Live Update: Apple Q2 2009 Earnings Call

1:57 PT - DM: Good afternoon (or whatever time you find yourself in). Welcome to the wonderful world of numbers and figures, or, as we here call it, Apple's quarterly financial earnings conference call. I'm Macworld Associate Editor Dan Moren alongside Macworld Editorial Director Jason Snell, and we'll be with you through roughly the next hour as we follow along with Apple's latest financial figures.

1:59 PT - DM: Right now we're being serenaded by lovely classical (baroque? My education is failing me) music as we wait for Apple CFO Peter Oppenheimer and Apple COO Tim Cook to come on the line and tell us everything we need to know about Apple's last three months. And anything else they want to share with us. How's Tim's fantasy baseball league doing? Who knows?

2:00 PT - JS: Somehow I suspect that my Shazam app on the iPhone won't be able to identify this classical composition.

2:00 PT - DM: Are you suggesting that there's not an app for that? That shocks, amazes, and frankly scares me just a little.

2:02 PT - DM: Thus far we do know that the figures have been pretty good: Apple's revenue is up year-over-year and most sales were solid. (We're apparently still awaiting additional participants at the moment—geez, people, hurry it up).

2:02 PT - JS: Well, it's safe to say that Apple's results today are pretty good. In three months of a difficult—to put it mildly—economy, Apple has managed to improve on its revenue versus the same quarter a year ago, and iPhone and iPod sales are up in the same period. Mac sales are down, but not precipitously. In general I'd have to say that any up-pointed arrow is a major victory, given what's happening in the world around us.

2:03 PT - DM: And away we go. Here comes Nancy Paxton with opening remarks. We'll be hearing from Peter Oppenheimer and Tim Cook and Gary Whistler (maybe; he's notoriously silent). As always, some of these will be forward-looking statements that are subject to change.

2:04 PT - DM: Peter comes on. "Extremely please to report best non-holiday quarter revenue and earnings in our history." Their expectations were exceeded and they're pleased. $8.16 billion, 9% growth over prior March quarter. Operating margin was 20.4% due to higher than anticipated revenue and gross margin. $1.2 billion net income, earnings per share $1.33. $9.06 in sales, adjusted for non-GAAP. Adjusted net income was $1.66 billion was $450 milion higher than reported net income. Non-GAAP measures provide added transparency.

2:05 PT - DM: Starting off with the Mac. Sold 2.22 million Macs compared to 2.29 million Macs year ago, 3% decline. Year ago, Mac sales increased 51%. Mac shipments compared favorably to 7% year over year contraction in overall market. Successfully transitioned entire Mac desktop line in March and see strong year-over-year. Feel very positive about Mac performance. Began and ended quarter with between 3-4 weeks of Mac channel inventory.

2:06 PT - JS: Apple says that it was tough comparing this year's early quarter compared to last year's, because the MacBook Air was introduced in the year-ago quarter, making it a "difficult compare." Basically, they're saying that the laptop sales slump versus last year is largely due to the Air's launch, and otherwise it would actually be a decent quarter, especially given the fact that the laptop market in general contracted by seven percent in this quarter.

2:07 PT - DM: Strong sales of January releases of iWork and iLife '09, believe that has a lot do with drawing people to Mac.

2:07 PT - DM: Over 11 million iPods sold. Generated strong sales of iPod touch year-over-year. All new iPod shuffle had favorable reviews. Remain very pleased with iPod market share. US share is over 70 percent based on NPD data. Continue to gain share year over year in worldwide markets. Saw healthy unit sales growth in UK, France, Germany, Japan, Australia, and China. Began and ended quarter between 4-6 weeks of channel inventory.

2:08 PT - DM: iTunes Store had good quarter. Introduced new changes including DRM-free titles. App Store continues to be a success, now offers over 35,000 applications, compared to 15,000 available 3 months ago. Within hours of reaching 1 billionth download. App Store is only 9 months old. Software remains key ingredient for great mobile experience. Very excited about prospect of even more compelling apps with iPhone OS 3.0 this summer.

2:09 PT - DM: iPhones sold 3.8 million handsets, 123 percent increase over 1.7 million sold year ago quarter. Now selling iPhone in 81 countries. Revenue recognized is $1.25 billion compared to $378 million year ago quarter, increase of over 300 percent. Sales value of iPhones over $2.2 billion.

2:10 PT - DM: iPhone OS 3.0 will include updated SDK with over 1,000 new APIs. The release also adds over 100 customer features. Developers enthusiastic about new SDK.

2:11 PT - DM: Because of the announcement of these new features and planning them as a new upgrade. Delayed the start of recognition of all iPhones sold on or after March 17th until iPhone 3.0 is released this summer. Will be recognized over 24 months.

2:11 PT - DM: Retail stores. The stores $1.47 billion in revneue, compared to $1.45 billion year ago quarter. 438,000 Macs sold in the stores, still "about half" to those who are new to Mac. Only opened 1 new store, bringing to 252 stores. Avg revenue store $5.9 million compared to $7.1 million year ago quarter. Year over year decline is a reflection of the economy compared with 3rd party channel expansion relative to year ago quarter. Retail customers increased from 33.7 million in the year-ago quarter to 39 million, an increase of 15 percent. Remain on track to open total of about 25 stores in fiscal 2009, half of which are outside U.S.

2:13 PT - DM: Commodity and other hardware component costs lower than planned. Sales of higher margin products was better than planned. Lower freight costs. Opearting expenses $1.3 billion, $152 million in stock based compensation. Spent less in many areas of company. 30.3 percent was tax rate for quarter. Cash is $28.9 billion on end of March quarter compared to $28.1 billion at end of December. Preserving capital, which works in current economy.

2:14 PT - JS: Interesting view into Apple's cash pile there. You might not normally think of it, but Apple has a massive amount of cash. It makes you wonder, could it get washed away by bad investments, given the bad economy? Here, Apple says no—the company is focused on "high-quality investments" and is "comfortable in its investment portfolio." In other words, they don't have the cash in a really big mattress, but it's also not invested in newspapers and lending institutions.

2:14 PT - DM: Looking ahead, here's the outlook. Guidance is based on GAAP, non-GAAP results will come out in July. Revenue between $7.7 billino and $7.9 billion. Reflects the iPhone 3.0 OS deferrment on revenue for iPhones. Gross margin about 33%, $30 million related to stock-based compensation. Tax rate will be about 31 percent. Targeted earnings per share 95 cents-$1. Very enthusiastic about iPhone 3.0. Also very excited about other products in pipeline.

2:16 PT - DM: And it's question time. Which, fortunately for me, usually has way fewer numbers.

2:16 PT - DM: CitiGroup: Outlook on pricing on component supply for next quarter?

2:17 PT - DM: Tim: Believe most excess inventory in supply chain was consumed last quarter. Some commodities like NAND will increase sequentially. Don't expect to see the level of reductions seen in the past.

2:18 PT - DM: CG: Aggregate bill of materials down sequentially in June quarter?

2:18 PT - DM: Tim: I expect it to be in a similar range as last quarter.

2:18 PT - DM: Banc of Montreal: Cash flow was down year over year, first time in a while. What drove that? Anything on deferred balance that changed consistent with revenue recognition policies?

2:19 PT - DM: Peter: Nothing with iPhone or deferred revenue from a policy change that played into that. Very pleased with cash generation in quarter, up over $700 million from end of December quarter. Three factors that played into cash generation: 1) made pre-payment to LGD for $500 million; 2) Accounts payable down from December to March by over $700 million, decline is very typical for Apple, but does play into results. 3) Tax payments. Made about $1.3 billion in tax payments in March quarter. Couple of things drove that: for current fiscal year (FY09), first estimated tax payment in March quarter and there are two that are due in quarter. This year higher payments because making more money and given equity market, credit that company gets are down. Prepaid some potential audit settlements accrued on balance sheet payed on cash basis. All three of those things combined for $1.3 billion in tax payments this quarter, significant year over year.

2:20 PT - JS: Wow, 1.3 billion bucks in taxes. I wonder if there are any tea bags left at Apple?

2:21 PT - DM: Barclay's Capital: Desktop side exceeded expectation due to launch, but sequentially average sale price (ASP) in desktop looked down? What's going on in the Mac business?

2:21 PT - DM: Tim: As we got into March and announced a completely new desktop line, we saw acceleration of sales and that acceleration allowed us on sell-through basis to be approximately equal to year before. After we did the desktop launch, we began to ship higher mix of desktops than before the transition, helping push overall ASP down. Within desktops, top end of line (Mac Pro) lower mix, higher mix to the Mac mini than before the transition. Pro products sold to creative pros were weaker than year ago quarter, presumably mainly economic related. Education in the US contracted by about 11 percent year over year, result of states not having tax revenues as projected. Hoping that starting this quarter, stimulus funds will begin to flow and that will pick up. But it remains to be seen. Yes, ASPs did decline, desktops a piece of it. Updating all desktops in a single day (unprecedented for Apple) really helped drive more sales in March and helped Mac business get to better place by end of quarter.

2:24 PT - DM: Tim: In notebooks, ASP was down sequentially, higher mix to $999 MacBook announced in late October. Actually a good thing not a bad thing. The consumer market is holding up much better than the professional or education.

2:25 PT - DM: BC: Anything on netbooks?

2:25 PT - DM: Tim: For us, it's about doing great products. When look at netbook, cramped keyboard, terrible software, junky hardware, very small screens, just not a consumer experience. Not something that we would put the Mac brand on, quite frankly. It's not a space, as it exists today, that we're interested in or that customers will be interested in long term. But do look at the space and see how customers respond to it. People who want a small computer that does browsing and email might want to buy an iPod touch or an iPhone.

2:26 PT - DM: Tim: If we find a way that we can deliver an innovative product that really makes a contribution, then we will do that. We have some interesting ideas in this space. Product pipeline is fantastic for Mac. 17 out of last 18 quarters, have exceeded market rate of growth. Quite an accomplishment in this quarter, especially when compared to very low-priced netbooks "that I think it's a stretch to call them a personal computer" which are propping up industry.

2:28 PT - JS: Boom! Tim Cook destroys the Netbook world again. "I think it's a stretch to call it a personal computer." Ouch. They've said much of this before, but it's very clear that Apple wants us to know that they're looking at this category and have some ideas... just nothing to announce today.

2:27 PT - DM: SCN Equity Capital: Question about App Store: mix between paid and free downloads? Color between iPhone and iPod touch?

2:28 PT - DM: Peter: We don't disclose the free vs. paid, but are hours away from billionth download and couldn't be happier.

2:28 PT - DM: Tim: One of the keys behind growth of iPod this quarter was that the iPod touch more than doubled year over year. Tremendous result; the sum of iPhone + iPod touch is now about 37 million units. Enormous platform for developers. With recent SDK changes, the developers are working on, unleashes a whole new leve of innovation that keeps Apple years ahead of everyone elese.

2:29 PT - DM: SCN: Direct/indirect sales mix for quarter and effect on margins?

2:29 PT - DM: Peter: Direct percent was 48; didn't have bearing on gross margin. Reasonably close to what we thought. As enter June, education buying season begins. One of the reasons expecting gross margin to be down sequentially, along with impact of US dollar as well as commodity and component market.

2:30 PT - DM: Credit Suisse: What about your 30 percent gross margin target? Given gross margin performance over past several quarters, given guidance. How do you guys think about longer term?

2:31 PT - DM: Peter: Guidance for June quarter about 33, for September, gross margins about 30. Not going to comment on fiscal year 2010. Very focused on delivering extraordinary products to customers. Don't count on gross margins that you've recently seen which have benefited from commodity/component environment.

2:31 PT - DM: CS: Signs of stabilization in consumer market? Comment on linearity of quarter?

2:32 PT - DM: Tim: We're not economists. Not entering the game of predicting bottoms; we'll report our results and give a view of next quarter. Look at different product areas: iPod linearity during quarter and overlaid last year, it would look very similar. Up 3 percent year over year, very very similar, except from a mix, the iPod touch is a runaway hit, clearly driven by App Store. On the Mac side, unit sell through accelerated in March after turned every desktop in the company on the same day. March very important month for Mac business. iPhone linearity reasonably linear after the first week or two, very little up and down in aggregate. Obviously a new business; first March quarter that they've been rolled out to a number of countries.

2:32 PT - JS: As radical as Apple is when it comes to its product engineering, it is in many ways a very conservative company, especially financially. You see it in answers like this—"we're not economists." But calling the iPod touch a "runaway hit" is also notable, because these guys don't say stuff like that unless they mean it.

2:33 PT - DM: Piper Jaffray: Question on iPhone. Exclusive relationship with AT&T is number one reason people don't buy iPhone; any comment?

2:34 PT - DM: Tim: We view AT&T as very good partner. Best wireless provider in US. Have done a very good job with iPhone, put full force of company behind it. We're very happy with the relationship and do not have a plan to change it.

2:34 PT - DM: PJ: Any structural or technological reason to stay with them?

2:35 PT - DM: Tim: Verizon is on CDMA and Apple chose to focus on one phone for the whole world, hence GSM. CDMA doesn't have life to it.

2:35 PT - JS: I think we could consider that Apple throwing a bucket of cold water on any thoughts of Apple making an iPhone for Verizon anytime soon.

2:35 PT - DM: PJ: Any color on hold up in China?

2:35 PT - DM: Tim: Three of four most populous countries, and 800,000 storefronts. China we're not in yet, we would like to be within the next year and are clearly working on that. But nothing specific to announce today.

2:36 PT - DM: PJ: And what about Steve Jobs? Any update?

2:36 PT - DM: Peter: We look forward to Steve returning to Apple at the end of June.

2:36 PT - DM: Sanford Bernstein: Revisit the Mac question. Mac business down 8% in Americas, US may have been worse. According to Gartner, US market was flat this quarter. Given that, 1) do you care about marketshare in US? 2) Given movement in ASPs towards lower end, does that change thinking about Mac pricing?

2:37 PT - DM: Tim: On a worldwide basis, IDC projected the market contracted by 7% worldwide. On a reported basis, we contracted by 3%. On sell through, flat year over year. U.S. was weakest largest geography in terms of comparison year over year, but larger percentage of U.S. business is education oriented, therefore subject to budget constraints that have been significant in almost all the states. One reason why the US is disproportionally affected. Second, we saw fewer professional Macintoshes sold on a regular basis, attributable to economy. Much more so in the U.S. where professional markets have been hit much harder. Do we care abot US share? Of course. Cycles come and cycles go, though. We're about making the best computers in the world, not the most. First and foremost our objective, and we believe that if we do that over the long term, that we will gain share. But we're not going to worry about the ebb and flow of every 90 days.

2:39 PT - DM: SB: Comment on thinking about expanding iPhone adoption?

2:40 PT - DM: Tim: We had a very good quarter in March for iPhone. Very small sequential decline from holiday quarter, far above expectations. Have also announced 3.0 OS and previewed it to developers. Increasing the number of people who will want the iPhone even more. Very focused on product side and App Store and also geographic rollouts. Spent time this quarter on Middle East and Asia: Saudia Arabia, UAE, Thaliand, Indonesia, etc. More in the future. Between those and things that I can't talk about, we have a plan that we believe continues to make us the leader in the space. Will make sure that they don't leave a price umbrella for people.

2:42 PT - JS: I know it seems obvious to many of us, but there are a lot of people out there who are convinced that with Steve Jobs away from the company, Apple is sitting around twiddling its collective thumbs. Cook is aggressively pointing out that Apple has a plan, has a product pipeline, and intends to continue being a leader in the computer and technology industry.

2:42 PT - DM: SB: Talked about considerations for March; can you help give us bridge about to think about 36.4 percent gross margin to 33 percent gross margins for next quarter.

2:42 PT - DM: Peter: Larger two of the three factors are stronger U.S. dollar and seasonally lower mix driven by beginning of education buying season. The dollar is a little bit stronger today, but bigger impact is Apple's hedges. In December and March quarter hedges were put in place at the time the dollar was not as strong; June quarter's hedges were put in place at March at stronger dollar levels. Driving force behind substantial impact of the dollar.

2:43 PT - DM: Peter: June is driven by K-12 and higher ed; Sep. quarter is more for higher ed than K-12. Expect to be competitive this year, especially given funding situation.

2:44 PT - DM: Goldman Sachs: Any information on percentage of customers that upgraded their library to DRM-free?

2:44 PT - DM: Peter: Just been a couple of weeks, too soon to tell. Nothing specific on that. March quarter was very strong on iTunes Store. Saw strong growth in music, video, and applications.

2:45 PT - DM: GS: Sep quarter gross margin down to around 30 percent?

2:45 PT - DM: Peter: Not guidance at this point, but about 30 percent for Sep. quarter, but will give more thoughts in July.

2:45 PT - DM: Bank of America: With regards to cashflow, anything in June that would impact, one-time factors?

2:46 PT - JS: Whew. For a moment there I thought the guy from Bank of America was going to ask Apple for a cash loan.

2:45 PT - DM: Peter: Wouldn't expect holiday phenomenon that they see each year. Don't have any prepaids to announce for June quarter; did have $500 prepayment in March. Related to tax, will make estimated payment for FY09 in June quarter, will make one in Sep quarter as well. But don't expect more payments on FY08 or audit settlements. Not as significant as March quarter.

2:46 PT - DM: BoA: Started with Wal-mart in December quarter; what was impact and channel inventory?

2:47 PT - DM: Tim: Wal-mart is a very key partner for iPod and did expand to iPhone coverage. We believe they do provide us extended reach in areas we weren't hitting before. Pleased with results thus far. Early going. In terms of total distribution, over 50,000 storefronts in 81 countries for iPhones, so sizeable presence. In terms of channel inventory, last quarter implied that about 1.75 million units in inventory, to remind you we are very conservative as to how we count inventory. For example, they count demos that aren't sellable (around 100,000 of those), count units in transit from factories to carriers that aren't physically available. At end of last quarter, that was around 100,000 units. Count inventory all the way to the store front; many people in industry count units as sell through and don't count channel inventory beyond distribution center. Very disciplined in this environment.

2:49 PT - JS: Nice shout-out to Wal-Mart, which has such a huge geographic presence that it allows Apple to reach people who simply don't have another nearby source from which to buy an iPhone.

2:49 PT - DM: Tim: We don't have the experience headed into this quarter about seasonality, given that this is the first June quarter with a worldwide spread. Ended at 1.38 million units, including all of those categories. Very comfortable with inventory.

2:50 PT - DM: Needham: In view of application quantity explosion, what steps is Apple taking to insure that iPhone apps can be discovered; any difference from music discovery on iTunes Store?

2:50 PT - DM: Peter: We include easy to find top 50 and top 100 apps both paid and free; associated in various genres and are expanding those. Team has done fantastic job making it easy and fun to discover apps.

2:51 PT - JS: Given that I see this as one of the areas where the App Store has really failed—top-seller lists is your best way to let users discover new apps, really?—I think it's interesting that Apple thinks it's doing a great job in this area. (PLUG ALERT! Speaking of app discovery, please check out our own app directory featuring all our iPhone app reviews.)

2:51 PT - DM: N: Any interesting trends?

2:51 PT - DM: Peter: Hitting about 1 billion downloads in 9 months is very exciting, all genres are very popular, but games are quite popular. That's one of the reasons the iPod touch has been such a success.

2:51 PT - DM: Cross Research: Competitive landscape for smartphones, as we get closer to Palm Pre launch and iPhone 3.0?

2:52 PT - DM: Tim: Difficult to comment on products that aren't shipping. iPhones have sold over 21 million and has highest customer satisfaction of any product shipping. Combination of App Store and billionth download that should occur tomorrow, we think we're way ahead. Everything from games to medical applications are on the App Store. Power of device and ecosystem is enormous.

2:53 PT - DM: CR: Any thoughts on cash balance? Not up as much this quarter, but any thoughts there?

2:53 PT - DM: Peter: For all the right reasons, we're working hard to be sure that your prediction of increased cash does occur. Nothing new to announce today. Continue to be careful with how investing the cash, very concerned with principal conservation.

2:54 PT - DM: CR: Any update on construction of new campus?

2:54 PT - DM: Peter: No updates today.

2:54 PT - DM: Tim: We're spending all of our energy on constructing new products. (Quippy!)

2:54 PT - DM: Deutsche Bank: Gross margin guidance implies reasonably strong education selling season. Help us understand why 4.5% sequential revenue decline?

2:55 PT - DM: Peter: A couple things. Last year in a much better economy, Q3 revenue was down 1% sequentially. This year guidance provides for a couple more points of sequential decline. But guiding for year over year growth on a GAAP basis. The economy and its continuing impact on consumers and education buying season; June quarter is dominated more by K-12. Things will be more competitive this year given economy. Expect some reductions in ASP sequentially, as usual for June quarter. Second, won't begin recording revenue on iPhones sold since March 17th, won't start until iPhone 3.0 is released. Finally, currency environment. Expect dollar to have impact on gross margin and revenue.

2:56 PT - DM: DB: What impact will software have on mix in June quarter?

2:56 PT - DM: Peter: No specific product guidance, but iLife and iWork sales exceeded expectations, part of reason revenue was higher than expected.

2:57 PT - DM: DB: You talked about protecting intellectual property. Haven't seen anything about that: any update?

2:57 PT - DM: Tim: We think Apple's innovation in the iPhone is leading the market by years. We think competition is great and makes all of us better, as long as companies make their own stuff. [Awkward silence]

2:58 PT - DM: And with that we appear to be done.

2:58 PT - JS: A sterling job as always, Dan. You will be seeing numbers in your sleep tonight, I imagine. Very interesting results from Apple—stay tuned for more here at Macworld.com.

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