AAPL: Cook’s Chat


        2/12/2013 @ 10:01AM            |6,470 views

Apple CEO Tim Cook Live From The Goldman Tech Conference (Updated)

Feb 12-2013


Apple CEO Tim Cook this morning kicks off the 2013 Goldman Sachs Technology and Internet conference at the Palace Hotel in San Francisco with a fireside chat. Cook’s session will be followed immediately by sessions with eBay CEO John Donahoe and Broadcom CEO Scott McGregor; a few hours later, Yahoo CEO Marissa Mayer will take to the stage.

You can bet that topic #1 at Cook’s session is going to be Apple’s $137.1 billion cash position. Last week, activist investor David Einhorn actually sued the company in an effort to block the company’s plan to eliminate a provision from its charter that would allow the company to issue preferred shares without holder approval; Einhorn thinks the company should issue perpetual preferred shares with a 4% coupon to existing holders as a way of distributing more cash to holders. Legg Mason portfolio manager Bill Miller last week also was quoted as suggesting Apple needs to distribute more cash to holders. The catch is that the majority of the cash is held overseas, and that bringing it back into the country would result in a big tax bill.

I’ll be blogging the proceedings live. Things get underway at 7:15 a.m. Pacific time. I’ve bold-faced some key sections to make it easier to navigate the live blog.

Post session summary: Cook didn’t break a lot of news, but he did affirm that the company is seriously looking at returning more cash to holders; he says that David Einhorn’s lawsuit against the company’s proposal to change the rules on issuing preferred stock is a “silly sideshow.” But he did say that Einhorn’s idea about issuing perpetual preferred shares is creative, and that the company’s board will consider it. He also talked about the company’s acquisition strategy, noting that they have considered large deals in the past, but that none met the company’s requirements. Cook did not really answer questions about whether Apple will be building bigger or cheaper iPhones. And he would not comment on the company’s long-term gross margin strategy. He also takes a swipe as OLED phone displays, asserting that the colors are not realistic; he says the company’s retina display is far better. Find all the details below.

Apple shares at about 7 a.m. Pacific were down $3.48, or 0.7%, to $476.45.

  • I’d note that Cook was originally scheduled to speak much later in the day; it isn’t entirely clear why his talk was rescheduled for first thing in the morning. Maybe it means he plans to make news. Maybe it means he doesn’t plan to break anything new. (There is a rumor floating around the conference that they had to change the time because Cook will be attending the State of the Union address in Washington tonight, sitting next to first lady Michelle Obama.)
  • Apple is webcasting the audio from the proceedings if you want to listen in.
  • There’s power, WiFi and a large supply of Diet Coke, so I’m all ready to go.
  • 7:13 a.m. Goldman exec gives the welcome speech. Goldman CEO Lloyd Blankfein is going to talk in a moment or two.
  • Blankfein takes the podium, and thanks everyone for coming to their biggest tech conference ever.
  • After some brief remarks, Bankfein begins introducing Tim Cook.
  • Cook is reading the usual disclosure statement.
  • He’ll be interviewed by the analyst Bill Shope.
  • Shope starts with the cash question – noting Einhorn’s comment that Apple has a “Depression” mentality.
  • Cook says Apple makes bold and ambitious bets on products, but is conservative on investment. Last year they did $10 billion in cap ex, and will do a similar amount this year. They invest in new stores, supply chain, retail stores and do some acquisitions. Cook says they do have some cash. (Chuckles.) He says it is a privilege to be in that position. $22 billion in cash flow from operations in the last quarter alone. He says they can seriously consider returning additional cash to holders. He says management and board is in serious discussions on returning more cash to holders.
  • On Einhorn’s proposal for a perpetual preferred stock. He says the idea is “creative,” and that Apple will thoroughly consider it.
  • On Einhorn’s lawsuit, he says the disagreement centers on a proposal in Apple’s proxy called Prop. 2 which is about the rights of shareholders. It is not about whether can return additional cash; not about how much; not about the mechanism to return it. It is about the rights of holders. Some time ago, early in 2012, we were looking at what we could do to improve governance further. He says they should eliminate blank-check preferred from Apple’s charter. Not that could not issue a preferred, but that they would need to get holder approval to do it. He says he finds it bizarre that they would find themselves be sued for doing something that is good for shareholders. He says it is a silly sideshow. Cook says his preference would be that everyone would spend the money they using on this and give it to a worthy cause. Cook says they are not going to do a campaign; there is not going to a Yes on 2 sign on my front lawn, he says. It is a waste of time, he says. But he says he supports Prop. 2, and will personally support if. And he says he encourages others to vote for it. But it is not something he is going to spend cycles on.
  • Shope asks about large acquisitions, and why Apple has not done them.
  • 7:30 a.m. Cook says last three years they have averaged acquisition every other month. Focused on companies with smart people and/or IP. Generally speaking, they have taken something they are working on and move the skills to something else. Bought PASemi a few years ago; they were in the process of building capability to create engines of iPhones and iPads. They were able to supplement incredible group already at Apple. We moved people to work on our iOS devices. We like to control the primary technology behind the parts we use.
  • Cook says they have looked at large companies, but that they “didn’t pass our tests.” Would they look again? Yes. Is there a reason they could not do one? No. But they will be disciplined and thoughtful. They do not feel pressure to go out and acquire revenue.
  • Shope moves off the balance sheet, and moves to the company’s culture of innovation.
  • Cook says innovation is deeply embedded in Apple’s culture. It’s in the DNA of the company, he says. Cook says Apple is the center of innovation. He says there is no formula. Some of the essentials are skills and leadership. Apple in terms of skills is in an unrivaled position. They have skills in hardware, software and services. The model that grew the PC industry, where companies specialized in a thing, and someone did some integration, is not working for what consumers want to day. Arguably, where you can innovate in hardware, or software or services, “the real magic happens at the intersection of these.” The iPad is very magical, he says, because of that. He notes that some people call what they do vertical integration. He says that was out of favor for some years, but Apple stuck to that strategy. He says this is something you cannot just write a check for. There are people trying desperate to catch up, he says.
  • In terms of leadership, he says, they have superstars. People at the very top of their game. People like Jonny Ive, who he says is the best designer in the world. Bob Mansfield, the top silicon expert in the world. He cites a few others. So Apple has culture deeply embedded; incredible blend of skills to deliver these magical moments; and the leadership. “I have never been more bullish on innovation at Apple.”
  • Shope shifts to products. He wants to know if iPhone has reached natural limit on market share gains in smartphones.
  • Cook says the people he works with do not view any limits.  He says when you look at smartphone market, it was 700 million units last year, will double in next few years to 1.4 billion. In long run, all phones will be smartphones. And there are a lot more people in the world than 1.4 billion. He sees a market that may be “one of the best markets of all time.” He adds that Apple has tremendous momentum. He notes that innovation has moved from PCs to tablets and smart phones. He says the company in China is growing over $10 billion a year in revenue – $23 billion last year. Pull all of that together, he says, and there is tons of opportunity. I see a wide open field, Cook says.
  • 7:42 a.m. Shope notes that the phone is not affordable to a large slice of the world’s population. He asks if they will make some cheaper phones.
  • Cook says Apple’s north star is great products. We would not do anything that we would consider not a great product, he says. Other companies do that; that’s not who we are, he says. With iPhone, he notes, they cut price of iPhone 4 and iPhone 4S in September of last year. He says they were surprised at the level of the demand. So they have made moves to make things more affordable. He says iPod started at $399; today you can buy a Shuffle for $49. We said, how can we do a great product, while selling at a very low price. He says they looked at doing a cheap Mac, but decided they couldn’t do it. But then they invented iPad. Sometimes, you can take the issue, and solve it in different ways. But again he says that the north star for Apple is doing great products.
  • Shope asks about building an iPhone with a larger screen size.
  • Cook says that in the PC industry, people competed with specs and price. He says some people find OLED display color saturation to be awful. He says the retina display is twice as bright as an OLED display. He says that there are many attributes of displays. They want the best displays. He is not going to comment on what they will do in the future. But the experience goes beyond a simply number like screen size.
  • Cook says the only religion they have is that they must do something great. They will never make a crappy product.
  • Shope shifts to iPad and the opportunity set in tablets.
  • Cook says the tablet market will be huge. It is a huge opportunity for Apple, he says. It is one of those areas with hardware, software and services integrated. He notes that HP sold 15 million PCs in the latest quarter, in which Apple sold 23 million iPads. There has been a sea change here. We are in the early innings of this game. The tablet market last year was about 120 million; this will triple in four years, to around 375 million, which is more than annual PC sales. The tablet is attracting people who never owned a PC; and people who have. Apple is the poster child of the post-PC revolution. Over 300,000 iPad apps so far. Other guys have a few hundred. We have a significant lead in this area, he says. He says you can’t tell market share since no one but Apple reports units. But IBM reported than on Black Friday, the product that was most used for shopping was iPad, twice as much as every Android device. Why is this? Because it is an incredible experience. We really sweat the details, so we have a greater customer experience. Cook says the age-old model of everyone doing a sliver of something is not working; customers want integration.
  • Moving on to the iPad mini. Shope notes that it has impact on gross margins for Apple and impacted sales of other iPads.
  • Cook says for years he has been asked cannibalization questions. If you look at when they came out with iPad, people worried it was going to kill the Mac. The truth is, we don’t think about it that much. If we don’t cannibalize, someone else will. With iPad, the Windows PC market is huge and there is a lot more there to cannibalize than there is of Mac or iPad. If a company ever begins to view that as a primary focus, it is the beginning of the end. He says data showed over 50% in countries like China and Brazil don’t own Mac products. This is a huge thing for us, to introduce new people to the company. Some percentage will buy other Apple products. You saw that with iPod creating halo for Mac, with iPhone creating halo for iPad. All of these things have synergies. It is not about just selling a point product; it is about looking at the total. I think this is a huge opportunity. Seems perfectly reasonable to me to have an iPad and an iPad Mini; it probably wouldn’t be smart not to, he says.
  • Shope notes that the Street worries about trade offs between revenue growth and long-term gross margin strategy.
  • Cook says he is not going to give long-term margin guidance. But he says you can always accept lower margin at any product at any given time for a strategic reason, but at the background we always know that this halo effect plays. They have confidence in their ability to work the supply chain and work down cost curves. They have other ways to make money and reward holders besides just selling hardware. Services and software revenue last quarter was $3.7 billion. If you look at that versus software and services companies, that is an incredible amount of revenue. There are other things we’re doing and could do to have revenues and profits flow. We don’t look at the sale of a product as our last part of the relationship with a customer, it is the first. Our stores do a great job of helping people along on their journeys. There is also a financial benefit of doing that. The point is that they do not have to worry about margins in the very short run; they are managing Apple for the long run.
  • Shope asks him to talk about the difference in platform strategy between developed and emerging markets. In some emerging reasons, he notes, customers can’t buy music on iTunes, for instance.
  • Cook says that last year they put enormous energy in expanding ecosystem geographically. App store now in 155 countries. iTunes in over 100 countries. Free iBooks in over 100 countries; paid in over 50 countries. iCloud in almost every country. There are restrictions on sale of movies in some countries. Only one major market where they are not selling countries. (He didn’t say which one.) He says they have really advanced the ball. He says they want to have all of their ecosystems everywhere.
  • Shope asks Cook to talk about Apple’s retail strategy.
  • Cook says there is no better place to discover and learn about products than in retail stores. Apple’s stores are there not for selling, but for serving. Genius Bar helps you get more out of your Apple products. The stores act as a gathering place, with an important role in the community. He says they are not just stores; that store might not be the right word. Last quarter they had 120 million in their stores, with a little over 400 stores. He says this is huge, and some stores are now not big enough. He says this is an issue like cash – a privilege to have it. This year they will add 30 stores, mostly outside the U.S. Will open first store in Turkey. Also will move 20 stores to newer locations to add more space. He says that the company would not have been nearly as successful with iPad without the stores. Cook says he incredibly bullish on the store; average store last year did over $15 million in revenue. They will continue to invest in the stores “like crazy.”
  • Cook says if he ever starts feeling his energy sag, he visits the stores, and it is like taking Prozac.
  • Shope asks about his first year as CEO; this is the last question from the Goldman analyst.
  • Cook says he is incredibly proud of a lot of things. He is most proud of Apple’s employees. He says they are the most creative people on Earth. They have the best smartphone on the market, the best tablet, the best PC and the best music player. Cook says he is incredibly bullish on the future. He is proud that they have a spine on supply responsibility. He says they are going to do what is right and just. He is proud that they are doing heavy lifting on the environment, that they design products with the environment in mind. They have the largest private solar farm anywhere. He says it is both the privilege of a lifetime and humbling.
  • 8:15 a.m. Shope says thinks.
  • Cook says thanks to Goldman and the audience. And that’s it.
Apple shares after the session are down $6.51, or 1.3%, to $473.78.

Update: Piper Jaffray analyst Gene Munster finds two takeaways from the session, he writes in a brief research note.

“We believe the two key takeaways from Tim Cook’s recent public comments were:

  • We have greater confidence that there will be a slight increase to the dividend when Apple reports the March quarter.
  • We continue to expect Apple will have a cheaper iPhone related product. We are modeling for this in the September 2013 quarter.”

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