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

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.
Written by Zack Whittaker, Contributor
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.

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