Tim Cook at Goldman Sachs Conference: Retail Philosophy, Acquisitions, and the Apple Ecosystem

Apple CEO Tim Cook is now speaking at the Goldman Sachs Technology and Internet Conference, participating in a Q&A session with analyst Bill Shope. Apple is streaming live audio of the session on its investor site, and we’ll be sharing some of the highlights here in this post.

Question about Apple’s cash usage strategy…do you have a Depression-era mentality?

What a way to start! We’re making significant investments in a number of areas: supply chain, retail stores, corporate acquisitions, etc. Now, we do have a significant amount of cash, and we’re fortunate to have that. We’re returning some of it to investors and will continue to have discussions on that.

Thoughts on Greenlight’s proposal about unlocking more capital for shareholders?

We welcome input from our shareholders and are discussing a broad array of options.

How about Greenlight’s lawsuit regarding your proxy statement?

There are some misconceptions over what this is about. It’s not about turning money back to shareholders. It’s about corporate governance. So we’ve decided to eliminate the ability to issue “blank check” shares ourselves. We could still do it, but would have to go to shareholders for approval. So frankly, this seems bizarre to me that we’re being sued over something that’s good for shareholders.

We wish people involved in this lawsuit would take this money and donate it to a good cause. This is a waste of money for all involved…a silly sideshow. But you’re not going to see us sending out a mailing or campaigning for our proposal. It’s the right thing to do, and I’m going to vote for it. You’re not going to see a “Yes on 2″ sign in my front yard.

Question on acquisitions…most of them are small. Is there something in your culture against large acquisitions?

We do a fair number of acquisitions…one every other month. Most of them are for talented people working on smaller projects that we absorb and then move them to our own projects. PA Semi is an example…talented chip folks working on PowerPC and we moved them to iOS device work. We’ll do more deals like this.

As for large companies, we have and will continue to look at them. But so far they haven’t passed smell test for us. We could do it, but we’re disciplined. Not interested in just growing revenue, but if there was a large acquisition that fit our needs, we would do it.

How do we think about Apple’s culture of innovation today?

It’s never been stronger. It’s so embedded in Apple…the desire to make the very best products in the world. It’s in the DNA of the company, and so I feel fantastic about it. Now, if you look at some essentials for innovation, there’s no formula. But some of the essentials are skills and leadership. If you look at skills, Apple is in a unique and unrivaled position…expertise in software, hardware, and services. Consumers want an elegant experience where technology floats to background and customer is at the center. The real magic happens at the intersection of software, hardware, and services, and we have the ability to innovate and create magic there.

For many year, this idea of “vertical integration” was out of favor. People thought it was kind of crazy, but we never did and we continued to build. This is something you work decades for. I think there are people trying desperately to catch up, and they’re finding it very difficult to do.

In terms of leadership, I look around the executive boardroom and see superstars. Jony Ive is the top designer and now turning his attention to software. Bob Mansfield is the leader in silicon. No one better than Jeff Williams at operations. Schiller, Riccio, etc. I’ve never been more bullish on Apple…we have the talent to pull this off.

Question about law of large numbers. Have we reached a natural limit on iPhone growth?

We don’t have the word “limit” in our vocabulary. It’s because of that that we’ve been able to do things for so many years and deliver things people never knew they needed. When I look at smartphone market, I see a market that was at 700 million last year…projected to double over next four years. Over the long-term all phones will be smartphones and there are a lot more people in the world than 1.4 billion. And people like to upgrade regularly. This is an enormous market to get to.

We’ve sold 500 million as of the end of last year, but over 40% of that happened last year. So there’s incredible momentum. And we’ve built a great ecosystem that is also fueling a developer industry..we’ve now paid out over $8 billion to them. Innovation has all moved to tablets and smartphones, so there’s so much momentum. When you look at what we’re doing in China, it’s impressive. There are also areas where we’re not doing as well, and we view those as opportunities. When I string all of these things together, I see a wide open field.

Question about opportunities…low-cost and prepaid markets have little access to iPhone given expense. How do you create a quality product accessible to more people?

We wouldn’t do anything we don’t consider to be a great product. That’s just not who we are. That said, if you look at what we’ve done for people who are price sensitive, we’ve lowered the price of the iPhone 4 and 4S as of last September, and last quarter we didn’t have enough supply of the iPhone 4. It surprised us.

Also take a look at the history of iPod. When we started, it was $399. Now you can get an iPod shuffle for $49. Rather than cheapening, we build new products with a separate experience. For years, people said ‘Why don’t you have a Mac under $500 or $1000 or whatever?’ We worked on that for a long time and came up with the iPad. So we’re always trying to reinvent with great new products.

Question about Apple’s design choices..focusing on iPhone 5 screen size and how Apple’s knows it’s right for users.

First of all, I’m not going to talk about what we might do in the future. But look back at the PC industry…companies have historically competed on two fronts: price and specs. But customers are interested in the experience. Do you know the speed of an Ax processor? It doesn’t matter. So when we look at displays, there are a lot of factors…and it’s all about the experience. There are many details of a display (Retina is twice as bright as OLED, and better color saturation), and we sweat all of them to create the best experience, which is always broader than can be defined by a single number.

Question about the “Apple would never…” religion

The only thing we’ll never do is make a crappy product. That’s the only religion we have…we must do something great. Something bold, something ambitious. Something great for the customers, and we sweat all of the details.

Question about iPad and potential for tablet market

It’s a huge opportunity. It’s an ideal example of the intersection of hardware, software, and services. Look at PCs…we sold more iPads last year than market leader HP sold of their entire PC lineup. There were about 120 million sold last year…projections suggest 375 million within four years. Will exceed PC sales.

Apple is the poster child of the post-PC revolution. We have over 300,000 apps custom designed for the tablet. The other guys have a few hundred. And you can see the whole of Apple coming out here. I don’t know about market share because we’re the only ones really report numbers, but if you look at usage, IBM saw over Black Friday that shopping activity on iPad was twice as high as the entire Android market. Data is very clear that iPad is popular and people use them more. I’m not sure what people are doing with these other tablets. We want people to use our products, not just buy them. Our relationship starts there…it doesn’t end there.

iPad is also moving into all of the key markets. In almost every Fortune 500/Global 500 company. Making inroads in education, and of course consumers. It usually takes a long time to penetrate all of these markets, but we’ve already done that. But we still think we’re in the early innings of this. Customers want integration and we deliver that.

iPad mini was huge last quarter. iPad set a standard for pricing, and iPad mini brought that down further. But it did bring down margins. What about tradeoffs between entry pricing and financials for the company.

I get asked about cannibalization a lot. The first time I remember being asked about this was the iBook versus the PowerBook. When the iPad came out, people said we were going to kill the Mac. The truth is we don’t think about that. If we don’t cannibalize, someone else will. In the case of iPad, the Windows PC market is huge, and there’s a lot more there to cannibalize than there is of Mac. If a company ever begins to use cannibalization as a major factor in their decision-making, it’s the beginning of the end. Because if they don’t, someone else will.

If you look at the iPad, over 50% of the people buying iPad in countries like China and Brazil don’t own any other Apple products. And we’ve seen a very clear pattern of people buying an initial Apple product and then buying more. We’ve seen this halo effect with iPod for the Mac, iPod for iPhone, and now even iPad for iPhone. Seems perfectly reasonable to me to have both iPad and iPad mini in our lineup. I think this is going to be the mother of all markets. And customers are voting and they’re buying.

Your margins have long been above your competitors’. How do you think about this over the long-term?

I don’t want to get into projecting margins beyond what we do in conference calls, but in general here’s what we do. You can always go in and accept a lower margin for strategic reasons, but at the background we always know that this halo effect plays out. We also are confident in our ability to manage the supply chain and bring down the cost curve. Because we’re not a “hardware company”, we have other ways to make money and reward shareholders. Last quarter, for software and services, it was $3.7 billion. If you look at software and services companies, that’s an incredible amount of revenue. Being more than just a hardware company gives us some flexibility over the short-term. We’re managing Apple for the long-term.

Looking at Apple as a platform company, address how things might differ between developed markets and emerging markets. Some markets, for reasons outside of Apple’s control, don’t have iTunes music and movies, etc. How does that affect platform strategy.

Last year, we put major effort into expanding our ecosystem into new markets…App Store, iTunes Store, iBookstore all in over 100 countries. Only one major country where we’re not selling movies. We advanced significantly last year in getting our infrastructure in place in countries around the world. We still have a ways to go, and you’re right, in some cases it’s beyond our control, but we keep knocking on the door. But versus last year when we were talking, there is a dramatic difference in our ecosystem in emerging markets.

Question on retail strategy

There’s no better place to discover, explore, and learn about our products than our retail stores. Our people are amazing. You walk in and immediately realize the store isn’t there for selling, but for service. The store helps you get more out of your products and acts as a gathering place. You might find a youth program with kids coming on an elementary school field trip. You might find a local musician performing. I’m not even sure “store” is the right word anymore. They are the face of Apple for almost all of our customers. People don’t think about the Cupertino headquarters…they think about the local Apple store. Last quarter, we welcomed 120 million people in our stores, and we only have a little over 400 of them.

So this is huge, in fact so huge that some of our stores aren’t big enough. But like cash, it’s a good problem to have. So this year we’re closing 20 stores and moving them to larger spaces. And opening 30 more stores, disproportionately outside of the U.S., including first store in Turkey.

I don’t think we would have been nearly as successful with iPad if it weren’t for our stores. This was something new that people didn’t know anything about, but the stores gave people the chance to come in and experience it.

We’re incredibly bullish on stores and going to continue to invest in them. Our people are fantastic, and there’s no place quite like it. I don’t have very many bad days, but if I ever feel that I’m dropping down from an excited level, I go and visit a store. It’s like a Prozac.

Look back at first full year as CEO. What are you most proud of?

Most proud of our employees. I have the privilege every day of working with people who want to make the very best products in the world, and they’re there to do not only great work, but the best work of their lives. It’s a privilege of a lifetime for me to be there now.

I’m proud of products. For those things we’ve elected to do, they’re really great. I’m incredibly bullish on the future. I’m proud that we have a spine and are out in front on supply chain responsibility. I’m proud that we’re doing heavy lifting with the environment…eliminated toxics, largest private solar farm anywhere, etc. I’m proud about all of these things. It’s both the privilege of a lifetime and incredibly humbling to be able to work with all of these great people.

-End of Session-

Apple Patents Nearly Invisible ‘Microslot Antennas’ Allowing for Smaller Devices

Apple has been awarded a patent (via AppleInsider) for ‘microslot antenna’ technology, which could enable ‘invisible’ radio antennas to be embedded into the housing of a Mac, iPhone or iPad to save space inside and allow for more compact devices.

Notebook computer with integrated wireless antenna (20) on device housing
The antennas would use microscopic slots in the housing, with widths of just a few microns, making them almost invisible to the naked eye. The patent shows a variety of possible locations for the antennas on a laptop, though the same approach would likely be taken with iPhones and iPads also.

Top view of microslot antenna design supporting multiple frequencies
Current devices may contain antennas for GSM, 3G/LTE, GPS, wifi and Bluetooth, though some of these may be combined. The iPhone 5, for example, uses just two antennas for the five functions, using rapid frequency switching to enable one antenna to do two jobs. Eliminating the need for internal antenna space altogether would, though, allow for slimmer and smaller devices.

As TechCrunch observes, this could also create the possibility of an all-aluminum case. Apple has previously had to have a small area of glass or plastic to provide radio windows for the internal antennas. Microslot antennas would eliminate this need, perhaps leading to more Mac-like iPhones and iPads in future.

Apple’s interest in the possibility of implementing microslot antennas dates back to at least 2007 when the patent was filed, meaning that the concept may be requiring significant refinement before arriving in a shipping product or may have been scrapped entirely by this point. Still, it is clear that Apple is continuing to look for ways to handle the increasing complexity of wireless communications while maintaining its design goals for size and aesthetics.

Samsung Retakes Title of World’s Largest Semiconductor Customer from Apple in 2012

Research firm Gartner today shared its estimates of global semiconductor purchases for 2012, finding that Samsung has retaken the title Apple had gained in 2011 when it leapt over both Samsung and HP. Samsung (28.9% growth) and Apple (13.6% growth) registered as the biggest winners in 2012, as the overall market declined by 3% with Sony (1.9%) and Lenovo (0.3%) being the only other top-ten companies showing positive performance.

“Although Samsung and Apple continue to go from strength to strength, other leading electronic equipment makers fared less well, and six of the top 10 reduced their demand in 2012,” said Masatsune Yamaji, principal research analyst at Gartner. “In addition to a weak macroeconomic situation, a dramatic change in consumer demand contributed to a reduction in semiconductor demand in 2012.

Yamaji pointed to the strong shift to mobile devices as a primary reason for the overall decline in the semiconductor market, with traditional computers that require significantly higher semiconductor content experiencing relatively poor sales in the face of smartphone and tablet popularity.

Top Ten 2012 Semiconductor Customers (Billions of Dollars)
Samsung and Apple together now account for over 15% of the world’s semiconductor market, up from roughly 12% in 2011.

Gartner’s numbers measure the total silicon content of all products designed by Apple and each of its competitors, a metric known as Design TAM. This is distinct from Purchasing TAM, which would attribute to a given company only the amount actually purchased by the company. As an example of the difference between the two metrics, semiconductors purchased by a third-party manufacturing partner would generally count toward the primary company’s Design TAM but not its Purchasing TAM.

Apple Reports Best Quarterly Results Ever in Q1 2013: $13.1 Billion Profit on $54.5 Billion in Revenue [Call Ended]

Apple today announced financial results for the fourth calendar quarter of 2012 and first fiscal quarter of 2013. For the quarter, Apple posted revenue of $54.5 billion and net quarterly profit of $13.1 billion, or $13.81 per diluted share, compared to revenue of $46.33 billion and net quarterly profit of $13.06 billion, or $13.87 per diluted share in the year-ago quarter. Apple’s quarterly profit and revenue were both all-time company records, but Wall Street analysts had projected even slightly higher numbers.

Gross margin for the quarter was 38.6 percent, compared to 44.7 percent in the year-ago quarter, and international sales accounted for 61 percent of revenue. Apple also declared another dividend payment of $2.65 per share, payable on February 14 to shareholders as of the close of trading on February 11. The company currently holds $137.1 billion in cash and marketable securities.

Quarterly iPhone unit sales reached 47.8 million, compared to 37 million in the year-ago quarter and the company sold 22.9 million iPads, up from 15.4 million in the year-ago quarter. Apple sold 4.1 million Macintosh computers, compared to 5.2 million in the year-ago period, as well as 12.7 million iPods, down from 15.4 million a year ago. Apple set new sales records for both iPhone and iPad sales.

“We’re thrilled with record revenue of over $54 billion and sales of over 75 million iOS devices in a single quarter,” said Tim Cook, Apple’s CEO. “We’re very confident in our product pipeline as we continue to focus on innovation and making the best products in the world.”

Apple’s guidance for the second quarter of fiscal 2013 includes expected revenue of $41-43 billion.

Apple will provide live streaming of its Q1 2013 financial results conference call at 2:00 PM Pacific, and MacRumors will update this story with coverage of the conference call highlights.

Despite the record revenue and earnings, Apple’s stock is currently down nearly 5% in after-hours trading after falling short of analysts’ expectations and issuing weaker guidance than many had expected.

Conference Call Highlights, Q&A Follows

Tim Cook:

– We are incredibly pleased to report an extraordinary quarter. New records for iPhone and iPad sales. No technology company has ever reported these kinds of results. Most prolific period of innovation and new products in Apple’s history. New products in every category we make in the past few months.
– One team to surprise and delight our customers. Part of Cook’s job is to preserve corporate culture. No greater reward than seeing how customers love our products. Our fundamentals: people, strategy and pipeline, ecosystem and retail stores will serve us well.
– Tomorrow is anniversary of Mac revolution. 1984, Jobs introduced Macintosh at shareholder’s meeting in Cupertino. We’ve come a long way.
– We don’t measure success just by the numbers. The most important thing to us is that our customers love our products, not just buy them. Laser focused on unprecedented customer experience.
– Sold more than 500 million iOS devices, more than 10 per second last quarter.

Peter Oppenheimer:

– New all-time quarterly records for iPhone and iPad sales, broadened ecosystem and generated highest quarterly revenue and net income ever. $4.2 billion per week this quarter vs. $3.3 billion per week in year ago quarter, thanks to 14-week quarter last year.
– Net income was record $13.1 billion, just ahead of amount generated in last year’s 14-week quarter.
– Reorganizing the presentation of our results to provide greater transparency. Established new segment of “greater China”. Mainland China, Hong Kong and Taiwan.
– Allocating certain manufacturing costs and variances to “operating segment” instead of including these expenses to corporate expenses.
– Retasked earnings for last two years on Apple.com/investor — no affect to overall operating income.
– Realigned information related to product category. iPod, Mac, iPad and iPhone sales are now separate from related software and services. Third party accessory sales is a separate line item.

– 47 million iPhones versus 37 million in year ago quarter. 3.7 million per week, vs 2.6 million per week a year ago. Up 39% per week. Strong iPhone growth in greater China, up more than 100% year over year.
– iPhone market share up to 51% in the U.S. this year.
– iPhones in target for channel inventory.
– iPhone and iOS continue to deliver exceptional experience and secure ecosystem that IT departments require.
– Embraced by Gov. and Enterprise. Many agencies issuing iPhones by the thousands.
– NASA, NOAA, etc.
– Neiman Marcus, Volvo, etc.

– 22.9 million iPhones versus 15 million last quarter, 1.7 million per week versus 1.1 million, up 60% per week.
– Customers loving 4th generation iPad, iPad mini is tremendous hit.
– iPad is tablet of choice for biz and Gov.
– Barclays, Bank of Beijing, etc. Barclays rolling out 8,000 iPads, most successful IT deployment in Barclay history.
– State and local Gov are rolling iPad out too.
– State legislatures in VA, TX and WV rolling out iPads to legislators.
– 10,000 iPads being deployed to local Gov’s in Sweden, more going to Netherlands for court system and tax authority.
– Below 4-6 range of channel inventory.

– Sold 312k Macs per week versus 371k per week last year, down 16%.
– Significantly constrained on new iMacs, only able to ship them for December. Mac sales would have been much higher without constraints.
– Between 3-4 weeks of inventory, below target of 4-5 weeks.

– 12.7m iPods versus 15.4m a year ago. iPod Touch was popular, accounts for more than 50% of all iPods sold.
– Share was over 70% in U.S. according to NPD. Continues to be best selling mp3 player in most countries.

– $2.1 billion for iTunes sales, new records for music, movies and apps.
– Expanded footprint, adding iTMS in 56 countries including Russia, Turkey, India and South Africa. 119 countries total.
– App Store had record breaking quarter with 2 billion downloads in December alone. 775,000 apps to 500 million account holders in 155 countries and 300,000 iPad apps. Cumulative app downloads have passed 40 billion, $7 billion total to app developers.

– 250 million iCloud accounts, 2 billion+ iMessages per day.

– $6.4 billion revenue through retail stores, fueled by iPhone and iPad sales. 11 new stores including 4 new stores in Greater China. 401 stores, 150 outside the U.S. Relocated or expanded 14 stores that had outgrown their space.
– 396 stores open with $16.3 million per store.
– 121 million visitors versus 110 million in year ago quarter. 23,000 visitors per store per week, up 17% year over year.

– Cash from short and long term investments was $137.1 billion, up $16 billion from last quarter. Net of 2 billion in stock repurchase and $2.5 billion in dividends.
– $94 billion in cash was offshore.
– $23.4 billion in cash from operations, up 33% from last year.
– Dividend of $2.65 payable in February.

– Changing our approach to guidance. Reflected conservative point estimate of results that we had reasonable confidence in achieving.
– Plan to offer range of guidance for what we believe we can achieve. We believe we are likely to report in the range of guidance we can provide. $41-43 billion in revenue for next quarter, gross margin between 37.5 and 38.5%.

Q&A

Q: iPhone 5 did incredibly well in the U.S., but internationally data has been more mixed. How would you characterize trends outside the U.S. for iPhone? Do you feel you have right screen sizes and price points to capture demand?

A: Sequentially we increased over 70% from September quarter, 3.5x market. We could not be happier with that. In terms of geographic distribution, we saw our highest growth in China. It was into the triple digits which was higher than the market there. I would characterize it as “we’re extremely pleased.”

Q: With such a large cash generation this quarter and stock price off its highs, why not step up and buy back even more stock than you had originally planned?

A: We continually assess this. We are pleased to have started our share repurchase program this quarter. Combined with the dividend, we returned $4.5b in cash this quarter. Expect to return $45 billion to our shareholders over the next 3 years.

Q: Many of your competitors are differentiating themselves with larger screen sizes. How do you feel about the market in that respect? Is there a long term case for larger screen sizes for smartphones?

A: iPhone 5 offers a new 4″ retina display. The most advanced display in the industry. No one comes close to matching the level of quality as our retina display. It also provides a larger screen size without sacrificing one-handed ease of use. We believe we’ve picked the right screen size.

Q: Can you give us some color regarding iPhone demand trends coming out of the quarter?

A: If you look at iPhone sales across the quarter, we were constrained for much of the quarter on iPhone 5. As we begin to ship more, sales went up with production. iPhone 4 was in constraint for the whole quarter and sales remained strong.

Months of rumors about order cuts and so forth, so let me take a moment to comment on these. No comment on any particular rumor as I’d spend my life doing that. I suggest its good to question the accuracy of any kind of rumor about build plans. Even if a particular data point were factual, it would be impossible to interpret that data point as to what it meant to our business. The supply chain is very complex and we have multiple sources for things. Yields can vary, supplier performance can vary. There is an inordinate long list of things that can make any single data point not a great proxy for what is going on.

Q: When you provided guidance before, was it uniquely conservative? Is it no longer conservative? Are we getting a real planning range that’s fundamentally different from before?

A: In the past we provided a single conservative point estimate that we were confident of achieving. Our new guidance provides a range that we believe we will report within. No guidance is guaranteed.

Q: You think you’ll report in the range — was the guidance before something you felt reasonably confident in achieving? Historically you eclipsed your estimates enormously. Now you say you’ll land in the range.

A: In the past we gave a single point of conservative guidance. We were reasonably confident we would achieve it. We now provide a range of guidance that we expect to report within.

Q: Tim, you started the call talking about Apple’s philosophy of ensuring that you satisfy your customers and make great products. Into that backdrop, how important is market share preservation? Is holding share in the smartphone market in 2013 a priority for Apple? Yes or no and why?

A: The most important thing to Apple is to make the best products in the world. We aren’t interested in revenue for revenue’s sake. We could put the Apple brand on a lot of things and sell a lot more stuff. We only want to make the best products. We’ve been able to build market share and have a great track record with iPod of doing different products at different price points. I wouldn’t view those as mutually exclusive as some might. We’re focused on making great products that enrich lives.

Q: Talk a little more about Macs? Shortfall there is $1 to $1.5 billion. How much of that is pushed into March quarter?

A: Thanks for asking the question. The best way to answer this is to look at the previous year. The difference is $1.1 billion from last year. iMacs were down by 700k units year over year. As you remember, we announced new iMacs late in October. Announced they would ship in November and December. Did ship by those dates. Limited weeks of ramping on those products during the quarter. Significant constraints on the iMac at the end of the quarter. Sales would have been materially higher without those constraints. Tried to share this on the conference call in October.

If you look at last year, we had 14 weeks in the quarter last year. 13 weeks this year. Channel inventory was down from the beginning of the quarter by more than 100k units. Didn’t have the iMacs in channel. These factors bridge more than the difference between this year’s sales and last year’s.

These are lesser things: the market for PC’s is weak. IDC estimate is -6%. We sold 23 million iPads, could have sold more than this because we were constrained on iPad mini. Some cannibalization there, sure there was some there. Mostly was iMacs, 13 versus 14 week, channel inventory more than explains difference from last year to this year.

Our portables alone were in line with IDC projections of market growth.

Q: Lot of publicity around Maps, can we have an update? How does year look in terms of innovation and iOS 7 and your online and web services? How will that drive Apple?

A: We’re working on some incredible stuff. The pipeline is chock full. We feel great about what we’ve got in store.

In terms of Maps, we’ve made a number of improvements since the introduction of iOS 6. Roll out even more improvements throughout the rest of the year. Going to keep working on this until it lives up to our standards. Include improved satellite imagery, improved local information and so forth. Usage of Maps is significantly higher than prior to iOS 6.

Feel fantastic as to how we’re doing. 4 trillion notifications through notification center. 450 billion iMessages, 2 billion per day. 200 million registered game center users. 40 billion App Store downloads. More stuff we can do and we’re thinking about all of it.

Q: Gross margin in the quarter? Looking ahead, comment on a few areas on — where on your product cost curve? What about iPhone mix? iPad of mini to regular?

A: iPad mini, it’s hard to know. Couldn’t make enough. Constrained every week. Customers love the mini and we wish we could have made more. Significant backlog at end of the quarter.

Gross margin, we were 260 basis pts ahead of our guidance. Half from lower product and transitory costs. Rest came from higher mix of iPhones, weaker dollar and leverage on higher revenue. Gross margin will be 10 to 110 basis points lower sequentially. Teams have made meaningful progress in product and transitory costs, and will benefit from that. Typical level of deferred revenue from device sales going forward. Will be offset by loss of leverage coming out of December quarter, and different mix of current products. Regarding mix, we’ll have lower gross margin on iPad mini that is significantly lower than corporate average.

ASP on iPhones was essentially the same YoY. Underneath that, if you look at the mix of iPhone 5 versus total iPhone, versus iPhone 4S the prior year, those mixes were similar. For capacity, we saw similar results in Q1 as we saw in Q1 of the prior year.

Q: You spent almost as much as Intel did on CapEx. You said you weren’t gonna become integrated, but you’re presumably buying equipment for partners. What does this do for strategy? How deep will you go on semiconductor and componentry?

A: $10 billion in CapEx this fiscal year, up $2 billion year over year. A billion in retail stores, plus equipment we will own that we put in partner facilities. Our primary motivation there is for supply. Adding to data center capabilities, as well as infrastructure.

Q: What happened last year in terms of refresh cycle? You say you ship products when they’re ready, but are you going to stagger them out this year or will it be a similar situation to 2012?

A: 80% was unusually high percentage for us last year. The number of ramps were unprecedented in that we had new products in every category which we haven’t done before. We feel great to have delivered so many great products for the holidays and our customers have expressed joy over it.

Q: What are you hearing on China from customers and partners? What do you expect going forward?

A: If you include retail stores in China, our revenues were $7.3 billion on he quarter. Up over 60% year over year. Comparing 13 to 14 weeks, underlying growth is higher than that. Exceptional growth in iPhones into triple digits, iPad was shipped very late in the quarter and despite that saw very nice growth. Expanding in Apple Retail there. Year ago, we had 6 stores — now have 11. Have many more to open. In our premium resellers, we went over 400 in the region, up from 200 in the previous year. 7k to 17k in iPhone point of sale. Not nearly what we need and not the final by any means. Making great progress.

It’s clear that China is our second largest region and there is a lot of potential there.

Q: You’ve said the Apple TV experience was dated. Can you step outside the form factor and talk about how important this market is to Apple? Can you accomplish what you want to accomplish with the reality of where content is distributed today?

A: You’re asking lots of questions I won’t answer. In terms of products we sell today, we sold more last quarter than we’ve sold before. Eclipsed 2 million during the quarter. Up 60% year over year. Very good growth in that product. What was a small niche at one time is now a much larger number.

This is an area of intense interest for us and remains that. I tend to believe that there is a lot we can contribute in this space and we continue to pull the string and see where it leads us. Don’t want to be more specific.

Q: Didn’t give EPS guidance — is there any parts to EPS and gross margin that you want to address?

A: Gave a line item on each estimate across the P&L — for the future, we’ll give a range for revenue, gross margin and OpEx. There are many possibilities for EPS across the range for you to figure out. We will report our actual results in April.

Q: How did iPhone 5 sales proceed in terms of new customers versus upgrades and how does that compare to the 4S last year?

A: Don’t have specifics, but iPhone 5 volume shows that we’re selling to a lot of new customers.

Q: We heard that it was a lot of upgrades to existing customers but it doesn’t sound like you’d agree with that.

A: Don’t use what you heard as a proxy for the world. Many carriers are created differently.

Q: Confused as how to think about iPads for March quarter. iPad mini was constrained, any comments on seasonality? How are you thinking about aggregate inventory in the channel? Will that be going up or down in March quarter?

A: iPad mini was very constrained — ended underneath our target channel range. We believe we can achieve supply/demand balance later this quarter. That would likely mean that we would need more units in the channel than we have today. That’s a fair conclusion to draw.

For total iPad sales, we don’t provide a sub level forecast. We would expect a large year over year increase in holiday sales, but a drop sequentially. We expect to meet demand for the mini.

Worth pointing out that for last quarter, we had strong sales of iPad and iPad mini.

Q: Discuss the tablet market a little bit? And also constraints going forward? Where do you see challenges in meeting demand?

A: Overall, our team did a fantastic job ramping a record number of new products. Significant shortages due to robust demand on iPad mini and both iMacs that persisted across the quarter. Short on both products today. Supply of iPhone 5 was short to demand until late in the quarter. iPhone 4 was short for entire quarter. Can achieve supply demand balance of mini and iPhone 4 this quarter. Significantly increase supply on iMac this quarter, but not sure if we can achieve balance this quarter.

Cannibilization is a huge opportunity for us. We never fear it because if we do, someone else will do it. iPhone has cannibalized iPod, that doesn’t worry us. iPad has on the Mac, and that doesn’t concern us. For iPad, Windows market is much larger than Mac market. Tremendous amount of opportunity there for us. I believe the tablet market will be larger than the PC market at some point. You can see by the growth in tablets and pressure on PC’s that those lines are beginning to converge.

The other thing for us, maybe not for others, if somebody buys an iPad mini and it’s their first Apple product, we have great experience through the years – if someone buys their first Apple product, these people buy another Apple product.

It’s the halo effect, as we termed it, that we saw with the iPod and the Mac – we’ve seen some of that with the iPad as well.

I see it as a huge opportunity.

Q: How should we think about the iPhone family year over year and quarter over quarter increases or decreases? Any dynamics related to slower pace of LTE rollouts having an impact?

A: For iPhone, in the year ago quarter, we built 2.6 million units of channel inventory. We did the China launch in the March quarter versus December. Underlying sell through was 32.5 while sell-in was 35. In thinking through the number of iPhones to predict, we look to the 35 number as a base line. We believe we’ll grow year over year, but don’t want to be more specific than that. We guide in the aggregate instead of the product level.

Q: Pace of LTE rollout around the world, has slower rollout had impact on iPhone sales philosophy? Could that change?

A: Today we have 24 carriers on LTE around the world for iPHone 5. Those are in countries like the US, Korea, UK, Germany, Canada, Japan, Australia and a few others. Next week, we’re adding 36 more carriers for LTE support in countries we’re not currently supporting LTE — Italy, Denmark, Switzerland, Philippines and several Middle Eastern countries, covering 300 million customers. iPhone 5 supports other ultrafast networks like HSPA+. Feel very good about the situation, particularly with these adds next week.

Q: Guiding high single digits on iPhone sell through going forward. Why?

A: Not talking about guidance on a specific product level. Here are some things we talked about. 5 to 10% year over year increase on revenue. 2.6 million units of iPhone channel inventory built last year. Increased revenue by $1.6 billion. Hit distribution to 100 countries in December, versus March last year. Introduced iPad mini last quarter, kept price-reduced iPad 2 in the line. Saw reduction in iPad ASP of $101 year over year in December quarter. iPad units grew faster than iPad revenue. Expect iPad ASP to continue to drop on a year over year basis for same reasons.

PC market grew 4% last year, IDC is projecting it to decline this year by 3%. Underlying performance in business is stronger than 5-10% YoY growth implies. Feel strongly about pipeline.

Q: iPhone 4 is constrained during quarter, seems to be a lot of demand at lower price points. Why not get more aggressive and move downmarket in the iPhone business?

A: I’m not going to go into our pricing strategy. We feel great about the opportunity for getting products to customers and getting a percentage of those buying other Apple products. We see evidence of that through history and evidence of that through today.

Sharp Reportedly Cutting iPad Display Production Amid Shift in Consumer Interest to iPad Mini

Reuters reports that Sharp, one of Apple’s primary display panel partners for its mobile devices, has slashed production of iPad displays at one of its plants. Sources did not indicate the reasons for the dramatic cut, but it appears to be a combination of a shift in consumer interest to the smaller iPad mini and a natural seasonal slowdown coming out of the holiday quarter.

Sharp Corp has nearly halted production of 9.7-inch screens for Apple Inc’s iPad, two sources said, as demand shifts to its smaller iPad mini.

Sharp’s iPad screen production line at its Kameyama plant in central Japan has fallen to the minimal level to keep the line running this month after a gradual slowdown began at the end of 2012 as Apple manages its inventory, the industry sources with knowledge of Sharp’s production plans told Reuters.

Apple also obtains iPad display panels from Samsung and LG Display, with a source at Samsung indicating that there has been no production cut there and a source at LG suggesting that any production cuts there were in line with typical seasonality.

Reports of cutbacks in iPad component production come close on the heels of reports that Apple has slashed orders for iPhone 5 parts, although there have been significant questions about the figures cited in those reports and whether the decline actually represents a weakening of demand.

Cellular-Capable iPad Pre-Orders En Route to U.S. Customers with Friday, November 16 Delivery

In line with reports from last week, Apple has begun shipping pre-orders of cellular-capable fourth-generation iPad models to U.S. customers. MacRumors has received word from over half a dozen readers indicating that their orders are now en route via FedEx with delivery scheduled for this Friday, November 16.

We had previously reported that some customers who were initially seeing delivery estimates of next week were receiving free upgrades to November 16 delivery upon request, and it now appears that most early pre-order customers will be seeing delivery this Friday even without special requests.

We had also received a report indicating that AT&T would begin selling the cellular-capable models of the iPad mini and fourth-generation iPad on November 16, with the carrier offering a $100 discount to those signing for a two-year data contract for the device. All iPad models including the iPad mini are eligible for the promotion.

We’ve yet to see word of any cellular-capable iPad mini pre-orders heading out for shipment, so it remains to be seen whether they too will make the same delivery window of this Friday.

Bob Mansfield’s Return to Apple Reportedly Influenced by Scott Forstall’s Departure

AllThingsD offers a look at the back-and-forth situation with Apple executive Bob Mansfield, who announced his retirement as hardware chief in late June only to rescind the move two months later in order to work on special projects under CEO Tim Cook. With this week’s management changes, Mansfield is now heading up a new “Technologies” division and has committed to remaining at the company for at least two more years.

AllThingsD notes that Mansfield was indeed serious about retiring earlier this year and was enticed to stay on in an advisory capacity to ease the transition. But his all-in commitment to head the new Technologies division was reportedly influenced in no small part by the impending departure of iOS chief Scott Forstall.

As one source close to the company told AllThingsD, “The timing of Bob’s return is not coincidental.”

To begin, Mansfield was not a fan of Forstall’s confrontational management style, and sources said he generally tried to avoid the iOS exec. Indeed, Bloomberg last year reported that Mansfield would meet with Forstall only if Cook was present to mediate. I’ve heard many similar stories.

“It wasn’t a him-or-me situation,” one source said of Mansfield’s return and Forstall’s ouster. “But, put it this way, I think Bob was much more willing to commit to two more years once he knew Scott was on his way out.”

Mansfield is just one of several senior Apple executives taking on new roles in the restructuring, with design guru Jony Ive adding software design to his existing hardware design responsibilities, Eddy Cue picking up Siri and Maps, and Craig Federighi adding iOS to his OS X responsibilities.

Component Suppliers Say Apple Has Ordered Parts for 10 Million ‘iPad Minis’ in 4Q 2012

While some sources have indicated that production challenges with components for Apple’s forthcoming “iPad mini” will limit launch supplies of the device, The Wall Street Journal now reports that many component suppliers are moving ahead to meet Apple’s plans to build more than 10 million units of the device during the fourth quarter.

Some component suppliers to Apple in Asia say they have received orders to make more than 10 million units of the smaller tablets in the fourth quarter. That is roughly double the order that were placed for Amazon’s Kindle Fire tablets in the same quarter, these suppliers say.

The figure indicates that Apple believes demand for the product will be strong, despite stiff competition in the market.

Mockup of 7.85-inch “iPad mini” (courtesy of CiccareseDesign)
Just last week, the publication reported that mass production of the iPad mini had begun ahead of an introduction said to be coming at a media event sometime this month. One recent rumor has claimed that invitations for the media event will be going out this Wednesday, with the event presumably following approximately one week later.

Netflix for iOS Updated to Support the iPhone 5′s Widescreen

Netflix has updated its iOS app to support iOS 6 and to provide support for the iPhone 5′s 4″ screen. The update also claims to improve the browsing, searching and watching experience.

Support for the iPhone 5′s taller screen is particularly useful in video/movie apps such as Netflix as it allows many widescreen movies to be viewed in their native aspect ratio. The Netflix app is a free download from the App Store [Direct Link] but requires a Netflix account.

Many popular apps are being quickly updated to support the iPhone 5′s larger screen. Yesterday, Instagram was updated, and several iOS games have also seen updates.

iPhone 5 Battery Life May Be Impacted Greatly by Cellular Signal Strength

Deep in its lengthy review of the iPhone 5, iLounge has performed an analysis on the battery life of the iPhone 5. The site tested the device under a number of conditions, including both cellular and Wi-Fi web browsing, voice calls, FaceTime calls, video recording, and video and audio playback.

The phone performed fairly well but iLounge found battery life struggled when transferring cellular data or making voice calls, which they speculated was due to a weak signal:

if you’re using your iPhone 5 in places a with a very strong (4- to 5-bar) LTE or 3G signal, your cellular battery life may approach that number, but if not, the cellular antenna will struggle to maintain a signal, and fall well short. Because LTE and 3G/4G towers are in a state of build-out flux right now, our tests suggest that many LTE users won’t come close to Apple’s promised numbers.

iLounge has the detailed results on its battery testing in its iPhone 5 review, but unsurprisingly, mileage will vary greatly depending on a number of factors including health of the battery, signal strength, screen brightness, and other considerations.