This is Tim: Cook and Oppenheimer on dividend and buyback

[Editors’ Note: Apple CEO Tim Cook and CFO Peter Oppenheimer held a conference call on Monday morning to discuss the company’s announcement of dividend payment and share repurchase initiatives. What follows is an edited transcript of what Cook and Oppenheimer said on the call.]

Opening remarks

Cook: Thank you, Nancy. Good morning to everyone and thanks for joining us. I’d like to start by discussing how confident we feel about Apple’s future. We are participating in some very large and growing markets and we see significant opportunities ahead of us.

Starting with iPhone. In our most recently recorded quarter we sold 37 million iPhones. That’s a very large number but it represented less than 9 percent of handsets sold during the quarter. The handset market is expected to grow dramatically in the years ahead, from 1.6 billion in 2011 to over 2 billion by 2015. And it’s our belief that eventually all handsets will be smartphones, so the potential for iPhone is enormous.

We’re off to an amazing start with iPad, selling 55 million from the launch of the first iPad in the spring of 2010 through the end of our most recent quarter. And with the launch of the new iPad, it just keeps getting better. Gartner estimates that the tablet market will be 325 million units by 2015, and as I’ve said many times before, we believe that the tablet market will eventually surpass the PC market in size. It’s just a question of when.

And with the Macintosh, as of last quarter we had outperformed the PC market for 23 consecutive quarters, yet we have less than 6 percent market share of this 350 million unit-per-year market. We are innovating at an incredible pace, building a tremendous ecosystem with apps and content, providing great services such as iCloud, which has already eclipsed over a hundred million users within just a few months of its launch. And we’re delivering incredible developments like Siri, a profound new way to interface with the iPhone.

We’re also investing in distribution around the world. We continue to open our own stores, including 40 this fiscal year alone. We are expanding our footprint with new carrier partners and other third-party resellers, and we are investing in our direct enterprise sales force. Simply stated, we don’t see ceilings to our opportunity.

All of this innovation and success has led to the generation of substantial amounts of cash, both domestically and abroad. We have used some of our cash to make great investments in our business to increase research and development, acquisitions, new retail store openings, strategic pre-payments in capital expenditures in our supply chain, and building out of our infrastructure, and you will see more of all of these in the future.

Even with these investments, we can maintain a war chest for strategic opportunities, and have plenty of cash to run our business. So we are going to initiate a dividend and share repurchase program. We have thought very deeply and very carefully about our cash balance. We will continue to invest in the business, and we will maintain our disciplined and focused approach in the future. Innovation is the most important objective at Apple, and we will not lose sight of that. These decisions will not close any doors for us.

Subject to a board declaration, we plan to initiate a quarterly dividend of $2.65 per share beginning in the September quarter. A quarterly dividend will provide current income to our shareholders, and we also believe it will broaden Apple’s investor base by attracting new investors who don’t currently own Apple stock.

Additionally, in the December quarter, we plan to commence a share repurchase program. The board has authorized the repurchase of $10 billion of stock over the next three fiscal years with the primary objective of neutralizing dilution from future grants through Apple’s employee equity program. We will continually assess the opportunities to invest further in our business, and in consultation with our [board] we will review our dividend and share repurchase plan periodically.

We will continue to do what we believe is in the best interest of Apple and our long-term shareholders. I’d now like to turn over the call to Peter, who will provide more details on our programs.

Oppenheimer: Thank you, Tim. Apple’s cash has increased substantially for all the right reasons. Our business is performing extremely well, and we have been very disciplined with our stewardship of the cash, making great investments in the [unclear]. In fiscal year ’11, our cash increased by $31 billion, with $24 billion of that growth coming from abroad. During the first quarter of fiscal year ’12, we generated another $16 billion. That left us with about $98 billion of cash at the end of the December quarter, of which about $64 billion was outside the United States. As Tim said, that’s plenty of cash to run the business.

So we’re announcing today a dividend and share repurchase program. In thinking about our cash, we wanted to achieve several objectives: First, we want to maintain the flexibility to take advantage of investment opportunities that present themselves. Second, we want to provide some current income for our long-term shareholders. Third, we want to increase the attractiveness of Apple to a wider investor base. And finally, we want to limit future dilution from our employee equity program.

The program that we’re announcing today will have two elements: a dividend, and a share repurchase. Subject to board declaration, we plan to initiate a quarterly dividend of $2.65 per share, beginning in our September quarter. We plan to declare the dividend concurrent with our quarterly earnings release in July, and to establish the record and payment dates at that time.

Our board has concluded to amend existing RSU [Restricted Stock Units] agreements, so that unvested RSUs can participate in dividends declared. This would apply to both historical grants that are unvested as of the dividend record date as well as future grants. Dividend equivalents on unvested RSUs will be deferred and paid when the underlying RSUs vest.

At Tim’s request, none of his unvested RSUs will participate in dividends.

Based on anticipated shares, and RSUs outstanding, we would expect the first year’s annual dividend payments to be over $10 billion.

With respect to share repurchase, our board has authorized a $10 billion program—beginning in our fiscal year ’13—to be executed over three years with the primary purpose of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs. Commencing in fiscal year ’13, which begins on September 30, 2012, we will begin to repurchase shares primarily to offset the amount of shares we expect will ultimately be issued from the current year employee equity grants. We intend to execute these repurchases over the course of each fiscal year.

We expect cash used to repurchase shares through the share repurchase program and to net share sell vesting RSUs to consume approximately $4 billion in the first fiscal year. Combining dividends, share repurchases, and cash used to net share sell vesting RSUs, we anticipate utilizing approximately $45 billion of domestic cash in the first three years of our program.

In closing, we remain very confident in the future of our business, are extremely enthusiastic about the opportunities that lie ahead, and look forward to executing our plans to initiate a dividend and share repurchase program. With that, I’d like to open the call to questions.

Question and answer

Ben Reitzes, Barclay: Tim and Peter, can you talk about your philosophy on dividend growth? Within the $45 billion, is there any growth of the dividend thought about in there, and how are you going to shepherd us through the process each year, do you envision?

Oppenheimer: In consultation with the board, we will review our dividend payments periodically. We believe that our quarterly dividend of $2.65 per share will be attractive to both current and prospective shareholders. Based on our anticipated shares, and RSUs outstanding, we expect our dividend payment to be over $2.5 billion per quarter, or more than $10 billion a year, which would make us one of the highest dividend payers in the United States. We want to maintain sufficient U.S. cash to be able to take advantage of strategic opportunities that might present themselves, and we do not want to incur the tax costs to repatriate the foreign cash at this time.

Reitzes: Alright, and then, just finally, you know, sometimes, when companies do a dividend and the shareholder base changes, and you guys have been very clear to talk about your growth and whatnot, and how what lies ahead… I know you guys don’t like to announce new products, but last quarter you talked about we haven’t seen anything yet, I think, or on the last product’s launch you said that that there was many more things to come—can you just reiterate a little bit more about your confidence in the product pipeline and your growth outlook, even though you did a pretty good job during the preso?

Cook: We actually do love to announce new products, we just don’t do it in conference calls. We had an incredible growth last quarter, it was 73 percent despite the base that it’s growing upon being very large. And so I think the growth speaks for itself, and let me tell you, I am extremely confident in our future—the pipeline is full of stuff, and I think our customers are going to be incredibly pleased with what they see coming out.

Katy Huberty, Morgan Stanley: You both mentioned that Apple retains the flexibility to use the extra U.S. cash for other investments, but I wonder about the international cash at the end of this calendar year you can see approaching $100 billon of cash that’s stuck overseas. Did the board discuss about how you might go about putting that to use? I know, Peter, that you said that at this time you don’t want to bring it back to the U.S., but what are you going to do with that $100 billion of international cash?

Oppenheimer: Today, we’ve got plenty of U.S. cash to invest in the business, to pay dividends, and to initiate our share repurchase program. Repatriating the cash from offshore would result in significant tax consequences under current U.S. law. We have expressed our views with Congress and the administration, we think the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash that they have; that’s our view, and we’ve expressed it.

Gene Munster, Piper Jaffray: You both mentioned periodically revisiting the dividend—is that a yearly, or a couple times a year—any color on that?

Cook: Gene, we’ll continually discuss this, but there’s not a certain period of time where that we’ve decided that we would change it, but we will continually discuss it as you would expect us to do.

Munster: In terms of a stock split, can you talk a little bit about your methodology on stock splits?

Cook: This is something that we have looked at, while we were looking at this task question. And the current information we have would suggest that there’s very little support that it helps the stock. However, we are in a unique position and at a unique point in time and so this is something that we continue to look at. And if we reached a decision where we thought that it was in the best interest of Apple and its shareholders, we would do it. But again, at this point, that’s not how we see it.

Munster: I know we’re not talking about fundamentals on this call, but do you guys think you’ll put up a press release out in terms of how the new iPad did over the opening weekend?

Cook: We had a record weekend, and we’re thrilled with it, but this call isn’t to discuss the current business, as you know.

Bill Shope, Goldman Sachs: After doing this analysis, as a followup to Ben [Reitzes]’s question, how do you think about growth and share purchases versus growth and dividend program? In other words, if your earnings and attach performance were to continue to exceed your expectations over time, do you think the potential excesses would go into a larger buyback or a larger dividend, and so how are you thinking about that?

Oppenheimer: We remain very, very confident in what we’re doing, our business and the products that we’ve got in the pipeline, and we are squarely focused on achieving our potential in the business. We will continuously assess the opportunities to invest in the business in a deliberate and disciplined manner, and in contemplation with the board we will review our plans periodically and we’ll make changes to the program that we’ve announced today that we believe are in the best interests of Apple and our shareholders but don’t have anything further to say today.

Shannon Cross, Cross Research: Can you give us some idea about the methodology about how you thought about the percentage should be paid out to shareholders, how you came up with the numbers you did for today?

Oppenheimer: The program that we’re announcing today is very significant and we’re excited about it. As we’ve noted, we expect to use about $45 billion during the next three years from our domestic cash balances to pay dividends, repurchase shares, and pay the taxes to net share sell RSUs.

We opted to go with a hybrid approach after doing a lot of analysis and thinking, and frankly, listening to the input we were getting from shareholders. So we’ve put most of our emphasis to begin behind our dividend, that’s where the majority of the cash that we will return will go.

We expect to pay in our first year more than $10 billion out in dividends, and it will make us one of the largest dividend payers in the United States. And then, we also wanted to commence a share repurchase program with the primary objective to neutralize dilution from our future employee equity grants and employee stock purchase programs. That’s something else that we thought was important that we heard about about. And then most importantly, we want to maintain sufficient U.S. cash to be able to quickly take advantage of strategic opportunities that might present themselves and we did not want to incur a tax cost to repatriate the foreign cash at this time.

Cross: Tim, could you talk maybe philosophically a little bit about your thoughts on needing a cash cushion, or having a cash cushion? I know some people talk about tech companies, given how product cycles change and how consumer behavior changes and the economy, need to have a pretty substantial one, how do you think about it? Is it more a tax issue here, or a real comfortable cash cushion going forward, because clearly you’ll have a substantial amount of cash even after the three years?

Cook: The way that we looked at this was, because of the tax consequences of repatriating the foreign cash, we focused on the domestic cash. And within the domestic cash, our first and foremost objective, as it will always be, will be to make the most innovative products in the world. And so we decided how much cash that we needed to do that, and of course there’s a wide range of investments that obviously I won’t detail in here.

In addition to that, we looked at other things that we might invest money in that would come out of domestic cash, and after we had done all of that—and allowed for a war chest to do things that today we can’t predict, but opportunities that might come along in the future—we had extra cash left over. And so we concluded we had plenty of cash to run the business and given that we felt it would be the right action to initiate a dividend, and expand Apple shareholder space in the process, and so it’s great for current shareholders and it’s fantastic for attracting new investors. And then we felt the share buyback program was also in the best interest of Apple and its shareholders. So that’s how we looked at it.

Kulbinder Garcha ,Credit Suisse: On the question of the cash balance on-shore, Tim, do you think you actually need like a $30 billion cash pile number domestically too, to offer all the flexibility you want? Or could it be the case of two or three years down the road, once you’ve maybe executed on whatever you’re going to do in terms of growth you could actually even have a lower level? And then, how widely held is your stock by employees? I’m just thinking this should be a good income generator, good for motivation for employees.

Cook: Well, I think it’s great for shareholders—it’s great for employees which are also shareholders—so I think it’s great all the way around. And to your question about, is there a magic number, there’s not a magic number here that we’re trying to keep in terms of cash balance. There’s a judgement, and that judgment as we tried to articulate will continually be looked at over time, so we’ll continue to evaluate how much money should go into dividend and how much money should go into buyback, how much money we need for investments, et cetera. That’s what we’re paid to do.

Oppenheimer: Relating to your employee question, at the end of the December quarter, there were about 17.7 million RSUs outstanding, that had not vested, and employees also participate in Apple stock through our employee stock purchase programs as well.

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