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Apple CEO Cook: IPhone X Costs Less Than A Coffee A Day
Nov 03, 2017

As a lot of focus was on the iPhone X, which started going on sale in Australia during the call, Cook was asked repeatedly about patterns of demand. After batting away specifics about unit shipments or demand levels, other than to say it was "very strong," Cook was asked how Apple was sure it could sell a phone costing over $1,000.


Said Cook, based on monthly installment plans, it's not so bad. "So, if you think about that, that's a few coffees a week," said Cook. "It's less than a coffee a day at one of these nice coffee places."


Here's a rundown of the highlights of the call:


Cook started off the call by stating, "I couldn't be more excited about Apple's future. This was our biggest year ever in most parts of the world."


Cook noted a return to growth in "Greater China," where the company enjoyed "unit-share gains" for iPhone, iPad, and Mac. He said it was an all-time high for Mac and services revenue in China.


Cook applauded "exceptional efforts" by the company's employees for producing record quarterly profit.


Cook said the iPhone 8 and "8 Plus" "are our two most popular iPhone models" since going on sale in late September.


Noting the "launch" of iPhone X starting tonight in certain regions of the world, Cook said "Orders have already been very strong."

"The iPhone X orders are very strong for both direct customers and channel partners, which as you know are lots of carriers throughout the world. As of a few minutes ago, the first sales started in Australia. I'm told we had several hundred people waiting at the stores in Sydney, and I'm getting similar reports from stores across that region."


Cook noted "over 1,000 apps with powerful augmented reality features" in the App Store.


"We believe AR is going to change the way we use technology forever," said Cook. He noted apps to interact with "virtual models for everything you can imagine, from the human body to the solar system."


The Mac "had its best year ever," with the highest annual revenue ever, and its fastest revenue growth ever in the September quarter, up 25%.


Cook referred to the Apple Watch as "still the best-selling and most loved smartwatch in the world," and noted sales were up 50% in the September quarter for the third quarter in a row.


Including sales of the AirPods wireless head phones, Cook said "Our entire wearables business was up 75% year over year in the fourth quarter, and already generated the annual revenue of a Fortune 500 company," said Cook.


Cook ended his remarks by saying the current quarter will be "our biggest quarter ever."


During his presentation, Maestri called revenue growth in the services business "terrific," at 24%, the highest rate of any quarter during the year. Maestri noted the iCloud service saw "very strong double-digit growth." He said subscriptions for Apple Music were up 75% in the quarter, the strongest of the year. "That really helps the growth for the entire services business," observed Maestri. He noted that the services division is "now the size of a Fortune 100 company."


With respect to this quarter's outlook, Maestri noted that the December quarter in the prior fiscal year had spanned 14 weeks, whereas this quarter is just 13 weeks long.


During the Q&A, Morgan Stanley's Katy Huberty asked when supply will catch up with demand for the iPhone X.  Cook replied that "the ramp for iPhone X is going well, especially considering that iPhone X is the most advanced iPhone we've ever created and it has lots of new technologies in it. We're really happy we're able to increase week by week what we're outputting."


"We're going to get as many of them to customers as soon as possible; I can't predict at this point when that balance will happen."


Asked about China, Cook said that among headwinds, "Currency has been affecting us more significantly last quarter in China," said Cook.


"I feel great about the results." Cook said the company doesn't provide geographic-specific guidance, "but you can tell from our overall guidance we think we're going to have a really strong quarter."


Cook said AR "amplifies human performance, instead of isolates humans; it's the mix of the virtual and the physical world, so it should be a help for humanity, not an isolation sort of thing for humanity."


Cook was asked by Michael Olson of Piper Jaffray to elaborate on the prospects for AR. He said of the plethora of apps, "They're all over the place: I see things consumers will love because they're going to change shopping; I see business-related apps as well that are going to be great for productivity; I see apps that make me want to go back through k12 again because it changes the classroom."


"I think this is very much like 2008 when we fired the gun in the overall app store."


Shannon Cross of Cross Research ask about the lineup of iPhone going from $349 to over $1,000. "How are you thinking about the guidance for the December quarter," she asked, "are you seeing really strong demand at the low end?"


Cook said that last quarter, based on average selling prices, "we had good success through the different iPhones."


Added Cook,


We tried hard to have an iPhone that is as affordable as possible for people who really want an iPhone that may have a more limited budget; and we've got some iPhones that are really great for that market; and then we've got three new iPhones and people will look at them and decide which ones they want.


He noted it was the first time with three models at the top end of Apple's iPhone range, and the first time the company had a "staggered launch" of iPhone models.


Steve Milunovich of UBS pressed Cook to offer more detail on the mix of phones sold, and which would be sold going forward, and how Apple can expect to sell phones "at this price."


Cook declined to talk about mix. He instead noted, again, the 8 and 8-Plus were the top two models of iPhone. The 8-Plus, said Cook, has gotten off to the fastest start of any plus model; that for us was a bit of a surprise. A positive surprise, obviously. We'll see what happens next. As I mentioned before, we've never had three products, and it's only today the first customers can sort-of look at all three. And so we'll see what happens there."


Cook then went into an extended disquisition about the higher price of the iPhone X, comparing it to the daily price of a cup of coffee:


In terms of price elasticity, I think it's important to remember a large number of people pay for the phone by month. If you look at the U.S. carriers, I think you would find you could buy an iPhone X for $33 per month. So if you think about that, that's a few coffees a week. It's less than a coffee a day at one of these nice coffee places. The other thing to keep in mind is that many people are now trading in their current iPhone for the next iPhone. Many people pick up $300, $350 or so for their iPhone, and that reduces the monthly payment less. Some carriers also have promotional things going on. In terms of the way we price, we price to the value that we're providing. We're not trying to charge the highest price we could get, or anything like that. We're pricing to what we're giving. 


Asked about innovation and competition with Alphabet's (GOOGL) Google's Android, Cook said "there's always doubting Thomases in terms of those who question Apple's innovation and competitive ability. He added he thinks AR will be "profound" as one such innovation at Apple.


Toni Sacconaghi of Bernstein asked why wouldn't gross profit margin go higher with the ability to price "for the value delivered," as Cook said.


But Maestri said the "cost structure" for each new device "tend to be higher than for the products they replace." Although costs come down over the lifetime of a product, "there are a lot of elements in the gross margin line we control, and there are elements we don't control," such as foreign exchange.


Added Maestri,


Also, the mix of products we sell changes over time, and that adds an impact to the overall gross margin for the company. There are situations where commodity markets can be a bit out of balance. We have a case right now around memory pricing, which is a headwind for the time being. And services margins should be accretive to company margins. So, there are puts and takes. We tend to think about maximizing margin dollars because we think that matters to investors.


Sacconaghi also asked about the "push out" of availability for the iPhone X, and whether it was "much weaker supply" versus history, or "much greater demand" than historically.


Cook responded, "the truth is we don't know."


We put our best estimate into the guidance and you can see that we're very bullish. We feel really great about the product lineup. We just sold the first units minutes ago, and so we'll see how things go. Until you get all of them out there, where customers have the ability to demo and so forth, any kind of mix discussion is you know very much estimating, and so we've put our best estimates in, but we've never done this before, so there's no comparison here, either with the three iPhones or the staggered launch.


Jim Suva of Citigroup asked Cook about sales in India, which for Apple doubled from the prior year. He noted Apple is "still a relatively small slice of the pie" in the country. "What would it take to have a more significant role there?" he asked.


Cook replied that "growing a market like india" is a result of doing many things well. "it's building stores, it's building channels, it's building markets, it's building the developer eco-system, it's having the right product lineup for the market. I feel like we're making good progress there and we're gaining understanding of the market. We still have a long way to go, which I see as an opportunity more than a problem." Cook noted the company's sales of the iPhone SE in India were for the most part manufacturers in India, and he said he expected that would "save some amount of money over time, and avoid the compounding of taxes and so forth."


Amit Daryanani of RBC Capital asked whether "yield" and "efficiencies" were very different this quarter as far as the forecast for gross profit margin.


Maestri reiterated his point about "higher cost structures" for the iPhone X, and also added that "the impact of memory on our margin is 40 basis points sequentially, and 110 basis points from last year."


Brian White asked about the iPhone 8 and 8-Plus in Mainland China, and pre-orders for the iPhone X.


Cook declined to "disclose mix" because of the competitive value of the information. "In terms of the way the pre-order process works in China, in terms of the channel, the broader carrier channel, it generally takes indicators of interest versus something I would label a pre-order; I would hesitate to quote a number for fear it could be mis-construed. We'll find out where the supply and demand meet at some point in the future."


White noted that iPhone sales were up more than usual in the quarter, even without the X having yet gone on sale. Cook noted that emerging  markets sales were particularly "strong."


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