2:29 PT - DM: Citi: Latest thoughts on share repurchase? Using relatively little of cash for retail store openings and investments. Returning some to shareholders?
2:29 PT - DM: Steve: Economic downturn may present extraordianry opportunities to those that have cash. Very comfortable with our cash position in the bank and it’s not burning a hole in our pocket.
2:29 PT - PM: Or to put it as The Rutles once did: All you need is cash.
2:30 PT - DM: Citi: Gross margin outlook related to higher cost of aluminum unibody; how much more expensive than previously?
2:30 PT - DM: Peter: Sequential decline really is driven from new notebooks and iPods. Many new technologies and features in those, but unibody contributed. Products would initially have higher cost, but through volume and cost engineering, they’re going to get the cost curve down over time.
2:31 PT - DM: Citi: 35 percent decline in aluminum pricing since guidance for gross margins. How fast?
2:31 PT - DM: Steve: We’d certainly sell MacBooks cheaper if we just made them a block of aluminum, but we have to machine them.
2:32 PT - DM: [Missed the name]: Pricing of Mac line: how is it positioned in this economy; what about the netbook category?
2:32 PT - DM: Steve: “This particular downturn is not creating a market of cheaper computers, that market has existed for some time. There are parts of that market we choose not to play in.” Prices are quite competitive in the segments that they choose to be in. Will downturn drive customers to lower segments? “I will be surprised if that happens in large numbers. I actually think there are still a tremendous number of customers that we don’t have in the Windows world or the 99 percent of the phone market we don’t have who would like to and can afford to buy Apple products.” Not tremendously worried.
2:33 PT - PM: That point about Apple not losing too many customers who flee to lower-priced goods touches on Jobs’ first point about Apple’s economic outlook—that the company enjoys tremendous loyalty from customers who are more likely to delay purchases rather than switch to another manufacturer.
2:33 PT - DM: Steve: Vis-a-vis netbook category, Steve thinks that the iPhone is their entry into the netbook. “A pretty good solution, and it fits in your pocket.” They’ll wait to see how it evolves and they’ve got some “pretty interesting ideas” if it does take off.
2:34 PT - PM: The iPhone as Apple’s entry into the netbook market—well, that’s one way of looking at things. Still, I wouldn’t be surprised if Apple were to inch ever closer to that category, especially if it determines there’s money to be made.
2:34 PT - DM: Analyst: About the iPhone, how do you see it doing in this economy?
2:34 PT - DM: Steve: “We’ll be glad to tell you how it does.”
2:35 PT - DM: Cross Research: Channel inventory. iPod, iPhone, Mac, comments from retailers? How things are positioned?
2:35 PT - DM: Tim: In the Mac area, began and ended quarter between 3-4 weeks of inventory, below their target of 4-5 weeks. In iPod, began and ended betwen 4-6 weeks, which is right in target range. In iPhone, shipping to carriers in 51 countries by end of quarter, and over 30,000 points of distribution. With 44 countries launched prior to end of August, at end of quarter, less than 6 weeks of inventory. Remaining seven countries launched in Sep. and Oct. there’s not enough data. About 2 million iPhones in total channel inventory across all 51 countries, and they think that’s about right.
2:36 PT - DM: Cross Research: Mac refresh impacted Mac sales last quarter?
2:36 PT - DM: Tim: 2, maybe 3 factors. 1) US K-12 sales were down 7 percent due to state and local budget constraints. California was down 28%. Significant contraction, especially purchases of 1000 units or more. If they unit sales had grown as predicted, Mac sales would have been higher. 2) Customers were delyaing purchases because of portable transitions. Rampant rumors and lots of press reports of potential portable transition. Slowing especially toward end of Sep. and begininng of Oct. Considerable rebound since last week, and very optimistic about those results.
2:36 PT - PM: So apparently the trick to staving off those annoying questions about Steve Jobs’ health is to have him appear on the conference call. I doubt there’s too many analysts out there eager to get his or her head bitten off.
2:38 PT - DM: Cross Research: Steve, can we make this a recurring event?
2:38 PT - DM: Steve: “Peter and Tim do such a good job that I don’t think I could add much.”
2:38 PT - DM: Gene Munster from Piper Jaffray: Bigger picture for iPhone in 2009?
2:39 PT - DM: Steve: “I think we have to be the best. And I think we have to not leave a price umbrella beneath us.” Working very hard to hit those. “I think we’re way out ahead of everybody else at this point.” Very committed to making iPhone a great value for customers.
2:39 PT - DM: Piper Jaffray: US vs. international phone sales?
2:40 PT - DM: Tim: Significant percentage international, but no specifics.
2:40 PT - DM: Piper Jaffray: Help us understand margins, reconcile comments last quarters vs. what we’re seeing?
2:40 PT - DM: Peter: We’ve introduced new iPods and notebooks that cost more, and that’s why the margins declined. Was hard to make comments because they don’t talk about new products, but that was the product transition that they discussed.
2:41 PT - DM: Piper Jaffray: Did you see a deceleration towards end of quarter?
2:41 PT - DM: Tim: On the iPod side, iPod was up 8 percent in whole quarter. End of Sep. and beginning of Oct. were running flat year-over-year on a worldwide perspective. Very difficult to predict whether or not usual holiday lift will happen as usual. On the Mac, did think they saw purchasing delays due to portable transition and K-12 institutional business being down.
2:42 PT - DM: Piper Jaffray: Less economy-related, more general conservatism?
2:42 PT - DM: Tim: Difficult to separate purchase delay vs. economy. Could be all one, or both, it’s hard to know. Very excited about rebound last week. Forecasting going forward is very difficult.
2:42 PT - DM: Needham: Percentage of iPhones went to new users vs. upgraders from 1G iPhones?
2:43 PT - DM: Tim: Confidential for carrier partners. But countries jumped from 6 to 51. So lots of new customers.
2:44 PT - DM: Needham: Apple did better than it would appear given the numbers, vis-a-vis RIM.
2:44 PT - DM: Steve: “We’re happy to beat them on number to number comparisons.”
2:44 PT - DM: Sanford Bernstein: iPhone volumes for Q4? Strong seasonal growth?
2:45 PT - DM: Tim: Don’t predict unit sales at a product level. But did begin shipping from many more countries in last quarter. Did have channel build, about 2 million units as mentioned. Take that into account in predicting fiscal Q1 sales. Will expand into more countries, on target for more than 70 by end of year. But countries expanding in, but less opportunity there than in existing countries (except perhaps China?). “Our crystal ball’s not working at the moment.”
2:46 PT - DM: Sanford Bernstein: Gross margin side, 30-31 percent for Q1?
2:46 PT - DM: Peter: Anticipated quarter about 30 percent in 2009 last quarter. Continue to anticipate gross margins of about 30 percent in 2009. Not going to leave an umbrella for competitors.
2:47 PT - DM: Tim: Point out the touch price dropped from $299 to $229, and units above it from $399 to $299 and $499 to $399. Doubled memory at same price on nano along with new design. Notebooks entry price from $1099 to $999, and MacBook Pro features to MacBook price range, $700 less than what was offered before.
2:48 PT - DM: Sanford Bernstein: Clarify with Steve, extraorindary opportunities for those with cash; suggesting opportunities for Apple outside of Apple, in terms of acquiring companies?
2:49 PT - DM: Steve: “Hiring every engineer in Silicon Valley is a good idea, though.” Nyuck, nyuck, nyuck.
2:50 PT - PM: Comrade Snell weighs in from across the Atlantic with this comment on Apple’s cash situation: “That’s what you do in a downturn, you plow your cash into R&D and when the turnaround hits, you have products and your opponents don’t.”
2:49 PT - DM: SB: Should we continue to see more affordable price points across Mac and iPhone lines going forward?
2:50 PT - DM: Steve: Deliver an increasing level of value. “We don’t know how to make a $500 computer that’s not a piece of junk and our DNA will not let us ship that.” But can continue to deliver greater and greater value to the customers they do serve. They’ll stick with that winning strategy by adding more value in the customer bases they serve. Capiche?
2:51 PT - DM: STM: Steve, how are you thinking about Apple TV now? Upcoming year of 2009, how’s the digital living room market?
2:52 PT - DM: Steve: The whole category’s still a hobby right now, and nobody’s succeeded at it. Experimentation has slowed down. Given economic conditions, and venture capital outlooks, continue to believe it will be a hobby in 2009.
2:52 PT - PM: Since we’re listening in on the call and you probably aren’t, believe me when I say that Jobs’ tone of voice couldn’t have been less enthusiastic about Apple TV. That’s a hobby for Apple in the same way golf is a hobby for me. And I haven’t gone golfing in four years.
2:52 PT - DM: STM: Tablets and touchscreens? More attractive opportunity going forward?
2:52 PT - DM: Steve: Such creative people that are looking at a lot of things, but can’t talk about future products.
2:53 PT - DM: STM: Supply/demand equilibrium in 2009 or anything else affecting guidance?
2:53 PT - DM: Peter: A concerning environment from credit perspective. Treasury team has done great job with cash. It’s a tough environment and they’re being as careful as they can. Hopefully won’t have issues.
2:54 PT - DM: Tim: In iPod space, at end of quarter were still filling channel to get new products at right level in channel. iPhone, though they ended with right level of channel inventory, but difficult to predict demand for quarter, but no known issues with supply. On Mac side, have significant backlogs on new products, trying to fill those as fast as possible, but will see trajectory of demand going forward. Whether it’s enough, don’t know, but can’t forecast demand. (I love all these fog, visibility, and forecast metaphors).
2:56 PT - DM: RBC Capital: Only 1 SKU in phone business, but strive to be best, what opportunities for further innovation?
2:56 PT - DM: Steve: “From everything I heard, Babe Ruth had only one home run, he just kept hitting it over and over again.” Oh, how folksy Steve.
2:57 PT - PM: That was not a very Ruthian metaphor.
2:57 PT - DM: Steve: Software is the differentiation in this category. 100 variations on same voice phone isn’t very attractive, and most competitors don’t have experience in software platform business. Approach it as a software platform, pretty different than most competitors.
2:57 PT - DM: RBC: Question about economy, price points, upgrade cycles, and more.
2:58 PT - DM: Tim: Answer differs by products. iPod, half of sales are in December. Before then, visibility is limited. In Mac, how much was purchasing delay vs. economy, will gain knowledge on that each week, but will take a little while longer.
2:59 PT - PM: And that wraps things up for this quarterly earnings call. Thanks again to Dan Moren for his mad typing skills. If all it takes for Steve Jobs to participate in a quarterly conference call is a global economic meltdown, then I’m sure we’ll all agree that it’s a small price to pay. All kidding aside, a very strong quarter for Apple under some trying circumstances. The company seems well-positioned to weather the turbulence of the next three months, though look for its lower-than-expected guidance to have a short-term impact on the stock price of Apple shares.
2:59 PT - DM: And that’s it. Details about the replay are being made available, just in case you want to hear all of Steve’s folksy remarks. It’s been a pleasure serving you folks, as usual, and we hope that when you make your next travel plans in the future, you’ll continue to fly Macworld.