Apple (AAPL) CEO Tim Cook was the kickoff guest this morning at the Goldman Sachs technology conference, sitting down for a chat with Goldman Apple analyst Bill Shope.
Apple shares continued to trade down after the talk, ending the day off $12.03, or 2.5%, at $467.90.
Before Cook came on, Goldman research director James Coviello introduced Goldman CEO Loyd Blankfein. Blankfein expressed surprise at the early-morning crowd for a West Coast event (it’s just after 7 am Pacific Time). Blankfein’s role was to introduce “our very important first speaker. “It’s impossible to introduce Tim Cook without mentioning how Apple has redefined how companies think about technology, and changed how supply chains operate, and consumers’ experience.” Blankfein noted Apple has sold more than 500 million devices based on its iOS operating system.
Shope starts with a topic that is “top of mind”: David Einhorn‘s attitude that Apple has a Depression-era mentality. “Apple doesn’t have a Depression-era mentality,” said Cook. “Apple makes bold bets on products, and we’re conservative financially. Last year we invested $10 billion in capex. When you combine that with returning $40 billion to investors with dividends and buybacks, I don’t know how a company with a Depression-era mentality would do those things. Now, we do have some cash (laughter from the audience). It’s a privilege to be in this position to be able to return even more cash. And we are in active discussions about that.”
Shope asked Cook about the suggestion from Einhorn regarding preferred shares. “I think it’s creative. And we welcome all suggestions from shareholders, and we’re going to seriously consider it.” Asked about Einhorn’s lawsuit over the Apple proxy statement. “It’s not about how cash is returned to shareholders,” said Cook. “It’s about the rights of shareholders. We thought that we would need to go to common shareholders to get approval [to issue preferred shares] so frankly I find it bizarre that we would be sued for doing something that’s good for shareholders. So, I think it’s a silly sideshow. But you’re not going to see us do a campaign mailing. You’re not going to see a “Yes on 2″ sign in my front lawn. This is a waste of money. But I support prop. 2. I think it’s the right thing for shareholders. But it’s not something we’re going to spend cycles on. So, the serious thing is how to return cash to shareholders. But this prop. 2 thing is a silly sideshow. We feel so strongly that shareholders should have to approve preferred shares, we would clearly go for a vote on it [issuing preferreds] whether our charter requires it or not.”
Shope moved on to asking Cook about acquisitions. Cook notes that the company has been managing an acquisition per month in recent years. He mentions the acquisition of chip design firm PA Semi a couple years ago. “This was an incredibly skilled group of guys and they could supplement an incredibly skilled group of people within Apple. That’s a great example of what we’ve done. We’re constantly looking in the market for things to do. We really like to control the primary technology in what we do. We have looked at large companies. None of them passed our tests, for a number of reasons. Would we look again? Sure. But we don’t feel a pressure to just go out and acquire to generate revenue. We want to develop great products. We don’t have the cash burning a hole in our products.”
Shope asks Cook about “the culture of innovation” at Apple, which Cook responded “has never been stronger.” He went on to say that the “real magic” happens at the intersection of devices and services, mentioning that “the iPad is magic.” “This thing, some people call it vertical integration, I don’t care what you call it, for some time it was out of favor. We never found it out of favor. It takes decades to build that experience. I see a lot of companies trying to catch up with that. As far as leadership, I look around the table at the management team, and I see Jony Ive, who is just the world’s best designer. And now he’s bringing his brilliance to our software, and I’m just ecstatic about that. And I see Phil Schiller, and I see Jeff Williams who is just the best in operations in the world.”
Shope asked if the company has reached “a natural limit” in terms of iPhone share in the smartphone market. “We don’t have that term ‘limit’ in our vocabulary,” says Cook. “The smartphone market, at 700 million units, is expected to double in coming years to 1.4 billion. There are a lot more people than that, and people love their phones, and upgrade them frequently.” Over 40% of the 500 million iOS devices, he notes, were sold just in the last year. “If you look back at the app economy of the PC market, or look at it today, you see most of the money flowing to a couple large parties. But you don’t see a lot of people developing for it [the PC]. They’re all developing for tablets and smartphones. When I string together all of these things, from the ecosystem to the market, this is all available to only 50% of the people in the world. So I don’t think about this term limit.”
Shope notes the iPhone is simply not affordable to people in emerging markets. “This is a popular question. Our North Star is great products. When people come to work every day, we wouldn’t do anything that we would consider not a great product. That’s not why were on this earth. If you look at what we’ve done for people who are price-sensitive, we lowered the price of iPhone 4. And last quarter, we didn’t have enough supply of iPhone 4. So it surprised us, the level of demand. Also look at the iPod. When it came out it was $399. Where is it today? You can get an iPod shuffle for $49. The same thing but in a different concept is for years, people said why don’t you have a Mac for less than a $500. But what did we do? We created the iPad, and now we have a great experience that starts at $329.”
Shope asks how one knows that Apple still has good judgement in terms of product features. Cook says in past it has been all about specs and prices. “These are all things that technology companies invent because they can’t create a great experience. So they talk about specs. When you look at displays, some people talk about size. Some people mention an OLED display. Their color its awful. If you want to buy something on line and you care about the color, you should really look twice [because the color on an OLED display will not reflect accurately]. The brightness of a Retina Display is twice that of an OLED display. The customer experience is always broader than what can be defined by a single spec. The only thing we’ll never do is make a crappy product. That’s the only religion we have. We must do something great. The customer must be at the center of it. We want to enrich people’s lives. And we sweat the details.”
Shope moves on to talking about tablets. Cook notes that Hewlett-Packard (HPQ) sold only 15 million PCs in the same quarter Apple sold 23 million iPads. “There’s a sea-change going on here.” The IPad is absolutely the poster child of the post-PC revolution. So what we do is focus on the ecosystem. There are over 300,000 apps that the advantage of that big beautiful canvas that the iPad is.” Cook notes that last Black Friday, the product used most for online shopping was the iPad. “I mean not just more, but twice as much as on all Android devices. Twice as much! So the data is very clear that people use them a lot more than these other products. I’m not sure what they’re doing with these other products. The thing that is also profound about iPad is it is being sold strongly in every market. So we find ourselves in every Fortune 500 company. We find ourselves in the education market. Usually it takes a long time to get into all these markets.”
Shope asks Cook about the issue of iPad mini and its impact on margin relative to market share. “I think the first time I got asked about cannibalization was when the iBook came out and people asked about it cannibalizing the PowerBook. When we came out with the iPad, people worried about it cannibalizing the Mac. So, we don’t worry about cannibalization. I think if a company ever begins to use cannibalization as a major factor in their decision about what markets to go into, it’s the beginning of the end. So, when we think about iPad mini, we see that over 50% of the people buying iPad in various markets font own an Apple product. So this is a great way to introduce people to Apple products. So it’s not just about selling a point product. As you can tell from my response on the iPad, I think that this is a huge opportunity. So I think it makes perfect sense to have an iPad and an iPad mini. I think this is the mother of all opportunities.”
Shope presses the matter of margins. “At the background, we have confidence in our ability to execute the supply chain and work down cost curves. In the area of tablets, we believe the market is huge, and it made sense to have one in a form that was smaller and lighter. And because we’re not a hardware company, we have other ways to make money and reward shareholders. If you look at our software and services revenue last quarter, it was $3.7 billion. That’s huge! So, we don’t look at our product as the last contact with our customers. So being larger than a hardware company affords us the ability not to worry so much about the short-term. I know people care about quarters, and we care. But our focus is for the long-term, not for the 90-day clock.”
Shope asks Cook about the fact that some people cannot buy iTunes content in places such as China. Cook says, “because we don’t believe in limits, we keep knocking on the door” in various markets.
Shope asks about the strategy for retail. “It’s a retail experience where you walk in and you realize this store is not here for selling, it’s here for serving. The store acts as a gathering place. It has an important role in the community. You might find that there’s a youth program going on with kids from a local elementary school coming in. You might find there’s a local musician. I’m not even sure store is the right word anymore. They have taken on a role that’s much broader. They are the face of Apple. And because we’ve focused on those things, people love them. Last quarter we welcomed 120 million people to our stores, and we only have a little over 400. So that’s more than ten million people a week. So this is sort of like the issue around cash. It’s a privilege. So what are we doing? We’re closing twenty stores and re-opening them, making them larger. And we are opening 30 new stores. They will be disproportionately outside the U.S. Our first store in Turkey, and we’re super excited about that. This is the thing that is not well understood about the stores. You look at something like the iPad. I don’t think the launch would have been nearly as successful without the stores. I think it gives Apple a tremendous advantage to have these stores, to launch these products, and give people a feel for a new category. So, we’re going to continue to invest in them. The average store last year was over $50 million in revenue. Who would have though a store could do that.”
In closing, Shope asks Cook what he’s most proud of in his first year at the helm. “I have the privilege every day to work with people who want to make the best products in the world. It’s the privilege of a lifetime to be at Apple at this point in time. We have the best smartphone on the market, we have the best tablet on the market. We have the best PC on the market. I’m incredibly bullish on the future. I’m incredibly proud that we’re out front in manufacturing. I’m proud that we have the largest solar farm, ever, anywhere, that we’re out front, removing toxins from our products.”
And that’s a wrap. The stock is down $7.92, or 1.6%, at $472.01.
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