Apple CEO Tim Cook is 'optimistic' that trade tensions with China will be resolved

Key Points
  • Tim Cook dispelled concerns about the iPhone X's popularity and lengthening upgrade cycles.
  • He is not overly concerned about a trade war with China.
Tim Cook
Michel Porro | Getty Images

CNBC's Josh Lipton and Jim Cramer spoke to Apple CEO Tim Cook about March quarter earnings, where Cook tried to dispel negative sentiment about iPhone sales.

In particular, he dismissed the idea that a longer upgrade cycle would hurt Apple:

"The important thing from my point of view is the iPhone active install base has been growing double digits and is still growing double digits. So what does it mean? It means that on a conceptual basis that there are a lot more iPhones being deployed new than are being retired. And that's really great for us and that's part of the reason why services went up 31 percent last quarter," Cook said.

Cook also noted that the iPhone X marks the only time that the top-tier iPhone was the best selling.

Here's an approximate transcript:

Tim Cook: We had our best Q2 ever. Revenues were up 16 percent year-over-year, earnings per share were up 30 percent year-over-year. Revenue was powered by iPhone growing 14 percent, services growing 31 percent, and the category that we call other products the watch, the AirPods, and home pod etc, grew 38 percent year-over-year. So, it was a terrific quarter.

iPhone was powered by iPhone X. iPhone X was the most popular iPhone each and every week of the quarter, and that's of course, on top of last quarter, it was also the most popular iPhone every week since its launch. So, the iPhone X has been a huge success and it's the first time since we split the lineup back at iPhone 6 and iPhone 6 Plus that the top model has been the top-selling model. That's unprecedented in that history.

Services, not only were a record for Q2, but all-time record for any record in our history. And it was broad-based. Each of our major geographies grew over 25 percent, and we had Many many services that did really well from the App Store which set an all-time record, to iCloud to Apple Pay to Apple Music and more. All of these services were hitting all-time records. Our paid subscriptions for the quarter, exceeded 270 million by the end of the quarter. That is up a 100 million, over a 100 million year-over-year. So we are seeing an enormous move to services that includes both our services and the third party services that we sell on the iOS App Store and the App Store TV-O apps.

If you look at the iPad, iPad grew both units and revenue for the fourth consecutive quarter and the new iPad that we announced at the end of March and an education event has been very very well-received and we are looking forward to have tons of those out there to education and consumer.

In terms of geographies, Greater China grew 21 percent, which was our best growth rate in Greater China in two and a half years. So we are incredibly proud of that.

From a cash return point of review, we bought $23.5 billion of our shares back during the quarter which was the largest amount we have ever done for any quarter, in our history and we are announcing today that the board has approved a $100 billion buyback and a 16 percent increase on dividend which is our largest increase on dividend since we launched it back in 2012. It was an incredible quarter. From a guidance point of view, we are guiding revenue between $51.5 billion - $53.5 billion for our fiscal Q3.

Any questions?

Josh Lipton: So last time we talked Tim, after Q1 results, you said the iPhone X was the best selling iPhone and that still holds true?

Tim Cook: Yes.

Josh Lipton: How does that shape maybe how you think about the opportunity on the high end versus lower-priced models now looking ahead?

Tim Cook: I think there are customers...with the market being so large for smartphones, it is essentially most people in the world, you need a variety of phones that meet individual needs. So we will have as we do today, a range of products from entry to top of the line.

Josh Lipton: The iPhone ASP [average selling price], in the holiday quarter, it had jumped to $796. I know for this quarter the street was looking for about $742. Looks like iPhone ASP actually clocked in at $728.

Tim Cook: If you remember, in the call last quarter, [chief financial officer Luca Maestri] made this point during the Q and A session that as you head into Q2, we lower channel inventory on iPhone. In particular, we lowered it by 1.8 million units. I think that was much more than the Street anticipated. And if you look at where we lowered it, we lowered it disproportionately on the high end of the line and we anticipated that and we told everybody in January that that obviously means that the sell-in ASP which is the $729 that you are quoting, is less than the sell through ASP.

Josh Lipton: Let me take a step back from this quarter, Tim. It's something we talk a lot about at CNBC is consumers are holding onto iPhones for longer. There is a recent survey where 60 percent of users were holding onto iPhone for two or more years, according to Consumer Intelligence Research Partners, that was compared to 51 percent twelve months ago. What is the impact of the lengthening of this cycle on Apple's business?

Tim Cook: I think the upgrade cycle has a different story in each country so most people in this country talk about upgrade cycles of this country. So if you think about the U.S., over time the U.S. went from a traditional subsidy model where people were paying $199 instead of $599 or $699 for a phone, and so when that subsidy model went away and people began paying installment payments instead, there has been a lengthening of the replacement cycle in the U.S. In some countries that didn't occur. And also in some countries, there was never a traditional subsidy, it was always buying the phone at price. So you see different stories in different countries so it's very hard to talk about it at aggregate.

But the important thing from my point of view is the iPhone active install base has been growing double digits and is still growing double digits. So what does it mean? It means that on a conceptual basis that there are a lot more iPhones being deployed new than are being retired. And that's really great for us and that's part of the reason why services went up 31 percent last quarter. We have been talking about this for several quarters, many quarters, to bring people's attention to it because it's very important and last quarter we exceeded $9 billion in services revenue in a single quarter.

Josh Lipton: So at least in countries and geographies like the U.S. where there is a lengthening of the upgrade cycle, that same consumer is buying more Apple products and services than they used to? Is that one way of looking at it?

Tim Cook: It means that there are a lot more people to buy...yes, that is true too, but the bigger point that it makes is that a lot more people have an iPhone and are using it, that means that a lot of iPhones that we sell and a lot of people forget this, are sold to people who are new to iPhone which are either people switching from a different kind of smartphone or people who are buying a smartphone for the first time. There is still a fair number of people around the world, that are buying a smartphone for the first time. That may seem strange to us because we have been using it for ten years but it's not so strange for many people.

Josh Lipton: You talked about Greater China, can you walk us through demand trends in mainland China?

Tim Cook: Yes, iPhone X was the most popular smartphone in all of China last quarter. So that is a powerful statement I think when we have the very top phone being the most popular smartphone there. The demand trends are 21 percent revenue there is powered by three main areas — iPhone, of course, is growing. In order to grow 21 percent at the country level in Greater China you have to grow really well at the iPhone level. But also the Mac is growing and took share and services are growing. Services was very powerful last quarter.

Josh Lipton: Did you see any impact of escalating trade tensions between U.S. and China?

Tim Cook: No, I don't think so. I am pretty optimistic there.

Josh Lipton: You are? Why, Tim?

Tim Cook: Why, because I think that China and the U.S. have this unavoidable mutuality, where the U.S. can only win if China wins, China can only win if U.S. wins and the world can only win if both win. I mean it's pretty much that simple. So if you look at what history tells us that countries that are the most open and most diverse do the best. And the folks that are closed and least diverse, their citizens do the worst. And it tells us that again and again and again. And I think both countries know that. And so yeah I am optimistic.

Josh Lipton: Do you think Apple is insulated from those tensions because of the [investments] on the ground there?

Tim Cook: You know, never gonna say we are insulated from anything. We do many things in China, we have large operations there, we are running our company on a 100 percent renewable energy which is a big deal in China and very much a outlier in doing that. We also have really encouraged more than a 1.5 million app developers that are writing apps for iOS and the App Store so we have people there focus on everything from manufacturing to developing and I think we have become a key part of the community.

Josh Lipton: Services, Tim. You budgeted $1 billion for original programming in 2018. RBC estimates that Netflix stands at $2 billion, Amazon at $3 billion.

Tim Cook: We never announced $1 billion, that's rumor and scuttlebut, so I am not going to comment on what size budget we got.

Josh Lipton: So let me ask, how do you judge the success of original programming? Will it bother you if Apple wasn't mentioned in the same breath in the awards season?

Tim Cook: We haven't even announced what it is yet. Why don't you ask me that after we announce what it is.

Jim Cramer: You approved another $100 billion [in buybacks]. How much did you have left over, so what's the total you'll be buying?

Tim Cook: We have $10 billion left over, and we are announcing today as well that ten will be completed during this quarter and we will start on the $100 billion.

Jim Cramer: How do you get a step-function up 100 million in services, that's just rather remarkable, and what do you regard as your installed base now?

Tim Cook: The active install base is over 1.3 billion. We had mentioned that last quarter and although we are not providing a number this quarter, it's higher than what it was last quarter so it's continuing to move up, double-digit on a year-over-year basis. So what you have got is you have more services for customers to pick from, and a lot more devices that are out there and a lot more customers out there that are buying. That's essentially what's behind the services revenue.

Jim Cramer: Do you want to try to talk to me about what Fortune size company?

Tim Cook: We have already surpassed a Fortune 100, and what we have said is versus where we were in '16, we are going to double by 2020, that would mean we would be at least a $48 billion per year services business.

Jim Cramer: You did pull out wearables, is wearables therefore a real mover or is it just something you're proud about?

Tim Cook: Our revenues grew almost 50 percent and that is very much powered by the watch and AirPods. So it was another record quarter for the watch, we have really hit an air pocket with the cellular series 3, and we had more carriers adopt it so in the quarter including starting in mainland China on that. And so it is doing extremely well. And that one we did say, if you look on a backwards basis, we are a Fortune 300 company already in the wearable space.

Jim Cramer: Anything about customer [satisfaction]?

Tim Cook: The customer sat of iPhone X is coming in at 99 percent. It's just so unbelievable, we are so proud for that. And it's actually 99 percent for the combination for X, 8 and 8 Plus so the new lineup.

We are doing extremely well with switchers.

Jim Cramer: If you look at where your workforce is right now, divided between U.S. and China, you have hired so many people in the U.S.

Tim Cook: Yes, we have hired a tremendous number. China is more of a story of the population around developers, which don't work for us directly but their economic engine is the App Store, and people in our manufacturing partners is a big piece of the China employment as well. We have a sizable employee population there but smaller than the U.S.

Josh Lipton: We had Qualcomm's CEO on CNBC recently, and he suggested that when you are going to be deposed in that case, that you might feel more inclined to settle. Is that how you feel?

Tim Cook: Unfortunately when you are the CEO of a big company these days, you get deposed quite a bit, and so depositions don't motivate me to do anything. We have never wanted to be in this lawsuit, we went into it reluctantly, because we had no choice. And so, if they begin to sort of admit the problems we would love to find another approach. I find no joy out of it either, it just doesn't bother me to have to do it.

Disclosure: Cramer's charitable trust owns shares of Apple.

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