesia, among other high-population countries, with double-digit growth year-over-year.

On Microsoft's Office for iPad offering

Cook said that Apple customers had been benefited by Microsoft's introduction of Office for iPad. 

"Office is a key franchise for enterprise customers," Cook said, "and having it on iPad is good. We wholeheartedly welcome Microsoft to the App Store, and customers are responding very positively."

He did say that if it were done earlier, "it would've been better for Microsoft, frankly," noting that many competitors had already brought products to its tablet — including Apple with its own iWork suite. Nevertheless, Office for iPad has further helped get more iPads into the enterprise, he added.

On looking ahead to new products

Cook didn't specifically address or mention anything about a smartwatch or any wearable device — let alone the long-standing rumors about an Apple television set. But Cook did hint that while Apple isn't first, it tries to be the best.

"We didn't ship the first MP3 player, nor the first smartphone, nor the first tablet," Cook said. "Arguably, we shipped the first successful MP3 player, smartphone, and tablet," Cook said. He noted at the company's fourth-quarter earnings in October that 2014 would see a number of product and service changes.

So far, there have been no new product announcements or categories, but that is expected to change when Apple holds its annual Worldwide Developer's Conference in early June.

On acquisitions and return to shareholders 

Apple has more than $159 billion in cash. Exactly what it's doing with it remains much of a mystery — that is, until today, when Apple announced it would ramp up its share buyback and dividends program.

Cook explained a little more about its cash position, and how it goes out and acquires firms. In a nutshell, it's about culture and fitting with Apple's ethos and technological advancements.

"From an acquisition point of view, we've made 24 bids in 18 months, showing that we're on the prowl," Cook said. "We don't have a rule that says we can't spend a lot. We'll spend what we think is a fair price. What's important to us is that strategically it makes sense — we're not in a race to spend the most, but we are to build the best products," he added.

Topics: Apple, iOS, iPhone, iPad

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  • I'll explain the iPad lag

    " you can fool some of the people..."
    • You may be right about that therory.

      Personally, I thought Microsoft's release of Office for iPad (which I used today, BTW) brought down sales of iPads. (Makes just about as much sense as your observational theory.)
      • Growth rate dropped, but sales increased.

        The thing that went down is the growth rate. For example, instead of growing 20%, the sales "only" grew by 17%. Growth always flattens as the installed base grows. This just demonstrates how numbers can be massaged to send any message you feel like sending.

        That said, I think the fact that the iPad Air was a minimal improvement over the last generation also contributed to the drop in growth rate. For one thing, Apple really needs to improve the cameras in their devices. They should also stop obsessing over making their devices thinner and start using any extra space they create to hold more battery. Frankly, I'd rather have a slightly thicker device that lasts longer on a charge at full screen brightness. If they had spent as much time engineering a more power efficient device and larger battery as they did trying to make it thinner, we'd already have a tablet that lasts two days on a charge. Hey Apple, if you want to increase growth, improve useful features. Stop focusing solely on aesthetics.
        • If I am not mistaken

          the absolute number of iPads sold actually went down. So no, this is contraction, not growth.
          • down?

            for this to be true there would need to be more faulty return refunds than sales.

            I guess you don't mean absolute.
        • iPads thinner! iPhones stay the same!

          Don't confuse iPads with iPhones. I've never heard a single complaint about battery life in an iPad. I would even take a few hours less if it meant thinner and lighter iPads. Better cameras are a different story.

          iPhones are yet another story. I like thinner phones but I wouldn't mind them staying the same in order to improve battery life by 25%
    • PC is dead!

      Didn't you know? All those 1.5 billion PCs aren't being used anymore, Apple has sold 210 million iPads... Oh, wait... What?

      So. if the PC market is so dead, home come it still sells nealry as many PCs per quarter than Apple has sold iPads since launch?
      • No one has said the PC is dead

        what they have reported, and reported entirely accurately, is that it is no longer a growth market, and the odds are long that it ever will be one again.
        • True of any new product ... once the market is saturated, sales level loff.

          You are correct in making the distinction.
          M Wagner
        • Meanwhile...

          The Mac's sales are growing DESPITE the industry slow-down.
          • Ummm...not really.

            Problem you have there is that facts are facts, and the facts are Macs haven't captured any larger percentage of the market then they had years ago.

            Which, when one considers the slowed PC sales, if Macs were selling appreciably more then they used to and PC's are selling less then Mac should be making at least some kind of headway. And they are not.

            Look about, nobody is showing statistic that are in the least reliable that indicates OSX is increased in any significant numbers (beyond what could be typical paltry minor yearly variations) that would show Macs have made even minor inroads in the computer market beyond what they have for years.

            Simple example:


            Why say complete nonsense that is so blatantly false?

            Look, just because Apple cannot pry hardly a single further smidgen of the PC market from Microsoft, theres no reason for some kind of Mac shame or anything like that. Live with the reality that Apple has their market for Macs and that seems to be that. It is what it is.

            So just stop with the lies. Please.
          • Facts are Facts


            "Problem you have there is that facts are facts, and the facts are Macs haven't captured any larger percentage of the market then they had years ago."

            Hmmm... I think it's been generally acknowledged by the fact based community that Mac sales are increasing YOY while PC sales are decreasing. Why don't you do the fact checking and report back with the fact laden URLs you don't think exist?
            pk de cville
          • Why don't you list those "fact-laden URLs" for us?

            I'm sure we'd all be interested to see them.
            Han Rasmussen
          • I just gave you the link.

            Ignor it if you like.

            I could care less.

            Facts are facts and as one would expect you provide nothing.



            Bugger off.
        • Ding ding ding! We have a winner!!


          Of course the anti Windows/PC bunch don't want to hear about that. I think BillDem said it just about right above:
          "This just demonstrates how numbers can be massaged to send any message you feel like sending."

          Zero increase in sales or even a decline in sales doesn't mean "no sales".
        • Like hell they haven't

          Practically all you hear from the tech media is the "Post-PC Era!" refrain, and the breathless claims of deathwatch for a "dying" PC. They all talk like nobody will be buying desktops or laptops anymore, that everyone will replace them with "mobile devices" and that everyone in the PC industry better jump off the sinking ship and get into the mobile market while they still can. They say crap like "Windows 8 was a necessary adaptation to the Post-PC Era" and that anyone not buying into the hype was a luddite with their head in the sand.

          And now that we're finally seeing proof that the "ZOMG PC IS DEAD!" claim is bogus, now you want to say no one ever said that? Like hell they didn't. They proclaimed it to high heaven, and they were WRONG.
          Han Rasmussen
      • Non-growth is death

        PC sales have been slipping for the past decade. There are still so many out there that they still outsell and outnumber tablet devices. Apple's PC are an anomaly but still subject to non-growth in the wake of iPad.
        • Fridge and washing machine

          sales slid for a long time as well, then they stablized. When "most people" have the device and it has matured, people don't rush out and buy a new one every year. They wait until either something significant comes along or the old one breaks.

          The PC has pretty much reached that position. The market is stabalizing and it will continue. There are lots of jobs that a tablet or smartphone are more suitable for than a desktop PC or a laptop, but on the other hand there are also jobs where a tablet or smartphone make absolutely no sense at all.

          You won't get me giving up my dual display work environment for a 10" tablet any time soon. But thereagain I spend 99% of my time working at a desk, so a portable solution is pretty irrelevant.
    • Anyone that has tried to talk 'Enterprise' to Apple knows they are not.

      We have been on the phone with Apple multiple times as an Enterprise company, and their licensing and support is consumer based, they can't address anything past a single machine. We have found third parties that have much better enterprise support and license management. This lack of support forces us to greatly limit any enterprise wide deployment. As for iPads - they are good for reading email, news threads, and video/games.
      • Apple knows about as much about selling to the enterprise as Microsoft ...

        ... knows about selling to consumers. Apple wants (no they NEED) upscale consumers who are willing to pay premium prices for "style". Microsoft has the same need (hence surface pricing) but high-volume license sales to the enterprise and to OEMs allows consumers to buy Windows products at cutthroat prices because enterprise will pay a premium for support. Consumers won't.
        M Wagner