Apple Earnings Call: Live Update

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2:26 PT - DM: Piper Jaffray: Are there markets where you're priced too high, given non-subsidized market for iPhone?

2:27 PT - DM: Tim: Over 70 countries for iPhone. Some countries are non-subsidized market. Largest example is India. Sales less in non-subsidized markets, obviously. Huge market opportunities and will make adjustments in future to play in a stronger way.

2:28 PT - JS: See, it's psychology 101: A lower up-front will drive sales, even if you end up spending more money on a monthly basis.

2:28 PT - DM: Piper Jaffray: No price umbrella means subsidized vs. non-subsidized?

2:28 PT - DM: Tim: We're not going to build a low-end voice phone. Our objective is not to be unit share leader, it's to build the world's best phone.

2:28 PT - DM: Piper Jaffray: How do you think about that sub-$500 market for netbooks, computers?

2:29 PT - DM: Tim: We're watching that space, but right now from our point-of-view, those products are based on hardware that's much less powerful than what we think that customers want, software quality that is not good, cramped keyboards, small displays. So we don't think people are going to be pleased with those products, but we'll see. We are watching that space. About 3% of PC industry was in this netbook kind of category so it's a category we watch. We've got some ideas here. But right now, we think the products are inferior and will not provided experience to customers that they're happy with.

2:30 PT - DM: Citigroup: Apple TV, any seasonality involved in that business?

2:30 PT - DM: Tim: Tremendous pickup year over year. Up almost 3x versus year ago quarter. We still consider this a hobby, but it is clear that the movie rental business has really helped Apple TV, and there are more and more customers that want to try it. Continue to invest because we fundmentally believe there is something there for us in the future.

2:30 PT - DM: STM Midwest: On desktops in pro segment: how does that affect the Mac numbers?

2:31 PT - DM: Tim: The Mac Pro percentage of our desktop business is not large. Desktop number is primarily iMac. The pro segment was down year-over-year, because small businesses are cutting back on expenditures in economic climate.

2:31 PT - DM: STM: Any update on education market? Lot of chatter about state budgets. Any sense of what you're looking at in calendar 2009?

2:31 PT - DM: Tim: Results last quarter, down 6% year over year total. K-12 component is more sensitive, down 10% year over year. Very significant funding in this environment. Data that we're collecting, 39 of 50 states have some form of shortfall. K-12 was weak in Q4 and Q1; don't forecast individual markets, but don't see it picking up until there's a huge infrastructre outlay; hopefully now that we have new president, maybe that'll be underway.

2:33 PT - DM: STM: Any updates on Snow Leopard, timeline? Any thoughts on progress?

2:33 PT - DM: Tim: No comments to share today. Very excited, but we don't have a launch date to announce today.

2:33 PT - DM: Sanford Bernstein: iPhone channel inventory was 2 million units, last quarter. Update?

2:33 PT - DM: Tim: In launch quarter, channel was approx. 2million units. In Q1 despite launching in 20 additional countries and additional channels, we ended quarter with sequentially lower channel inventories. Very comfortable with level we're at. Obviously, have to take changes in channel inventory in both quarters in consideration in looking sequentially at the sell-through.

2:34 PT - DM: Sanford Bernstein: Can you help "dimension for me" how big the draw down was in channel inventory?

2:35 PT - JS: Dimension! It's the funnest verb ever.

2:35 PT - DM: Tim: Draw down was about a quarter million. In terms of weeks, we can't be specific, because of all the additional countries added. Not sure of seasonal pattern of demand from quarter-to-quarter. Based on info from carrier partners, very comfortable with inventory level.

2:35 PT - DM: Sanford Bernstein: Comment on relative strength of iPod business, domestic and internationally? Stronger than expected. Relative growth rates of iPod business in U.S. and international?

2:36 PT - DM: Tim: In terms of geography, look at U.S.: iPod sales contracted at unit level 3% year-over-year. All of growth you see in number was all international. Look of linearity at worldwide level: very similar until last week of quarter; rush of buying last week of quarter. All of growth occurred in last week of quarter. Attribute to macroeconomic environment and affect on consumer buying behavior.

2:37 PT - JS: Interesting - this suggests that the iPod has finally reached a plateau in the United States. But there's still some growth to be had overseas.

2:37 PT - DM: Sanford Bernstein: What kind of impact did mix have on gross margins? Visibility from last quarter that iPhone margins higher than company average, so it pushes up gross margins. Some difference in revneue growth rate across all three markets in this quarter.

2:37 PT - DM: Peter: We don't talk a lot about year-over-year gross margin changes. More straight forward to talk about it sequentially. This year versus last, very different currency and commodity situations. Literally flat in percent terms year over year.

2:38 PT - DM: Cross Research: How are you thinking about operating expense? As relates to revenue growth?

2:38 PT - DM: Peter: We're very confident in our strategy and our business, and we're going to invest our way through this downturn just as we did for the last one. We're continuing to invest in engineering, marketing, customer experience to bring industry's most innovative products to market.

2:39 PT - DM: Cross Research: Walk us through impact of currency on P&L?

2:39 PT - DM: Peter: Hedging program. European hedges...okay, now they're talking about hedges? That's like shrubbery, right?

2:40 PT - JS: Dan, you're fired. After the call is over.

2:40 PT - DM: Cross Research: Warchest?

2:40 PT - DM: Peter: Proud to tell you that we're over $28 billion in cash for all the right reasons. No new update from what we shared with you last quarter.

2:40 PT - DM: UBS: Speak to linearity of guidance? What in particular does guidance assume in remaining two months?

2:41 PT - DM: Peter: Not going to give you an update on this quarter. Provided guidance for March quarter. Guidance has growth year over year.

2:41 PT - DM: UBS: Given iPhone 3G is in early days and had some inventory draw down, can you buck seasonal downtick that you usually see in handset industry and see sequential uptick?

2:41 PT - DM: Tim: Don't forecast product level externally in terms of guidance. Fear that we would have in this market is that economy may slow the adoption rate of smartphones, because they generally command higher monthly fees and that may keep some customers from signing up for higher contracts. Feel very good about our competitive position. Extremely good about product pipeline.

2:42 PT - DM: Goldman Sachs: Pluses and minuses about adding Wal-Mart and what's different from Best Buy and Apple Stores?

2:43 PT - DM: Tim: Just started working with Wal-Mart at end of December, so not enough data. From a reach point of view, Wal-Mart reaches a tremendous amount more people than they can reach in stores. They've got over 4000 or so storefronts, and they are in areas where there are no Apple Stores. Level of reach beyond what Apple and AT&T can provide. Also sell iPods in Wal-Mart and have a good relationship with them. With that data and knowledge that they went into iPhone too.

2:44 PT - DM: Goldman Sachs: Talk about linearity on Macs and iPhones in December quarter?

2:44 PT - DM: Tim: Mac sales were second higher, after the previous quarter. Sell-through accelerated tremendously after introduction of new portables. Quickly served those customers due to good product ramp. Stunning number of 34% year-over-year increase on portables despite tough environment. International on Mac was much stronger than U.S.; U.S. growth was 2%; international was 16% year-over-year. Several countries above 20%, including Canada and those in Latin America. People were delaying purchases on rumors of new portables as mentioned in last call. Not as strong as iPod spike, but similar spike in end of quarter for Macs.

2:44 PT - JS: Every time they talk about the "product pipeline" I get all tingly. They're just taunting us, aren't they? But it serves an important purpose, as a mantra: Apple has products in the pipeline. Apple will continue to release products. They will continue to fit Apple's core values. This is something that many of us think is obvious, but it's a message of stability that's important for the financial and investment community to hear.

2:46 PT - DM: On iPhone, it's difficult to say because of little history. Saw very strong ending of quarter with iPhone, but can't make educated comment on it since it's just second December in business and first in a large way in many countries.

2:46 PT - DM: JP Morgan: As far as retail stores, any sort of context around same store sales in interational vs. U.S.? On multiplier effect, do new stores internationally increase pull through?

2:47 PT - DM: Peter: Retail performance outside U.S. a bit stronger, similar to other parts of the business. Our retail stores are helping us in each of our geogrpahies. Great place for new customers, especially those new to the Mac. Some people choose to buy in stores, some people choose to buy elsewhere, we're fine with either (how generous!). Make sure that Macs and iPods have a great point of sales for new customers to come and experience them. As mentioned, plan to open about 25 stores in fiscal '09, about half international.

2:48 PT - DM: JP Morgan: How are other channels playing out?

2:48 PT - DM: Peter: Resellers are able to do what they want. Here in U.S., several did promotional activities with iPods, such as attaching gift card to iPods. If they want to do it, it's fine. Not as much of that after the holidays.

2:49 PT - DM: Banc of Montreal: Two margin questions: mentioned supply change adjustment in December quarter. Reoccur in March quarter, and describe what it is?

2:49 PT - DM: Peter: Exceeded our gross margin in December quarter by 420 basis points. In the range of quarter of that were favorable adjustments and settlements primarily related to prior quarter in the supply chain. Will not recur in March quarter, which is one of reasons for sequential decline.

2:50 PT - DM: Banc of Montreal: On non-GAAP adjustment, stated gross margin increased substantially from 49% to 61%. What's the reason for increase in non-GAAP adjustment?

2:50 PT - DM: Peter: Reflects two things: reversal of iPhone revenue and product cost recognized during the quarter. 61% is just the mathematical result of these adjustments, in and out, revenue vs. cost sold. $2.6 billion iPhone sales was much larger than revenue of $1 billion that was reported. iPhone 3G gross margin was higher in December quarter, due to lower costs.

2:51 PT - DM: RBC Capital Markets: Number of competitors coming to the market for the iPhone, many with their own variance on customer experience intiating, including Android, Palm Pre, Windows. How do you think about sustaining leadership and brand?

2:52 PT - DM: Tim: I would say first of all difficult to judge products not yet in the market. iPhone has sold over 17 million units thus far, received highest overall customer satisfaction from many different surveys. We've said since the beginning that software is key ingredient, and we're years ahead, and I'd include the App Store in that. If you look at others, I think when you think about having multiple variations of display, resolution, input methods, and hardware, it's a big challenge for a software developer, and not very enticing for them to build an app for all of these. Approach this as a software platform business, and so fundamentally different from those approaching from hardware view. Very confident with where they are competitively. We like competition, as long as they don't rip off our [intellectual property], and if they do, we're going to go after anyone who does.

2:54 PT - JS: Well, that sounds like two separate shots fired across the bow of Palm. First, it's the product that's not even in the market. Second, Palm's phone has some features that are very iPhone like, and it makes you wonder if Apple might consider using the patents it boasted about when it launched the iPhone to stick it to Palm.

2:54 PT - DM: RBC: Until Palm came out that others negotiated around multi-touch IP, but Palm seems to directly emulate touch interface that iPhone innovated, and that Steve talked about patenting; is that what you're referring to?

2:55 PT - DM: Tim: Don't want to talk about any specific company, just making a general statement. We are ready to suit up and go against anyone. However, we will not stand for having our IP ripped off and will use whatever weapons we have at our disposal.

2:56 PT - JS: Translation: Palm, better be sure you're not infringing on Apple's patents when you launch the Pre, or else.

2:55 PT - DM: RBC: Quarter to quarter, Macs down 3% amidst launch of new Macs, give us sense of what you're thinking about Mac trends going forward?

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