Live Update: Apple Q4 Earnings Call

(1:36) Jason:  Hi everyone.

(1:36) Jason Snell:  First numbers are out.

(1:36) Jason Snell:  $4.64 earning per share, $23.3 billion in revenue.

[Guest: how do those number meet consensus expectations?]

(1:40) Jason Snell:  The expected estimate was $4.06, $18.86B.

[perfface4radio: any breakdown yet - mobile/desktop, iOS vs MacOS X, hardware vs software/services/iTunes?]

(1:41) Jason Snell:  Yes. I am digesting it now but if you'd like to look,

(1:41) Jason Snell:   36.4% gross margin, 4.19M iPads sold, iPhone 14.1M units, Macs 3.89M Mac units.

[jscarlton: iPhones doubled since last year...jeeze]

(1:43) Jason Snell:  Yes, folks, that's a record number of Macs sold... again.

(1:44) Jason Snell:  And the iPhone number is massive. That's a record by more than 5 million.

[brendon: Only 4.19 mill iPads, looks like the iPad is doomed (just ask AMD)]

[leicaman: iPods down. Apple's is beleaguered!]

[jscarlton: Data summary is the best place to look for breakdowns:]

[pberry: Looks like "unaffiliated" analysts were closer to the mark. Again.]

(1:45) Jason Snell:  Laptops make up 68% of the Mac mix, which is generally what it's been lately.

(1:46) Jason Snell:  That's a record number of desktops and laptops, too, individually.

[Guest1: Brendon: Well, keep in mind that 57% of all sales were international - wait till they release the iPad in Europe.]

[brendon: what was the percentage increase in mac sales vs this quarter last year?]

(1:49) Jason Snell:  Mac unit sales up 27.3% year over year

[Jon Baines: What are the overall figures for the iPad? Anyone know?]

(1:50) Jason Snell:  iPad: 4.188M units, 2.792B revenue

[alexbrooks: iPad sales seem a little sluggish; due to Apple's slow roll out to third parties and new countries or a manufacturing ramp up problem? Or both?]

(1:52) Jason Snell:  Good question that will probably be asked in the phone call.

[drsbmac: Any idea why the significant decrease in iPad sales (3 million last Q means only about 1.5 million this Q)?]

(1:54) Jason Snell:  No, that's 4.188M this quarter, 3.270M last quarter, 7.4 total

[kalperin: from the "geeks don't understand the market" file: after hours quotes on google finance shows AAPL down over 18 points (almost 6%).]

[John: What's the cash balance? That's my favorite financial statistic.]

[Andreas: Apple stock declining 5% in after hours trading.]

[Guest: And calling 1.4 Million $500-$829 devices sold each month "sluggish" might be an overstatement ;)]

[Brendon: One of the most interesting things to me, the iPad is already out selling the Mac.]

(1:55) Jason Snell:  Not in revenue, Brendon, just in units.

(1:55) Jason Snell:  Keep in mind how much cheaper the iPad is.

(1:55)  The iPad is also cheaper than most Macs and more portable than all of them.

(1:55) Jason Snell:  Average Mac selling price is $1300.

(1:55)  Cash balance won't come out until the conference call starts.

(1:55) Jason Snell:  Average iPad selling price is $667

(1:56)  Also, hello everyone; glad we could be here and a special shout out to MDJ and MWJ readers.

[Charlie: Is the web cast link working for others? I'm getting an error message.]

(1:57) Jason Snell:  I'm seeing it too, Charlie

[Guest: Apple's 1st qtr forecast is lower then many thought - stock will lose recent gains]

(1:57)  Jason, given the imprecision of Apple's figures, I hate to put three significant figures on that ASP, and maybe even two. I'd say between $650 and $700.

[Guest: Jason, do you have ASPs for iPad and Mac from last quarter?]

(1:58) Jason Snell:  Sure, iPad ASP last quarter was $662 and Mac was $1270 or so

[Guest: 14M vs 4M iPhone vs iPad interesting given that the most bullish analysts expected more like 12M/5M.]

(1:58)  ASPs from last calendar quarter for Mac was around $1250 and for iPad almost exactly the same as this quarter.

[johnrust: Live stream is working now]

(1:59)  Also, keep in mind that the stock may be falling because the FIRST words out of CNBC's report was how "disappointing" the iPod sales were. Every trader in the country who trades at this time has that channel on the teevee.

(1:59) Jason Snell:  I'm not seeing the live stream

[sfmitch: Live stream still not working for me.]

[alexbrooks: Webcast not working from London, UK.]

[Tim: Is there a place I can listen in on the conference call? a website?]

(2:00)  The call hasn't started yet, so that may be part of the issue.

(2:02)  CNBC now saying that iPods and iPads "missed" expectations, leaving out that Apple did not give guidance for product lines—this is only the analyst's guesses that are wrong.

[bobrk: still broken here. the link is at but clicking the listen button gives a broken URL.]

(2:02) Jason Snell:

(2:02) Dan Moren:  The livestream was having some issue, folks.

(2:03) Dan Moren:  But it seems like we've got a URL, as Jason just posted.

[Tim: Stupid CNBC, of course typical mac hater... emphasizes the only piece of bad news]

(2:03) Dan Moren:  Here are the opening remarks.

(2:03)  Wall Street analysis is the only profession where you get to guess what other people will do, get it wrong, and then manage to blame the other people for not fulfilling your expectations.

(2:03) Dan Moren:  As always, some of this information are forward-looking statements.

[Andreas: What's the name of the tune playing (in the webcast)?]

(2:03) Jason Snell:  My classical knowledge is zero.

(2:04) Jason Snell:  Okay, here we go!

(2:04) Dan Moren:  Annnnd here's Peter Oppenheimer.

(2:04) Dan Moren:  Extremely pleased to report the conclusion of a great fiscal year for Apple.

(2:04) Dan Moren:  New all-time records for Mac, iPhone, and iPad sales in September quarter and highest quarterly revenue in Apple's history.

2:05Monday October 18, 2010 2:05 

(2:05) Dan Moren:  Very strong growth fueled primarily by record iPhone sales, iPad popularity, and best Mac quarter ever.

(2:05) Dan Moren:  Net income was 4.31 billion, exceeding previous quarterly earning records by $930 million and 70% growth year-over-year.

2:05Monday October 18, 2010 2:05 

(2:05) Dan Moren:  Mac products and services first.

(2:05) Dan Moren:  3.9 million Macs, beating previous record by over 400,000

(2:05) Dan Moren:  27 percent year over year growth.

(2:05) Dan Moren:  More than double IDC's poejcted growth for PC market overall.

(2:06) Dan Moren:  Very strong sales of iMac, updated in July.

(2:06) Dan Moren:  Mac growth strong in each segment, led by Asia/Pacific andJapan.

(2:06) Dan Moren:  Music products: 9.1 million iPods, compared to 10.2 million in the year ago quarter.

2:06Monday October 18, 2010 2:06 

(2:06) Dan Moren:  In September, announced new iPods. iPod share of US market for MP3 player is still over 70 percent, according to NPD.

(2:07) Dan Moren:  iPod also continues to be top-selling MP3 player, and gained share internationally year over year, according to latest data. Remain in target range of 4-6 weeks of iPod channel inventory.

(2:07)  (CNBC again saying that Apple "missed" on its iPad sales. Unreal.)

(2:07) Dan Moren:  iTunes Store had a strong quarter, revenue over $1 billion. Launched iTunes 10 in September.

(2:07) Dan Moren:  Also introduced new Apple TV for $99.

2:07Monday October 18, 2010 2:07 

(2:08) Jason Snell:  That really is an enormous iPhone number.

(2:08) Dan Moren:  iPhone: 14.1 million sold compared to just under 7.4 million in previous September quarter—91 percent year over year growth. Compared to 64 percent growth for smartphone overall in the quarter.

(2:08) Dan Moren:  8.82 billion compared to 4.61 billion in the year ago quarter, an increase of 92 percent.

2:08Monday October 18, 2010 2:08 

(2:08) Dan Moren:  8.6 billion is an ASP of $610roughly.

(2:08) Dan Moren:  166 carriers in 89 countries.

(2:08) Dan Moren:  Very strong year over year growth in Asia, Japan.

(2:08) Dan Moren:  Very happy to be shipping iPhone 4 in China as of last day of quarter.

(2:09) Dan Moren:  Last month, J.D. Power and Associates, reported that iPhone ranked once again highest for customer satisfaction in smartphones.

(2:09) Dan Moren:  Adoption of iPhone in enterprise still accelerating. Since iPhone 4 shipping from 60 percent to nearly 80 percent of Fortune 500 countries.

[Danny Guttridge: Why did their stock just drop 18 points?]

(2:09) Jason Snell:  Danny, that's what always happens. People who targeted higher sell, other people take profits and get out.

(2:10) Dan Moren:  Proctor and Gamble, GE, Pfizer and more, have made iPhone available to employees. About 3.3 million iPhone in channel inventory. Still have sizeable backlog and could have sent more if they could have made them fast enough.

(2:10) Dan Moren:  Sold almost 4.2 million iPads.

(2:10) Dan Moren:  over 65 percent of Fortune 500 are deploying or piloting the iPad.

[Joel Housman: Stock prices do not react positively to good news. You buy on the rumor, sell on the news.]

(2:10) Dan Moren:  Recognized revenue for iPad/accessories, $2.8 billion; $2.7 billion for the iPad, so $645 ASP.

(2:11) Dan Moren:  Bewteen 3-4 weeks of channel inventory, below target range of 4-6 weeks. Adding Verizon, Walmart, Target, and AT&T stores. Expanding distribution internationally.

(2:11)  3-5 weeks of channel inventory of iPad models means they're not bloody likely to introduce a new model in the next quarter.

(2:11) Dan Moren:  iOS device sales of 125 million passed last month.

[Kohlmannj: How many total iPads at this point, guys?]

(2:11) Jason Snell:  7.5 million total iPads

(2:11) Dan Moren:  During Sep. quarter, released iOS 4.1, bringing features to iPod touch and iPhone customers.

(2:11) Dan Moren:  Plan to release 4.2 in November, bringin iOS 4 to iPad.

(2:12) Dan Moren:  iOS 4.2 will also include AirPrint, allows printing from iOS devices over Wi-Fi without the need for drivers or software.

(2:12) Jason Snell:  Inventory of iPads built about 500K over the past quarter, so they've got more in the channel but still not as many as they'd like

(2:12) Dan Moren:  App Store continues to be an unparalleled success. Over 200,000 registered iOS developers. Including over 65,000 games/entertainment and over 30,000 iPad apps.

(2:12) Dan Moren:  Launched iAd in July. Very happy with results so far. Customers love the ads, marketers are very pleased with viewer engagement.

(2:13) Dan Moren:  On to retail. Record breaking quarter. 3.57 billion compared to 2.04 billion, an increase of 75 percent. 874,000 Macs solds compared to 670,000, up 30 percent.

(2:13) Dan Moren:  About half of Macs sold to customers who had never owned a Mac before.

(2:13) Dan Moren:  Opened 24 stores, including 16 international stores.

(2:13) Jason Snell:  Once again, the "half the macs to new users" stat!

(2:13) Jason Snell:  Apple Retail: just keeps on rolling.

(2:13) Dan Moren:  New Beijing and Shanghai stores opened on last day of quarter and were the highest revenue ever.

(2:13) Dan Moren:  Entered 11th country, meaning 317 stores worldwide and 84 outside US.

(2:14) Dan Moren:  Average of 301 stores open during Sep quarter, average revenue per store was 11.8 milion.

[Guest: Anyone know how many Macs in use (to compare to 125M iOs devices: call it 120M in use)?]

(2:14) Dan Moren:  Hosted a record 75 million visitors, compared to 45 million in year ago quarter.

(2:14) Jason Snell:  Apple store attendance (total visitors) up 62% year over year. Astounding.

(2:14) Dan Moren:  Expect to open 40-50 stores in fiscal 2011, with only 50 percent of them outside the US.

(2:14)  Apple has not updated the "Mac installed base" stat in many years; the last I heard, they were still using the 25 million stat from 10 years ago.  It's probably been that long since they said it, too.  It would be a great question to ask.

(2:14) Dan Moren:  Begin replacing several stores in the US.

[JohnF: The half the macs to new users seemed to be limited t 'in-store' sales..maybe not half of ALL macs sold.]

(2:14) Dan Moren:  Total company gross margin 36.9 percent, 190 basis points above guidance.

(2:14) Jason Snell:  Yes, it's always 50% of people buying Macs in retail.

(2:15) Dan Moren:  Driven by lower commodity cost and a better than planned mix of iPhone sales.

(2:15) Dan Moren:  Tax rate lower, because of higher mix of foreign earnings and discreet one time tax bonuses.

(2:15) Dan Moren:  Cash plus short term/long term securities total $51 billion, compared to $45.8 billion at end of June quarter.

(2:15) Dan Moren:  Cash flow from ops, $5.7 billion.

(2:16) Jason Snell:  Listen along with the conf call at

(2:16) Dan Moren:  In fiscal 2010, establishing record sales of over 13.6 million Macs, 31 percent year over year growth.

(2:16) Dan Moren:  Introduced iPhone 4, 40 million sales. An increase of 93 percent over fiscal 2009.

(2:16) Jason Snell:  Man, that Antennagate really killed Apple.

(2:16) Dan Moren:  Launched iPad, sold almost 7.5 million in just two quarters.

(2:16) Dan Moren:  Generated record revenue of over $65 billion, and increase of $20 billion year over year.

[Guest: Apple said user base was 75 million in June 2009]

(2:17)  I did not see that statistic, but it fits with what I'd expect from sales.

(2:17) Dan Moren:  To put into perspective, in fiscal 2010, Apple generated almost 5x the revenue and 10x earning of fiscal 2005.

(2:17) Jason Snell:  Amazing run over the past 5 years.

(2:17) Dan Moren:  Here's the forecast: expect revenue about $23 billion, compared to $15 billion in the quarter last year. Expect opex $2.325 billion. Expect OI&E about $65 million, tax rate about 25.5%

[pberry: CNBC "iPad Sales Light"]

(2:17) Dan Moren:  Targeting EPS of about $4.80

(2:17)  Peter is always "thrilled" with the latest quarter in closing.  It's a tradition, like college football.

(2:18)  oh man! Steve Jobs is on the call!

(2:18) Dan Moren:  Extremely confident in new product pipeline.

(2:18) Dan Moren:  Steve's here!

(2:18) Jason Snell:  Steve jobs!

(2:18) Dan Moren:  As most of you know, I don't ususally participate in Apple's earnings calls, since you're all in such capable hands with Peter and Tim. But I couldn't help dropping by for our first $20 billion quarter.

(2:18) Dan Moren:  Chatting about a few things, then staying for Q&A.

(2:19) Dan Moren:  Sold 14.1 million iPhones in quarter, and 91 percent unit growth, and way ahead of IDC's 64 percent growth for smartphones.

(2:19) Dan Moren:  Handily beat RIM's 12.1 million BlackBerries sold.

(2:19) Dan Moren:  "We've now passed RIM and I don't see them catching up with us in the future."

(2:19) Dan Moren:  RIM must try to become a software platform.

(2:19) Dan Moren:  Going to be competitive for them.

(2:19) Dan Moren:  With 300,000 apps on Apple's App Store, RIM has a high mountain ahead of them to climb.

(2:19) Dan Moren:  What about Google?

(2:19) Dan Moren:  Last week, Eric Schmidt reiterated that they are activating round 200,000 Android devices per day.

(2:20) Dan Moren:  For comparison, Apple activated 275,000 iOS devices per day for the last 30 days on average.

(2:20) Dan Moren:  And Apple has 300,000 apps on its App Store.

(2:20)  Talk about what RIM has to do seemed odd coming from SJ: who is he trying to convince?

(2:20) Dan Moren:  There's no solid data on how many Android phones are shipped each quarter. We hope that manufacturers will start reporting on number of Android phones are shipped.

(2:21) Dan Moren:  Google loves to characterize Android as "open" and iOS and iPhone as "Closed". We find this a bit disingenuous and clouding the real difference between are two choices.

(2:21) Dan Moren:  First thing "open" makes you think of is Windows. Unlike Windows, Android is very fragmented. Many Android OEMs, including HTC and Motorola, install proprietary user interfaces to differentiate from the standard Android interface.

(2:21) Dan Moren:  Compare with iPhone where every iPhone works the same.

(2:21) Dan Moren:  "Twitter Deck" launched recently for Android. 244 different handsets.

(2:22) Dan Moren:  Multiple hardware and software iterations presents developers with a daunting challenge. Many apps work only on selected Android handsets runnign selected Android versions.

(2:22) Dan Moren:  That's for handsets shipped in last 12 months.

(2:22) Dan Moren:  iPhone only has two versions of software.

(2:22) Dan Moren:  A bunch of different vendors creating app stores for Android including Vodafone and Verizon.

(2:22) Dan Moren:  At least 4 different stores. This is going to be a mess for both users and developers. Contrast with the App Store.

(2:23) Dan Moren:  Apple's App Store has over 3x as many apps as Android Market.

(2:23) Dan Moren:  Even if Google were right and the real issue is closed vs. open, it is worthwhile to remember that open systems don't always win.

(2:23) Dan Moren:  Take Microsoft's Plays for Sure music system

(2:23) Dan Moren:  Even Microsoft finally abandoned it in favor of Apple's integrated approach with their Zune player.

(2:23) Dan Moren:  Unfortunately leaving OEMs out in the cold.

(2:23) Dan Moren:  In reality, we think open vs. closed is a smokescreen to hide the real issue: fragtmened vs. integrated is best for consumer?

(2:24) Dan Moren:  We see tremendous value in having Apple be the systems integrated; we think this is a huge strength in our approach vs. Google's.

(2:24) Dan Moren:  We believe integrated will trump fragmented every time. And we think devs will be more successful if they can target a single platform.

(2:24) Dan Moren:  Very committed to integrated approach, no matter how many times Google tries to characterize it as closed.

(2:24) Dan Moren:  Confident it will triumph over Google's fragmented approach.

(2:25) Dan Moren:  I'd like to comment on the avalanche of tablets to arrive in the coming months.

(2:25) Dan Moren:  First, it appears to be a handful of credible entrants and not an avalanche.

(2:25) Dan Moren:  Almost all of them use 7-inch screen vs. iPad's 10-inch screen.

(2:25) Dan Moren:  One thinks the 7-inch screen would offer 70 percent of the 10-inch screen.

(2:25) Dan Moren:  7-inch screen is only 45 percent as large as a 10-inch screen.

(2:26)  And so (should) end the speculation about a 7-inch iPad for now. This is hilarious!

(2:26) Dan Moren:  If you take an iPad and hold it upright in portrait, and draw a diagonal line, the 7-inch screen is a little smaller than the bottom half.

(2:26) Jason Snell:  (This is all Steve Jobs, BTW, folks)

(2:26) Dan Moren:  You could increase the resolution, it's meaningless unless the user can sand down their fingers to one-quarter of size.

(2:26) Dan Moren:  Apple's done extensive research on this.

(2:26) Dan Moren:  There are limits to how small you make the the screen for a touch interface.

(2:27) Dan Moren:  Every tablet user is also a smartphone user. No tablet can compete with the ease and small size of smartphone. Given that all tablet users will already have smartphone in their pockets, giving up screen estate to fit in the pocket makes them tweeners.

(2:27) Dan Moren:  Fourth, almost all of the new tablets use Android software. Even Google is telling tablet manufacturers not to use current release.

(2:27) Dan Moren:  What does it mean when your software supplier tells you not to use their software in the tablets?

(2:28) Dan Moren:  Fifth, iPad now has over 35,000 apps in the App Store. New tablets have zero.

(2:28) Dan Moren:  Sixth, potential competitors are having a tough time coming close to iPad's prices.

(2:28) Dan Moren:  Despite 7-inch screens.

(2:28) Dan Moren:  Apple's spent all this time researching and constructing every part of the iPad for an incredible product for a great price.

(2:28) Dan Moren:  Competitor products will likely offer less for more.

(2:28) Dan Moren:  We think current crop of 7-inch tablets will be DOA.

(2:29) Dan Moren:  Manufacturers will learn the painful lesson that tablets are too small, thereby abandoning customers and developers who bought into the 7-inch products. Sounds like lots of fun ahead.

(2:29) Jason Snell:  Well.

(2:29) Jason Snell:  That was Steve Jobs, folks.

(2:29) Dan Moren:  First question from Richard Gardner.

(2:29) Dan Moren:  Two quick ones: supply constraints on iPad. How severe are the supply constraints are and how quickly improve?

(2:30) Dan Moren:  Tim: Relative to iPad supply/demand, go into a balance sitution in September with a limited numer of distroibution points in 26 countries. Exited quarter in supply position to expand distribution for the holidays.

(2:30) Dan Moren:  Tim: Also expanding internationally, launching additional countries as the quarter goes on.

(2:30) Dan Moren:  Gardner: You mentioned several sequential tailwinds for gross margin. Can you talk about headwinds?

(2:31) Dan Moren:  Peter: In our last conference call we talked about several things that would cause margins to come down some. Those things did play out, but margins came down about half of what we thought they would. We did a bit better in the quarter because commodity was better and we sold more iPhones than we thought we would.

(2:31) Dan Moren:  Gene Munster, Piper Jaffray: Steve, can you talk a little about the iPad opportunity?

(2:31)  It's the Munster Mash!

(2:31) Dan Moren:  Munster: Can you help us understand how you think about the business a year, two years down the road? Anything you can give on that front?

(2:32) Jason Snell:  Our Curt Poff claims he heard Steve Jobs' shoe banging on the table at one point during his statement. ;-)

(2:32) Dan Moren:  Steve: Well, the iPad is clearly going to affect notebook computers.

(2:32) Dan Moren:  Steve: I think the iPad proves that it's not a question of "if" it's a question of "when."

(2:33) Dan Moren:  Steve: We're already seeing tremendous interest in iPad from education and, much to my surprise, from business. We haven't pushed it really hard in business, and it's being grabbed out of our hands. And I talk to people in all kinds of business everyday that are using iPads.

(2:33) Dan Moren:  Steve: So, the more time that passes, the more that I'm convinced that we've got a tiger by the tail here. This is a new model of computing—you know, we've already got tens of millions of people trained on with the iPhone. It lends itself to a lot of different aspects of life, including personal, educational, and business.

(2:33) Dan Moren:  Steve: One could argue about the timing endlessly, but I don't think one could argue that it's going to happen any more.

(2:34) Dan Moren:  Munster: You think this could be your second business behind iPhone?

(2:34) Dan Moren:  Steve: As you know we're already shipping more of them than Macs.

(2:34) Dan Moren:  Munster: Any updates on Flash?

[Tutankhamun: This is the most honest Jobs I have ever heard, great stuff!]

(2:34) Dan Moren:  Steve: Flash memory? We love Flash memory.

(2:34) Dan Moren:  Munster: You mentioned you could have sold more iPhones, what do you think about true demand?

(2:34) Dan Moren:  Tim: What I would say is that demand in all countries is absolutely staggering.

[Guest: Wow the Steve is on a rampage ! Quite the demonstration he has !]

[bvid: Flash Memory Quote: Brilliant!]

(2:35)  Tut: Much as Google and RIM spin reality to match their goals, so does Apple.  Even if Apple has a compelling case, they are making an argument for their philosophy.

(2:35) Dan Moren:  Tim: I can't predict when supply will meet demand. I feel great about our ability to move sales from 8 million to 14 million, but it's clear that wasn't enough. We're obviously workin gon that, but it will take some time.

(2:35) Dan Moren:  Tim: It's clear that the iPhone 4, announcement and demand, took the demand to an entirely different level. We had anticipated a different level, but it's even higher.

(2:35) Dan Moren:  Next question, RBC Capital:

[Bob job: Steve Jobs, just what you need to liven up a financial earnings call!]

[jeffcarlson: And remember folks, this isn't even the holiday quarter.]

[Moltz: That antenna issue sure killed iPhone sales, didn't it?]

[Don McAllister: Seriously, asking about Flash? Jeez!!]

(2:36) Jason Snell:  I already made that joke, Moltz. Try to keep up.

(2:36) Dan Moren:  RBC: You are the tablet category right now. You talk about competition. Much like Apple encroaching on RIM in enterprise, do you think the tablet players will try other tricks and create a more fragmented market?

(2:36)  Don, they had the CEO right there taking questions; of course they're going to take the chance.  :-)

(2:37) Dan Moren:  Steve: I have a hard time envisioning what those strategies you mention are. In terms of pricing, tablets with far less functionality are having a hard time matching us in price. Flash hasn't presented any problem; most video on the Web is available in HTML5. iTunes media store and over 35,000 iPad apps on the store dwarfs anything else. We think we have a very good product here that's going to be hard to match and we're not done.

(2:37)  If I were attending Wednesday and got a question, it would be about when Apple can address zero-day vulnerabilities in less than three weeks or, in best cases, ten days (when fixes are already available).  Even if it was a downer, that's my most pressing unanswered question.

(2:37) Dan Moren:  Steve: So I don't know what these strategies are. We've priced iPad pretty aggressively. We're out to win this one.

(2:37) Dan Moren:  RBC: Smartphones: do you see that as a zero-sum game?

(2:38) Dan Moren:  Steve: As you know, the largest market of phones today around the world are non-smartphones. And so over the next several years, many of those non-smartphones are going to convert to smartphones and the pie is going to continue to grow, and I think there's number for many companies to be successful, but it will turn into a zero-sum game or a lot closer to that. But right now it's a battle for developers.

(2:38)  "We're going to make the pie higher until everyone has pie, then we're going to eat it all."  Even I can't mix a metaphor that well!

(2:38) Dan Moren:  Steve: And a battle for the mindshare of customers and right now iPhone and Android are winning that battle.

[alan smithee: any guess why steve is on the call when he's gonna have a platform on wednesday already? using this as direct line to wall street?]

[dwl: What's goin' on with SJ taking questions at a financial call? Is he just feeling good? Or is something in the wind? Prep for Wednesday?]

(2:39) Jason Snell:  I think he's feeling good and they decided not to cover this ground at a Mac event on Wednesday.

(2:39) Dan Moren:  Barclay Capital: First, for Peter: talk a little about gross margins guidance? With component price still favorable and probably more iPhones sold, why would margins go down sequentially? Also, revenue on the bumper program.

(2:39) Jason Snell:  Since these are tablet and phone smackdowns, not Mac stuff.

[Moltz: This seems like a terrific message. Everyone knows Apple owns the tablet market, what they were concerned about was the phone market. And here they come with good if not mind-blowing iPad sales for the quarter and absolutely awesome iPhone numbers.]

(2:39)  I think Wednesday they want to talk only about the Mac, and not have it be all marginalized by people who only want to talk about the "burning Apple vs. Google feud" and other such pundit catnip.

(2:40) Dan Moren:  Peter: We thought about each of those factors you cited and we see a small sequential decline, primarily driven by higher than expected mix of new iPods that we just recently announced and more iPad sales. As Steve said, we've been very aggressive with pricing. Higher mix of those on a sequential basis that I see affecting that.

(2:40) Dan Moren:  Barclay: Can you comment on how your hobby is doing, the Apple TV? Seems like Apple is moving towards a streaming model?

[KPOM: Interesting how Jobs basically declared that Apple and Android are the only games in town in the smartphone world.]

(2:40)  KPOM: That's what I mean about Apple making its argument about how you should perceive the market.

(2:41) Dan Moren:  Steve: We don't talk about unannounced products but I'm happy to tell you what I know of Apple TV. We've gone to a complete streaming model on Apple TV. All the content is rented from the iTunes Store or is streamed from your computer. Or soon to be streamed from your iPhone or iPad with AirPlay.

(2:41) Dan Moren:  Steve: And, how is our new model of Apple TV doing? I can report that in just a short amount of time we've already sold over 250,000. And we're thrilled with that.

(2:41) Dan Moren:  Steve: I think that it's a great product and I think that the $99 price point is very enticing. I think when we get the AirPlay stuff in place, it's going to be another big reason for people to buy it. We're really happy with how it turned out.

[TommyW: That's a good figure for AppleTVs.]

(2:42) Jason Snell:  Yeah, I think that's not a bad number at all for The Hobby.

(2:42) Dan Moren:  Next, Morgan Stanley: For Peter, how much of sequential decline for gross margin related to iPhone in this quarter and how much related to bumper program?

(2:42) Dan Moren:  Peter: We reported a revenue deferral just over $100 million, and expected to record that as revenue in the December quarter.

(2:42) Dan Moren:  Morgan Stanley: Is the iPhone the product segment that dropped the most? What drove the sequential downtick in gross margin?

[Thao: I can't believe they sold that many AppleTV. I'm still not feeling it.]

(2:43) Dan Moren:  Peter: Again, this was not a surprise to us. On our last conference call, we highlighted that we would have a higher mix of iPhone 4 sales and it had a different gross margin. We also sold more iPads and very aggressive there with pricing along with bumper program and some one-time factors.

(2:43)  Thao, it's not like a disturbance in the Force when Alderaan is destroyed.  I'm not sure you can feel it.

(2:43) Dan Moren:  Peter: To some extent, each occurred in Sep. quarter and we did 50 percent better than we thought.

(2:44) Dan Moren:  Morgan Stanley: Steve, it seems like you think Apple can outship Android over time. What are the key risks that you need to manage?

[Chris Breen: As for Apple TV numbers, there was pent-up demand. And the price made it oh-so-tempting.]

(2:44) Dan Moren:  Steve: Our goal is to make the best devices in the world. Not to be the biggest—Nokia's the biggest, and we admire them. But we don't aspire to be like them. We want to be like us, and we want to make the best ones.

(2:44) Dan Moren:  Steve: In our part of the market, Android is our biggest competitor. They beat us while we were transitioning to the iPhone 4, so we're waiting to find out what they did in this quarter.

(2:45) Dan Moren:  Steve: One of these days we'll eventually learn. I imagine we'll be competiting with them for quite some time. We believe in ours: providing users with products that just work.

[thn: Conrad deAenlle @MoneyWatch: "Apple’s stock (AAPL) plunged ... after the company reported earnings that beat Wall Street forecasts but left the impression that conditions were not as unequivocally wonderful as they have seemed in the past."]

(2:45) Dan Moren:  Steve: There may be lots of users who want theirs, and we're going to pursue ours and we think that's the winning one.

[thn: link to that:]

[TommyW: Typical market response. Any dose of honest reality from Apple, no matter how wonderful, is punished swiftly. Compare with hype or anticipation...]

(2:46) Dan Moren:  Now, Sanford Bernstein: For Steve and Tim. I wanted to better understand your aspirations for iPhone and iPad. You've said you think about the Mac business being where you make the best products but compete with a strong incumbent. iPods were opposite, very high marketshare, etc. In the past, you've said you viewed iPhone business being more like iPod business. Steve, is that consistent with what you said? "We don't want to be Nokia." How should we think about your aspiration for the iPhone and the iPad?

(2:47) Dan Moren:  Sanford Bernstein: You also said 7-inch screen won't cut it. Is your aspiration to be volume players/market leaders or just to make better products and have smaller share?

[KPOM: iPad are the only numbers that were below consensus. They actually missed by quite a lot, which is surprising.]

(2:47) Dan Moren:  Steve: And I'll let Tim say what he's going to say. Nokia makes $50 handsets and we don't know how to make a great smartphone for $50, but believe me I'll let you know when I do.

(2:47) Dan Moren:  Steve: So our goal is to make breakthrough products in every industry we compete in and to drive prices down while constantly making products better in the meantime.

(2:48) Dan Moren:  Steve: That's what we did with iPod. Updated devices every year, with more features for the same price, and sometimes for better prices.

(2:48)  KPOM: they didn't "miss" anything because Apple did not give guidance about iPad sales.  The analysts made their best guesses, they were wrong.  Is that Apple's fault?  Who knows the market better?

(2:48) Dan Moren:  Steve: As you know, we have a very low marketshare in the phone market—in the single digits, in terms of all the handsets. And we have a very high marketshare in tablets because we're the first mover.

(2:48) Dan Moren:  Steve: We don't think about it that way. The reason we don't make a 7-inch tablet isn't because we don't want to hit a price point, but because we think you can't make a great tablet for 7-inches.

(2:49) Dan Moren:  Steve: As a software-driven company, we think about the software strategies first. And we know that software developers aren't going to deal well with all these different products where the screen-size keeps changing. And they can't put enough elements on the screen to build the software they want to build.

(2:50) Dan Moren:  Steve: It's not about cost, it's about the value of the product when you factor in the software. So we're all about making the best products at aggressive prices, and that's what we will do. That's what we've done with the iPod, and that's what we will do with the iPad.

[Thao: That was not a smart question from Bernstein. Apple was never a volume player at sacrifice of profit.]

(2:50) Dan Moren:  Sanford Bernstein: If the market starts to move to dramatically lower price points and you feel you can't make a good phone.

(2:50) Dan Moren:  Steve: You're looking at it wrong. You're looking at it as a hardware manufacturer who doesn't think about the software.

(2:51) Dan Moren:  Steve: You're sitting around thinking "how can we make this cheaper? Well we can put a smaller screen, slower processor, less memory" and you think the software will make it come alive, but it won't.

(2:51) Dan Moren:  Steve: But app developers have already taken advantage of the products that have come before with larger screens, better specs, and they won't move.

[Peter: Steve smackdown!]

(2:51)  Sanford Bernstein came back and said "you're saying you will cede marketshare if you can't build a good product at these price points."  Jobs is rather combative (in a polite, not FSJ way) by telling him "you're thinking about it wrong."

(2:51) Dan Moren:  Steve: You can't change all those assumptions on those developers. Most of them won't follow you. They'll say "I'm not going back to write a watered down version of my app because you have a phone you can sell for $50 less."

[Moltz: I love this answer so much I want to take it under the bleachers and have its babies.]

[dwl: SJ is right about iPad size: the rumours didn't make any sense.]

[Thao: Go Steve! Give him a nice little lecture.]

(2:52) Dan Moren:  Sanford Bernstein: You now have more than $50 billion in cash; what is your aspiration for that cash and why are you not more open to returning to some of that cash to shareholders?

(2:53) Dan Moren:  Steve: Of course that's been suggested to us. We strongly believe that one or more strategic opportunities may come along and that we're in a unique position to take advantage of, because of our strong cash position. We don't let our cash burn a hole in our pocket or use it to make stupid acquistiions. We'd like to continue to keep our powder dry because we do think there are one or more strategic opportunities in the future. That's the biggest reason.

(2:53)  "keeping our powder dry" for "strategic acquisitions in the future" sounds to me like he's saying "we're saving cash until we can buy someone really big we have our eye on."

[KPOM: Good question from Berstein. Apple eventually needs to do something with that cash (buy someone, distribute it). MS had that issue 10 years ago.]

(2:53) Jason Snell:  Matt, it totally sounds like they actually have an idea who or what they want to buy.

[Jim Z: These questions are why Steve doesn't participate much.]

(2:53) Dan Moren:  Cross Research: Steve and Tim, could you talk a little bit about the corporate opportunity? How do you think about your positioning from a marketing, sales standpoint?

(2:54) Dan Moren:  Tim: On the iPad: about 2/3s of the Fortune 100 are deploying or piloting the iPad. I don't know about you, but I've never seen an adoption rate in eneterprise like this in my life. We're also seeing the iPad begin to pick up interest in K-12 which is another market that historically moves slowly.

(2:54) Dan Moren:  Tim: We're building additional capacity in sales. We're also enabling and training our carrier partners to do the same. Our announcement last week with AT&T was because customers wanted to buy it on a post-paid plan.

[Moltz: Wonder who they'd buy. A carrier? A movie studio? NO. A ZEPPELIN!]

(2:55) Jason Snell:  John, for $50B they could buy a fleet of Zeppelins and... uh-oh.

(2:55) Dan Moren:  Tim: 85 percent of Fortune 100 are deploying/piloting iPhone. This isn't a hobby or something we're doing lightly. We put enormous energy in the company and engineer and built enterprise features in the OS and get better and better as we stepped through the OS releases. It's clear that both the phone and the iPad have an enormous opportunity.

(2:55)  Microsoft will counter by hiring Jay Leno.

(2:56) Dan Moren:  Tim: The Mac is also increasingly getting pulled in to the enterprise as the employees are able to select. When people are given the choice, they prefer a Mac. We don't have as much distribution effort on that, but as we see it get larger, we will move accordingly. The great thing is that we're maintaining our focus on the consumer and the consumer is the forefront for thinking about all of our prodcuts. And the consumers in the enterprise are bringing this in.

(2:56) Dan Moren:  Tim: We're not developing two different products, enterprise and consumer.

(2:56)  We should be nearing the end of the call, esp. since SJ is involved.

(2:57) Dan Moren:  Cross Research: Followup for Peter. Getting substantial questions about gross margins. Any color on that?

(2:57) Dan Moren:  Peter: We don't provide product specific gross margins, but we are always working aggressively to lower our costs and I think we have a very good track record in this regard. We were happy with our gross margins in the September quarter, and we see them being down just slightly in the Dec. quarter.

(2:58) Dan Moren:  Deutsche Bank: Demand from new carriers to pick up iPhone 4: any pressures on subsidies?

(2:58) Dan Moren:  Tim: The pressure that I'm getting is on supply. Virtually everyone we're doing business with wants more supply. That's the pressure that I feel.

(2:58) Dan Moren:  DB: Can you give us some color in terms of number of carrier with iPhone 4? How did you end quarter, do you have targets?

(2:59) Dan Moren:  Tim: If you count at the country level, we ahve about 166 relationships in about 89 countries. That's a significant expansion across last year, as we went from a single-carrier relationship in most countries to many carriers. Latest country is Germany, launching with Vodafone, O2, in addition to T-Mobile.

(2:59) Dan Moren:  DB: Target to have iPhone 4 in all countries?

(2:59) Dan Moren:  Tim: We're in 85 of 89 and I believe that we will be in all 89 by the end of year.

(3:00) Dan Moren:  DB: What's your experience been with going non-exclsuive, margins, subsidies?

(3:00) Dan Moren:  Tim: Our ASPs have generally stayed about $600 despite opening several markets from exclusive to non-exclusive markets.

(3:00) Dan Moren:  DB: For Steve, you've said competitors haven't matched price point yet? What's your advantage?

(3:00) Jason Snell:  Dear Apple, buy more Zeppelins.

(3:01) Jason Snell:  We're through the looking glass, people—Apple execs are being asked how they can manage to make their products so much cheaper than the rest of the market!

(3:01) Dan Moren:  Steve: I think part of it is because we engineer so much of it ourselves. The A4 chip is an Apple creation. Everything from the battery chemistry to the enclosures. We've learned a lot from the miniturization we've done on iPhones and iPods. We've learned a lot, developed a lot of our own components whereas others have to buy them on the market with middlemen, and I think we're systems architects and know how to build systems in a very efficient way. This is a product we've been training for for the last decade.

(3:01) Dan Moren:  And that's it.

(3:01) Jason Snell:  Well, a lot to digest here.

(3:02) Jason Snell:  We will have much more later on, and I'll try to get a transcript of Jobs up later this evening too.

(3:02) Dan Moren:  That was a motherlode.

(3:02) Jason Snell:  We've been Jobsed! Wow. This is why he's not on the line every quarter, right? ;-)

(3:02) Jason Snell:  Well, another amazing quarter for Apple.

(3:02)  I think it's only SJ who can get away with lines like "you're thinking about it wrong" without the effluvium hitting the propeller.

(3:02) Jason Snell:  Please read our story and comment away over here:

(3:02) Dan Moren:  And Steve seems pretty positive for the outlook going forward.

[alexbrooks: Thanks again guys. Fantastic coverage as always.]

[nealp: Thanks guys, great job!]

(3:03) Jason Snell:  Thanks everyone for sticking with us today! See you back here Wednesday for the Mac event!

(3:03) Dan Moren:  Ciao!


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