Live Update: Apple financial conference call

2:00 PT - Dan Moren: Afternoon (or evening) to you, dear financial conference call aficionados. I'm Macworld Associate Editor Dan Moren, here to bring you the play-by-play of Apple's Q3 2008 financial results. I'm joined by Executive Editor Philip Michaels, playing the Tim McCarver to my Joe Buck.

2:01 PT - Philip Michaels: While we're waiting for the call to begin, let's look at the numbers Apple has already announced. The company reported a $1.07 billion profit on sales of $7.46 billion. That's the best June quarter in Apple's history. Also worth noting: Apple sold 2.496 million Macs during the quarter, which is a record number of Macs sold.

2:01 PT - P.M.: There's a lot of focus on the iPhone lately—we're as guilty of that as anyone. But this is the fourth quarter out of the last five that Apple has sold more Macs than ever before. Desktops and especially laptops remain a very important part of Apple's business, iPhone or no iPhone.

2:01 PT - D.M.: And away we go. We're getitng our introductory remarks already. They're starting remarkably promptly. Peter Oppenheimer, Tim Cook, and Gary Whistler are on hand as usual. The usual boilerplates about forward-looking statements apply (remember, Peter Oppenheimer is not the amazing Kreskin).

2:02 PT - D.M.: Peter: Highest June quarter revenue and earnings ever. These were the highest Mac shipments ever, as well as good numbers for iPod and iPhone. Higher than anticipated revenue and gross margin. Earnigns per share of $1.19. Here are a few points that demonstrate Apple's performance. Current quarter's growth (38%) is significantly above last year's June quarter (24% growth). Sales in retail stores were strong: 58% growth year over year. Store traffic 32 million, up 10 million from year-ago quarter. Apple's total revenue increased by $4.3 billion year over year for first three quarters; growth of 40%.

2:04 PT - D.M.: Mac products and services represented 61% or revenue in June quarter. Greatest number of Macs shipped ever; 41% year over year growth, and almost 3x the industry standard. Desktop sales grew 49% year over year; portables up 37% year over year. In the U.S. channels tracked by NPD, Apple's share increased to 19.5% this year from 15.4% last year. Best Mac quarter ever for education business; unit growth of 25% year over year. New all time high for quarterly Mac sales in K-12; sold more Macs in higher ed than ever in a June quarter.

2:05 PT - P.M.: Peter Oppenheimer says "We're thrilled with the momentum of the Mac business." Well, who wouldn't be? Credit the revamped iMac—introduced in April—for that 49% jump in desktop sales. Oppenheimer credits all the laptop products for the 37% rise in laptop sales, but considering this was the first full quarter that the MacBook Air was shipping, you'd have to figure that helped Apple grow its laptop business.

2:06 PT - D.M.: Music products and services account for 31% (?). iPod sales growth 10% in US, 15% internationally. iPod revenue grew 7% year over year, due to lower ASPs due to shuffle price reduction in February. Very successful in maintain high MP3 market share. (I'm getting cut out here, so unfortunately, I've got silence right now).

2:07 PT - P.M.: Let me grab the baton from Dan here. Peter Oppenheimer is recapping the quarter for the iTunes Store. Nothing you haven't heard before.

2:08 PT - D.M.: And I'm back. We're talking about iTunes and Apple's deals with the studios. 717,000 1G iPhones were sold in June quarter. $419 million in iPhone revenue realized. Reminder: did not being recognizing handset revenue for any iPhones sold on or after March 6th until iPhone 2.0 software became available. Began recognizing on July 11th, and will continue to do so for 24 months. Any handset revenue recognized in June quarter reflects prior to March 6th.

2:09 PT - D.M.: Sold 1 millionth iPhone 3G in just 3 days, in contrast to 74 days for original iPhone. Customer reaction overwhelmingly positive. Launched the App Store on July 11th with lots of fun applications. App Store currently offers more than 900; 20% free, 90% under $10. Over 25 million applications downloaded already.

2:10 PT - P.M.: Not to be a Negative Nellie here, but it's interesting that Oppenheimer did not mention either the launch problems Apple experienced on July 11 nor the widely reported shortages of iPhone 3Gs. I'm sure that might come up when the floor is opened to questions. That said, Apple has reason to crow—remember, this quarter last year covered the opening weekend of iPhone sales. (270,000 for those of you who remember your history.) Now, Apple has sold 1 million phones during an opening weekend. That's quite an improvement, even with the launch day mishaps.

2:10 PT - D.M.: Apple retail stores. $1.44 billion in revenue. 476,000 Macs sold in quarter, increase of 44% year over year, and half sold to new Mac users. Record number of trainings. Eight stores opened in quarter, including Boylston St. in Boston (represent!) and first store in Australia. $6.8 million average revenue per store in quarter. On track to end fiscal 2008 with 242 stores. First store in Beijing just opened; Swiss and German stores coming in second half of 2008.

2:12 PT - D.M.: Total gross margin exceeded expectations for several reasons that are extremely technical. Operating expenses $1.21 billion; $112 million in stock-based compensation. Tax rate was 29%, below guidance of 31%, due to higher than anticipated mix of foreign earnings. $1.33 billion in cash in the quarter. In first three quarters of fiscal 2008, generated over $5.4 billion in cash. Tremendous cash generation from iPhone sales that has not been fully reflected as earnings yet, due to subscription accounting.

2:13 PT - D.M.: Here's the forecast for next quarter. Cloudy with a chance of—oops, $7.8 billion. Under subscription accounting, iPhone sales will build signifcant revenue and earnings in future quarters. 31.5% in gross margin next quarter. Down from 34.8% in June quarter. Sequential decline expected due to full quarter impact of back to school promotion; significant product transition that can't be discussed today; and a one-time chew-up (?). Expect tax rate to be 30.5%. EPS to be about $1.00

2:14 PT - P.M.: That $7.8 billion would be 25% growth over last year's September quarter. That's significant because it's usually the forward-looking predictions that make the company's stock price rise or fall in the aftermath of this analyst call. And speaking of forward-looking predictions, what could this future product transition be? Something iPod-related? Start your speculation!

2:15 PT - D.M.: Very enthusiastic about iPhone 3G, App Store, etc. Expect revenue of fiscal 2008 to be $32.4 billion, increase of 35% year over year. Very excited about product pipeline. Now, on to questions.

2:15 PT - D.M.: STM Midwest: Future product transition effect on gross margin; is there a corresponding effect on revenue growth in Sep. quarter?

2:16 PT - D.M.: Peter: Revenue of about $7.8 billion; 25% growth over last Sep. Have included full quarter ASP impact of back-to-school promotion, future product transition that I can't discuss, and elasticity from shuffle price reduction. Very happy with our revenue growth; best Mac quarter ever, etc. etc. It's a classic Oppenhimer question dodge! (TM)

2:16 PT - P.M.: The first analyst to ask a question suggested the revenue estimate for September sounds conservative.

2:17 PT - D.M.: Followup: Apple's penetration in emerging markets? Additional color in international sales?

2:18 PT - D.M.: Tim'll take the reins. Europe revenue grew at 43%; Japan for third straight quarter has grown higher than overall company at 40%. Asia-Pacific continues to do very well: year over year in Mac area of 53%. Europe is growing about 4x market for Macs; Japan's growing about 4-5x and Asia-Pacific at 2-3x. Several developing markets growing over 50% in revenue year over year: China, Russia, Latin America, for example. Also saw some of more mature markets growing over 50% year over year: France, Germany, Australia, etc. Very strong quarter in every major geographic region. Very happy with what we see for store in Beijing so far.

2:19 PT - D.M.: Followup: Any change to store expectation in next few months? Peter says 242 stores by end of fiscal '08, up 45 from last year.

2:19 PT - D.M.: Citigroup, Richard Gardner: How many Best Buy stores were added in quarter? Followup: below target range on Mac channel inventory; is target range changing?

2:20 PT - D.M.: Tim: Added about 170 Best Buy stores across quarter, with total of 570. Plan to be about 600 by end of summer. Globally have about 10,300 storefronts for the Mac, up about 1600 year over year. Annnnd silence...then channel inventory. Did end at 3-4 weeks, still feel that 4-5 weeks is appropriate target.

2:21 PT - D.M.: Lehmann Brothers: Gross margins. Changes in commodity environment? What will components do and why?

2:21 PT - D.M.: Peter jumps in to go through factors that caused better performance in June first, before Tim steps in with commodity info. In June quarter did 180 basis points better than guidance, driven by one-time true-up(?); better commodity market than anticipated. Gross margin in September 31.5%, down from 34.8% for 3 factors: full quarter impact of back to school promotion; future product transition mentioned yet again; then one-time true-up with contract manufacturer will not repeat.

2:23 PT - D.M.: Tim: On LCDs and NAND flash, expect favorable cost environment. DRAM market is entering seasonally stronger demand market. Believe price will recover from low levels. Hard drives, optical drives, most other commodities in supply/demand balance and anticipate trends following historic norms.

2:24 PT - D.M.: Citigroup: Any change in company's philosophy in margin, volumes?

2:24 PT - D.M.: Peter: We're delivering state of the art products at price points that can't be matched...make reasonable margin, but not so high as to leave room for competitors. Release new products that cost more because they deliver entirely new value to customers; then, they drive prices down as they continue. Gross margins about 30% in fiscal 2009. Very confident in pipeline, growth opportunities, etc.

2:25 PT - D.M.: Citigroup: Asking as respectfully as possible...and it's the Steve Jobs health question! For the win! Really sorry to ask, because it's a very private matter. Apologize in advance for having asked the question.

2:26 PT - D.M.: Peter: Steve loves Apple, serves at the pleasure of the board, and has no plans of leaving Apple. Steve's health is a private matter.

2:25 PT - P.M.: Well, that was awkward. But at the risk of coming across as insensitive, it's a valid question—few companies are as publicly identified with their CEO as Apple is with Steve Jobs. Health is a private issue, certainly, but the pressure is going to always be on Apple to outline its plans for succession.

2:26 PT - D.M.: Peter: Capital expenditures in quarter, spent $113 million in retail stores; $191 million outside of retail stores (IT facilities, manufacturing, etc.). $1.2 billion in capital expenditures in the future.

2:27 PT - D.M.: Question: Apple TV? Number of video rentals, or how the launch of that service has impacted hardware sales?

2:27 PT - D.M.: Tim: Pleased with sales of Apple TV sales since February. But Apple TV remains a "hobby" because business is not nearly as large as others, and does not have potential of the iPhone business, but continued to invest in it.

2:28 PT - D.M.: Charles Wolff from Needham: Division of iPod sales between US and international?

2:28 PT - D.M.: Peter: Don't specifically break it out; but iPod sales grew 10% in US, 15% out of US.

2:28 PT - D.M.: Charles: So I should be able to solve for it [nervous laughter].

2:28 PT - D.M.: Gene Munster: iPhone's had a good launch. 2% of stores still have iPhone, but refilling channel? Braoder inventory?

2:29 PT - D.M.: Tim: Response to iPhone 3G has been stunning. Sold 1 millionth phone just three days after launch. Took 74 days to sell 1 million of first-gen iPhone and almost two years to sell 1 millionth iPod. Thrilled with what we see. There are a number of stock-outs. This is a factor of overwhelming demand. Very pleased with production ramp, trajectory of it; shipping units as fast as we can. Trying to match demand. Confident enough in production ramp, that will be launching 20 additional countries on August 22nd, bringing total to over 40, and still expect to be selling in over 70 countries by end of year.

2:30 PT - P.M.: Well, there's my inventory question—and Tim Cook seemed to answer it as definitively as one can in these things. "I like what I'm seeing in the product ramp," the COO said, which means that Apple is confident it's going to make enough phones to meet the demand for the iPhone 3G at some point. (Though Cook declined to say when.) The news that Apple plans to bring the iPhone to 20 more countries next month is also a sign that production is ramping up to Apple's satisfaction.

2:30 PT - D.M.: Tim won't predict when supply will meet demand. Been selling phone for 10 days, so can't predict with level of data.

2:30 PT - D.M.: Gene: Accounting treatment with iPod touch? Peter: When sold. Not making software updates available for free on iPod touch like on iPhone.

2:31 PT - D.M.: Goldman Sachs: Gross margin target in fiscal 2009, down substantially. Is it more about pricing, mix, or what?

2:31 PT - D.M.: Peter: State of the art products at price points competitors can't match, resulting in market share gains in their respective areas. As a result, gross margins will be about 30% in fiscal 2009 and can't get into what's in the product pipeline.

2:32 PT - D.M.: Goldman Sachs: What's the change, though? Margins seem lower?

2:32 PT - D.M.: Peter: Investments in front of me I can't discuss. New products that comptetitors won't be able to match.

2:33 PT - D.M.: Banc of Montreal: Guidance issue. Revenues up 3% from June to September. In reality, order of magnitude revenue up 10%. The only difference was reversal of deferred at contract manufacturer. So what's different this quarter?

2:34 PT - D.M.: Peter: We give you guidance that we have reasonable confidence in achieving (that's Oppenheimer boilerplate right there). Believe we will sell more Macs in September than in June, but do see gross margin being down.

2:33 PT - P.M.: The Banc of Montreal analyst seems to have only recently discovered that Peter Oppenheimer tends to give very conservative guidance on future sales and earnings. Either that, or this was a clever way to get Apple executives to disclose what this "future product transition" is supposed to be. Whatever the reason for the question, Oppenheimer isn't biting.

2:35 PT - D.M.: BoM followup: Sounds like what you're suggesting is that price will be one of those things that leads gross margins down?

2:35 PT - D.M.: Peter: That certainly could be the case. (Nice).

2:35 PT - P.M.: Really, many of these questions could be summed up thusly:
Analyst: Can you talk about future products?
Oppenheimer: No.
Analyst: Pretty please?
Oppenheimer: No.
Analyst: Awwwww....

2:36 PT - D.M.: Shannon Cross: Hello, can you hear me? I'm on an iPhone 3G so I hope you can...[zoom, that question went right by me].

2:37 PT - D.M.: Peter: Management team has made excellent decisions. $32.4 billion expected for the year. Just getting started with the iPhone. Run the business very very well...plan to continue that in the future (nooo, really? Here, I was hoping they'd run it into the ground).

2:37 PT - D.M.: Cross: Use of cash, etc?

2:38 PT - D.M.: Peter: Don't have a change in our position to share with you today.

2:38 PT - D.M.: JP Morgan (not the actual dude, but the firm): Back to commentary on margins going forward. You're saying that Apple could introduce a more flexible pricing structure across lines, maybe heading more towards a focus on volume?

2:38 PT - D.M.: Peter: Can't get into the future, but incredibly well priced in the market. iPod market runs the gamut, and we are as competitive today on the Mac as we've ever been. Very comfortable with pricing.

2:39 PT - D.M.: JP Morgan: Help us think about presence overseas?

2:39 PT - D.M.: Tim: To clarify, those are channel numbers, not our own stores. See numbers continue to increase, because as market share grows, need more coverage. Not as much for Mac as for iPod, iPhone, but Tim envisions it continuing to grow.

2:40 PT - D.M.: JP Morgan: Lot of buzz in corporate IT houses about the phone. Any idea about people folding in Macs in corporate environment?

2:40 PT - D.M.: Tim: About a third of Fortune 500 in our iPhone beta program. Oracle, Kraft, Disney, Genentech all beginning to deploy iPhones in their environments. Lots of companies writing business apps for their particular enterprise. Many of carrier partners have large sales forces to call on companies direct, but they're very excited about evangelizing iPhones here.

2:41 PT - D.M.: Morgan Stanley: Inventory did increase 50% sequentially; fair to assume that number normalized?

2:41 PT - D.M.: Peter: Increase in inventory related primarily to launch of iPhone 3G.

2:42 PT - D.M.: MS: Question about retail stores.

2:42 PT - D.M.: Peter: Traffic continues to go up. Up over 10 million people year over year. Opening about 45 stores this year. Ron is remodeling early stores (not personally, we hope) to give customers a better experience. With revenue growth has been able to provide leverage along the way.

2:42 PT - P.M.: I mentioned earlier that stock traders were likely to focus on Peter Oppenheimer's guideance for the upcoming quarter, rather than Apple's results for the just-completed quarter. Indeed, that's what appears to be happening, as Apple's stock has fallen in after-hours trading (by about 6%, according to the wire story I'm looking at now). The problem: Analysts were expecting $8.32 billion in sales and earnings of $1.24 per share in the September quarter, not the $7.8 billion and $1 per share that Oppenheimer is quoting. The drop in gross margins is also proving troubling to investors.

2:43 PT - D.M.: Merill Lynch: Operating margin impact in Sep. quarter from iPhone launch? What cannot be deferred from iPhone launch?

2:43 PT - D.M.: Peter: Operating expenses are recognized currently, while revenue is recognized over two year period of time. Launch expenses for iPhone 3G are built in to September quarter, that's built into guidance.

2:44 PT - D.M.: ML: Talk about roll out into other countries for iPhone 3G?

2:44 PT - D.M.: Tim: August 22nd is a block of countries; prefer to do more in blocks, but likely have some in blocks and some individually to reach 70 by end of year.

2:44 PT - D.M.: ML: About the App Store; iTunes has been run break-even or better. Because of revenue split between Apple and devs, how will App Store contribubute to profits?

2:45 PT - D.M.: Peter: Think about App Store in the same way as iTunes; while it will generate revenues, but just as iTunes store makes iPods more attractive, hoping the App Store will make iPhones and iPod touches more attractive.

2:45 PT - D.M.: Sanford Bernstein: Care to comment about guidance's relation to general US consumer? Store traffic down sequentially, but typically up between Q2 and Q3; do these indicators mean anything? Anything included in guidance for Q4 that incorporates health of US consumer (who is also suffering from a "common bug"?)

2:46 PT - D.M.: Peter: No impact in June quarter, but leave economic forecasting to others. Certainly aware of economic environment and have certainly considered it along with other factors in guidance.

2:47 PT - D.M.: SB: In terms of iPhone supply, why didn't you push launch date out one or two weeks to not have resulted in wide stock-outs? Can you confirm there's no production issue or component shortage?

2:47 PT - D.M.: Tim: Demand has been staggering. Almost in every country. On manufacturing, we're right on schedule, very pleased with trajectory. Confidence to launch in 20 additional countries in August.

2:48 PT - D.M.: SB: Why so confident that you can fill demand in 20 countries when weren't able to fill demand in 22 countries in two days?

2:48 PT - D.M.: Tim: Do have confidence over supply. Can't predict demand.

2:49 PT - D.M.: SB: Revisiting gross margin commentary going forward. iPhone is significantly higher gross-margin product than overall business. Should push up margins?

2:49 PT - D.M.: Peter: I wouldn't rule that in or out; won't make comments beyond fiscal 2009. As regards iPhone, don't discuss specific product margins, but iPhone is only small part of revenue and gross margin because of subscription accounting. We expect to sell significantly more iPhones this quarter and in the future than we have. Very happen with margins in new model.

2:50 PT - D.M.: RBC Capital: Imitation is sincerest form of flattery, seen it already with a number of iPhone knock-offs. Very crowded fall season with lots of choices for consumers vying for similar user experiences. What are key sustainable advantages in that kind of environment to keep the demand for iPhone?

2:51 PT - D.M.: Tim: We think software is the key ingredient for a great mobile experience. We believe we're many years ahead of the competition in this area. We welcome any competition as long as it doesn't step on our IP.

2:51 PT - D.M.: Peter: We're very excited about App Store. Over 900 applications available, and in just over a week, customers have already downloaded over 25 million applications

2:52 PT - P.M.: Quite an evolution in Apple's attitude toward applications in the year since the iPhone has been on the market. Remember, a year ago, Apple touted Web-based apps as the best approach, largely out of concern that unstable apps might detract from the iPhone experience. These days, Apple can't say enough about the growing market for native iPhone apps.

2:52 PT - D.M.: RBC: How aggressive will you be about enforcing your multitouch patents?

2:52 PT - D.M.: Tim: We'll be very aggressive.

2:52 PT - D.M.: RBC: What evidence do you see that this market can support a sustained level of the growth you've seen out of the gate?

2:53 PT - D.M.: Tim: Not making predictions other than the one we've already made (to wit, 10 million by end of year). We believe we're growing the market and not many people had an idea of what phone could do until we announced the iPhone. We think there will be a shift to more and more people wanting a smart phone over a voice phone.

2:53 PT - D.M.: RBC: Don't see price commitment being a headwind to achieving that?

2:54 PT - D.M.: Tim: We did at the four-hundred price, but now that we're at $199 in the US and similar elsewhere, we believe we're addressing that key concern and that market for iPhone will expand dramatically.

2:54 PT - D.M.: RBC: Reaffirming ten million in 2008?

2:54 PT - D.M.: Tim: We're very confident.

2:54 PT - P.M.: And, as the boss pointed out more than a month ago, they should be confident.

2:54 PT - D.M.: Oppenheimer and Co.: Question about back to school? How do you account for iPods that are given away, and what happens to ASPs?

2:55 PT - D.M.: Peter: In our promotion, we will send you a rebate for cost of iPod. Account for rebate as a reduction in revenue, done proportionally for both Mac and iPod, related to Mac and iPod sales.

2:55 PT - D.M.: Op: ASPs down because of shuffle mix? How do you see overall iPod market developing, with some competition for iPhone?

2:56 PT - D.M.: Peter: We don't provide guidance at the product level. We gained share internationally, which we were happy with. As regards iPhone, it's hard to precisely tell, likely was some element of cannibalization (yum). If there is iPod cannibalization, we want it to be from the iPhone.

2:57 PT - D.M.: Op: Why would new product innovation affect gross margins?

2:57 PT - D.M.: Peter: We have been introducing state of the art new products that have technologies and features that competition can't match. Costs are higher at first, but bring costs down over time by value engineering and volume manufacturing.

2:57 PT - P.M.: The prospect of this future product transition becomes ever more intriguing. Peter Oppenheimer's answer above—production costs are higher early in a product's life cycle—seems to imply that whatever product Apple has in store for the coming three months, it will most likely be a new one. (Or, at the very least, a radically revamped one that introduces new technologies.)

2:58 PT - D.M.: Shaw Wu (woooo!): On the Japan business. Any comments on how you feel about that business? Revisit iPod ASP question: I understand back to school promo has impact, but it seems as though it was down more than expected: function of mix, or back to school promo?

2:59 PT - D.M.: Tim: Very happy with how Japan subsidiary is doing. Exceeded company's overall revenue growth rate in last three quarters. Particularly good when you think about how markets there are doing. IDC predicted 5% year over year increase for the market; Mac was up 23% in units. Share improved year over year from 4% to 5% and iPod share grew about 10 points year over, up to 56% in May. Feel great about how we're doing in Japan; quite the turnaround from 2006.

3:00 PT - P.M.: We're an hour into this thing, and no one has a MobileMe question? Poor MobileMe. Even Apple TV is getting questions!

3:00 PT - D.M.: Peter: ASP down sequentially due to full quarter impact of shuffle price decrease. Back to school promo will have biggest impact over summer months, so that didn't play a particularly large roll. Very happy with elasticity that we've seen, and think tradeoff between ASP and units were a good one.

3:01 PT - P.M.: And that's it. A lot to digest. I'm as impressed as ever with Mr. Moren's superior ability to type and listen at the same time.

3:00 PT - D.M.: Theeee end. There's a replay, should you be so masochistically inclined. The information on the rebroadcast is here. That's it, though. Thanks for joining me and Phil in this whirlwind tour, and we'll see you in September for the next conference call.


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