Tim Cook Speaks: 3 Critical Insights from Apple, Inc.'s Earnings Call

By Markets Fool.com

We've seen the headlines. Apple's iPhone sales were down, and guidance for Apple's fiscal third-quarter suggests more of the same this summer. But there's more to the story -- and much of it was buried in the company's insightful earnings call.

Continue Reading Below

Apple CEO Tim Cook. Image source: Apple.

The iPhone business is healthy
Despite market concerns about Apple's iPhone business after the company reported a year-over-year 16% decline in unit shipments, Apple CEO Tim Cook said during the company's first-quarter earnings call (via a Seeking Alpha transcript) that management believes the segment is healthy.

To provide some additional color, iPhone sales come from three sources: customers who upgrade from previous iPhone models; customers who switch from Android and other operating systems; and customers who purchase a smartphone for the first time.

As we look at each of these three sources of iPhone sales, we see a business that is healthy and strong.

Cook went on to note that the upgrade rate for the iPhone 6s is better than it was for the iPhone 5s. Of course, he admitted it was slower than the upgrade rate for iPhone 6. But given what a monstrous upgrade cycle the iPhone 6 was as iPhone buyers embraced iPhones with larger displays, this is understandable. As far as customers switching from Android and other operating systems, the company added more switchers in the first half of the year than any other six-month period, Cook said. And Cook also noted that iPhone is still attracting "millions of first-time smartphone buyers each quarter, especially from emerging markets."

iPhone sales will return to growth
Not only does Cook believe the iPhone business is healthy, but he believes there is more upside left for the device.

Continue Reading Below

"And we're very optimistic that this too shall pass," Cook responded when asked whether or not the company's iPhone sales can return to growth, "and that the market and particularly us will grow again."

Again, Cook cited the company's strong upgrade, OS-switcher, and first-time buyer rates, as reasons to believe the fiscal 2016 decline is only temporary. And Cook was careful to emphasize that the iPhone 6 is just downright tough to beat in the meantime.

We're lower than the iPhone 6, but I think all of us know that that was an extraordinary cycle that accelerated upgrades from 2016 into 2015. And so that comparable will be tough for this year, but that's a transitory thing.

For what it's worth, Cook's references to tough year-ago comparisons aren't cop outs. The iPhone 6 cycle truly was huge. For instance, in the year-ago quarter, iPhone unit sales were up 40% compared to the year before.

iPhone SE. Image source: Apple.

iPhone SE: Looking good
An important thread that surfaced several times throughout the call was how well the company's March-introduced iPhone SE is doing in the market.

iPhone SE became available on March 31, so none of its sales were reflected in our second quarter results. But so far this quarter we're seeing terrific customer response.

Apple's iPhone SE, which is basically the company's latest smartphone technology packed into the iPhone 5s body with at an iPhone 5s price point, marked a significant departure from the company's typical annual introductions of flagship iPhones. With the iPhone SE, Apple catered to a more affordable price point for the first time with a competitive device.

Cook even noted that demand for the phone has been so strong that it "exceeds supply at this point."

While these were some of the most interesting takeaways from the earnings call, I'd recommend all Apple investors listen to the full recording. Given that Apple's second-quarter earnings followed a rare quarter of declining revenue, it comes at a critical time for the company -- and the insightful tidbits included in the call didn't disappoint.

The article Tim Cook Speaks: 3 Critical Insights from Apple, Inc.'s Earnings Call originally appeared on Fool.com.

Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.