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Tim Cook on Apple's big earnings beat

  • Apple CEO Tim Cook talked to CNBC's Josh Lipton about the company's third quarter earnings.
  • He said the hype around the next iPhone feels very different than the similar cycles around the iPhone 6 and 7.
  • He also mentioned Apple's investments in advanced component manufacturing in the United States.

Apple CEO Tim Cook spoke to CNBC's Josh Lipton following the company's earnings report on Tuesday. Here's a full transcript.

Tim Cook: We had a great quarter, I couldn't be happier – revenues came it at 45.4 billion which was at the top end of our guidance. Gross margins came in at 38.5% which was at the top end of our guidance. Revenues have now accelerated for 3 quarters in a row, from the growth rate point of view. And if you look at EPS we were up 17% year on year and so it was a fantastic quarter in any way you look at it.

If you look at the products, we sold 41 million iPhones but frankly it's better than that because we also reduced channel inventories by 3.3 million, largely because the sell-through was more than we expected. If you look across the world, we had several markets in Asia, in Latin America, and the Middle East which grew more than 25% year on year. If you look at 7 in the 7 Plus family, we grew strong double digit year on year as compared to the 6S/6S Plus a year ago. So iPhone was terrific.

If you look at services, we came in at 7.3 billion which was up 22% year on year, really great quarter. And we have now achieved our goal of being of the size of a fortune 100 company earlier than we thought. We've now achieved it on a look-back basis. We're very proud of that.

The number of subscriptions across the App Store were up 20 million during the last 90 days to over 185 million. As a reminder, that's a combination of Apple branded services like Apple Music and third party branded things, although it's principally… Apple is the biggest piece of that obviously in our services. These are paid subscriptions to be clear."

If you look at iPad, iPad was up 15% year on year. The approach we've had from a product point of view, of bifurcating iPad and iPad Pro, is really resonating with our users. The iPad launch that we did at the end of March and the iPad Pro announcement from June both were received extremely well and gave us the best compare on iPad that we've in many, many quarters.

We picked up share globally and in every major geography in the world on iPad. Also, a highlight of iPad was that U.S. education was up 32% year on year to over one million units, and so education doing well, and enterprise continues to do well in our partner initiatives with Cisco and IBM and Deloitte and SAP are all going extremely well.

The Mac also picked up global unit market share during the quarter. Our revenues on Mac were up 7% on the strength of the announcements we made at the development conference versus the global PC unit market shrank by 4%. Apple watch was up over 50% year on year. The series 2 is really resonating and I'm getting so many mails from people who are being helped along with lifestyle and fitness changes with the watch. It's really gratifying to see"

And so, if you sort of summarize the top line results were at the high end of our expectations EPS very, very incredible growth at 17%, iPhone, Mac, iPad, and Watch all doing really well. Our guidance for the current quarter from a revenue point of view is 49-52 billion, so we're projecting to continue the momentum in the quarter."

Josh Lipton: So you mentioned that iPhone demand was actually better than the shipments indicate because you got that channel down by 3.3 million. Do you think that performance was in any way impacted by the hype around your current product cycle?"

Cook: Around potential new products? Yes, I do. The noise or reports, some rumors and so forth, are at a different frequency and volume than we've ever had before. And it's clear because I'm getting comments from different people that there is a pause. But despite that, I feel great about how we did.

Lipton: Does this pause/hype feel different than the 7 or the 6?

Cook: Yes. Yes.

Lipton: On China, Tim, I saw that China is down 10%... The trends have been moderating. Looking ahead, do you think investors have to adjust their expectations about what's possible in that market for the iPhone franchise on the quarters ahead and maybe focus on services? How do you think about it?

Cook: Well, this quarter, or the last quarter, Q3, the description I would give the results is that they are very encouraging to me. They were better than the previous quarter, which we expected but even a bit better than I thought they would be. If you look underneath the numbers, which you can't see from the data sheet, Mainland China was flat year on year. In constant currency, it was actually up 5%, so we feel great about that. Mac had a strong quarter in China – record June quarter. IPad was very strong, services were extremely song, and iPhone units were flat year on year, which was the same as the market. And, so, we held share during the quarter.

If you look at Taiwan, we were up over 20% year on year for the quarter. And so we're down, now, to having an issue in Hong Kong. Hong Kong is what pulled the total down to… Pulled Greater China down to negative 10, and I'm really confident based on what I see, that we're going to do even better this quarter than we did last quarter. So, I'm certainly not adjusting my expectations. I feel very good about the opportunities there.

Lipton: And the mix, Tim, same as last time, any color? In general, for the iPhone franchise, still strong for the iPhone 7 Plus?

Cook: Very strong. Strong double digit on 7 and 7 Plus.

Lipton: Given that that mix is so strong, what has that taught you about the willingness of Apple customers to pay top dollar for the latest device? Could you have priced that 7 Plus even higher?

Cook: I didn't want to price it any higher. What we do is we look at the value that we're delivering, innovation that we're delivering, and we price accordingly. So I think if you are doing a great job there, then you know, people will pay a bit more. But, we want to charge a fair price and we felt like we did that with both 7 and 7 Plus.

The smart phone, just one quick point, the smart phone is becoming even more important to people because it's going across so much of your life and you can tell by some of the things we did at WWDC that that will only continue. And with things like AR… I think it becomes even more essential than it currently is. I know it's hard to believe, but I think that's the case."

Lipton: On Q4 guidance, there's so much commentary and talk by the analysts/commentators that your newer products might be delayed… Can you provide any color on that?"

Cook: No. (Laughs extremely hard)

Lipton: Should investors expect the channel sell-in to be typical in this Q4 relative to what has been recent years?

Cook: They should look at our guidance and judge for themselves but we think we're going to do 49-52 billion. That's what we think and you know, they can look at our track record of achieving it and then come to their own conclusion.

Lipton: Original programming – a lot of original programing coming from you guys right now. Karaoke debuts August 8. How do you judge the success of that programming Tim? Are there certain metrics you look at? Do you look at Apple Music subscribers? What do you look at when you're looking at the success of all the new content you're producing?"

Cook: Well, we're not producing a lot right now. But, there are two purposes of what we're doing right now. One is to learn and the other is to increase Apple Music subscribers. So I kind of look at both of those. And to me, the most important one is the first one right now because we've never done this before. So we'll see how Karaoke does… I think it will be funny and some people will get a good laugh from [indecipherable]. But, as you know, we have two great executives who just joined us with a terrific resume of shows they've worked on from Breaking Bad to The Crown and several other major shows. And so, this is an area where we're putting some effort.

Lipton: Final question Tim. President Trump did tell the Wall Street Journal that you told him that Apple is going to build these three big manufacturing plants in the U.S. Is that true? Does the President accurately understand Apple's plan?

Cook: From a job creation point of view, here's what we're doing. We've created 2 million jobs in the U.S., we're incredibly proud of this. And we do, probably unlike many companies, feel like we do have a responsibility to create jobs because Apple could've only been created here.

There are three areas of job creation that we are very focused on. The first is App Developers – they make up 3 quarters of the 2 million. And what we're doing here, among other things, is making free for everyone in K-12 a curriculum to teach coding to kids. We started with K-6… We've then been adding curriculum and in May we expanded that to include community colleges, technical colleges, vocational colleges. Things that we're interested in and the administration is very interested in in this area as well, and so we think that we can pick up a lot of people into the developer community and make it more diverse and bring the technology explosion to people who perhaps haven't seen it today.

The second area is manufacturing. In manufacturing, as I talked to Jim (Cramer) about this, we've looked at this and said, we think the right place for the U.S. to expand in manufacturing is in advanced manufacturing. This is about advances components and so we've initially put 1 billion dollars in an advance manufacturing fundm and we've already deployed 200 million of that to Corning in Kentucky and they're using that to expand their factory. They're in our supply chain, they produce for us, which gives us on iPhones and iPads that ship around the world. And, so, we want to do more than this. I hope that it's several plants… I don't know how many.

Lipton: You hope there's several places you can invest that 1 billion dollar fund?

Cook: Sure. If we find really great things, we might even expand that, right? But it will be in advanced manufacturing because that's where the puck is going. We're not a backward looking kind of company.

And third, we have about two-thirds or more of our employees in the U.S.