Live Update: Apple Earnings Call

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1:56 PT - DM: Hello, and thanks for joining us at Apple's federally mandated conference call to discuss its just-released third quarter financial results. As always, I'm Macworld Associate Editor Dan Moren, here for the play by play.

1:56 PT - JS: And I'm Macworld Editorial Director Jason Snell, alongside Dan for the color commentary.

1:56 PT - DM: At the moment we are, as usual, being serenaded by lovely classical music as we wait for the usual suspects to join us on the line here. It's probably not giving away too much to say we expect to hear from Apple COO Tim Cook and CFO Peter Oppenheimer. The preliminary numbers are already out, though, and Apple seems to have had a fantastic quarter, with revenues of $8.34 billion and profits of $1.23 billion, up both over the last quarter and the year-ago quarter.

1:58 PT - DM: I wonder if they actually fly a string quartet into Cupertino and then just hold the phone up to them. Spare no expense!

1:59 PT - JS: Are you insane, man? There's a recession on. It's a trio.

1:59 PT - DM: I hear Yo-Yo Ma refused, due to contract negotiations.

1:59 PT - JS: Some interesting things I've spotted in the initial financial data: iPod sales were down over the year-ago quarter for the first time ever, which shows perhaps that we have finally passed the peak of iPod mania. However, iPhone mania appears to be picking up the slack. This was also the second-highest number of Macs Apple has ever sold in a quarter, although the average selling price of the Mac did decline, reflecting Apple's price cuts in the face of the bad economy.

2:00 PT - DM: Bad economy or not, though, people are still clearly buying Macs, iPhones, and even iPods. Not the Apple TV, though—oh, I kid!

2:00 PT - JS: And if you look at a graph of Apple's overall revenue -- and I am, which is why I mentioned it! -- you'd actually have a hard time spotting that global economic meltdown. Apple's revenue growth proceeds unabated, punctuated by the gigantic holiday quarter.

2:02 PT - JS: Another numbers thing. Sixty-seven percent of the Macs sold in this quarter were laptops, reversing the downward tick last quarter. Generally Apple keeps selling more laptops every quarter, and it's back on the way up.

2:02 PT - DM: And here we go. Here comes Nancy Paxton for opening comments. We'll be hearing from Peter Oppenheimer, Tim Cook, and the ever laconic Gary Whistler, treasurer. As usual, there're forward-looking statements that we shouldn't bank on.

2:03 PT - DM: Hereeeeee's Peter. Record June quarter revenue and earnings and the highest non-holiday quarter revenue and earnings in Apple's history. Extremely busy quarter for new products, enthusiastic response. $8.34 billion in revenue, 12% growth year over year. Very proud, particularly given economic environment. Operating margin over 20%, better than expected revenue. $1.23 billion income, earnigs per share $1.35. $1.4 billion higher adjusted revenue; adjusted net income $1.9 billion, $700 million higher than reported net income.

2:05 PT - JS: Basically the non-GAAP numbers are what the company really sold and made during the quarter, separating out the iPhone revenue that's spread over the course of two years rather than being taken in a single hit. It's a better barometer of the last three months of Apple's business, rather than being smoothed out by two years' worth of previous sales.

2:05 PT - DM: Mac products and services. 2.6 million Macs, nearly meeting all-time quarterly record last September. More than 100,000 units over prior year; 4% year over year growth while 3% contraction of market overall. Revved both desktops and laptops. Mac portable shipments increased 13% year over year. Customer reponse to the new portables has been very favorable. Sales accelerated following launch. Began the quarter with between 3-4 weeks of Mac channel inventory.

2:06 PT - DM: Music. 10.2 million iPods, down from 11 million year ago quarter. A few reasons: reduced channel inventory by over 400,000. Sell through declined by 4% year over year. How are we looking at this market? Three categories of pocket product: traditional MP3 players (shuffle, nano, classic), iPod touch, and iPhone. Internally forecasted year over year decline for traditional MP3 players, hence iPod touch and iPhone. Expect traditional MP3 players to decline over time as they cannibalize with iPod touch and iPhone. Despite decline in sales, research shows about 50% of traditional iPod purchasers are buying their first iPods. iPod touch sales grew more than 130% year over year. Share of US market is over 70%, based on NPD's data. iPod top selling MP3 player and continued to gain share year over year internationally. Began and ended quarter with 4-6 weeks channel inventory.

2:08 PT - JS: These are the sorts of data scraps that you don't get in the revenue reports themselves. Apple doesn't break out products individually, so it's very informative to find that the iPod touch showed strong year-over-year growth, which is Apple's way of blaming the fact that the iPod numbers have peaked on the traditional iPods, not the snazzy new iPod, the iPod touch, which continues to grow.

2:08 PT - DM: Over 5.2 million handsets sold in June quarter, compared to 717,000 sold in year over quarter. More than 1 million 3GS handsets sold in weekend after launch. Not able to meet demand immediately, but working to adjust. 3GS is available in 18 countries today, and being rolled out this summer to the rest of the 80 countries where iPhone is sold. App Store now offers over 65,000 apps and iPhone 3.0 helped pave the way for developers. Customer reponse to App Store has been phenomenal. 1.5 billionth download last week. App Store is a key differentiator of iPod touch/iPhone experience. Recognized revenue from iPhone was $1.69 billion during quarter, compared to $419 million year ago quarter, up over 300%. Sales value was $2.9 billion. Did not begin to recognize revenue or product cost from March 17th until June 17th; those iPhones are recognized ratably over remaining terms of estimated lives.

2:11 PT - DM: iTunes Store had a good quarter too. As of last week, customers have purchased and downloaded over 8 billion songs from iTunes Store.

2:11 PT - DM: Apple Stores. $1.5 billion in revenue, compared to $1.45 billion in year ago quarter. 492,000 Macs sold, compared to 476,000 Macs year ago quarter, and about half the Macs sold were sold to new customers. 6 new stores in the quarter, 258 stores total, and 27 store remodels. Average of 254 stores open during quarter, average revenue per store $5.9 million compared to $6.8 million. $321 million was retail segment margin. 36 million visitors in the store, increase of 22% over last year. Launched new One-to-One program. On track to open a total of 25 stores of fiscal 2009 and to remodel 100 stores. Opening first store in France in holiday quarter.

2:13 PT - DM: 36.3% total company gross margin. Difference driven by three factors: component costs incread, but not as high as expected; spent less than expected in several areas; efficiently ramped new products in quarter, spending less than planned. Benefited from weaker US dollar. Operating expenses $1.35 billion. Cash plus short term securities is $31.1 billion, increasing over $2.2 billion. Cashflow was $2.3 billion. Investment priority is preservation of capital. Continuing to focus on short, high quality investments. In first week of September quarter made $500 million prepayment to Toshiba for NAND flash.

2:14 PT - JS: Once again, we see that Apple is an extremely conservative company financially. It invests carefully, keeps billions of dollars of cash on hand, and places careful bets on future components costs (like NAND flash) in order to keep future costs down.

2:14 PT - DM: Outlook for 4th quarter: revenue of $8.7 billion-$8.9 billion. Gross margins around 34%, $28 million stock-based compensation. $1.445 billion in operating expenses; OIE $30 million. Tax rate about 30%. Targeting EPS $1.18-$1.23.

2:16 PT - DM: Very enthusiastic about Snow Leopard coming out. Confident in strategy and working hard to continue to deliver industry's most exciting new products. And now, it's question time!

2:16 PT - JS: So basically, another fantastic quarter from Apple, with the iPod market maturing but the iPod touch and iPhone showing massive growth, all during an economic downturn that has seemed to have very little impact on Apple.

2:16 PT - DM: Gene Munster, Piper Jaffray: Demand for low-price MBP, how does that develop? And how do you see the Wireless carrier relationships evolving?

2:17 PT - DM: Tim Cook: In terms of MBP, some models currently constrained. Didn't have material effect on last quarter, factored supply into guidance. In terms of wireless carriers, most are thrilled with iPhone. Very good set of relationships. Obviously looking to expand.

2:18 PT - DM: PJ: See expanding relationships with carriers?

2:18 PT - DM: Tim: Nothing to announce today. I think AT&T is an excellent relationship and we're very happy with it.

2:18 PT - DM: SDN Capital: Any detail you can give on education/pro segment?

2:18 PT - DM: Tim: Relative to market, consumer market performed better for Apple. US K12 educational business is getting hit by budget shortfalls. Very negligible amounts of stimulus funds flow to state last quarter; may or may not occur this quarter. Pro business has been affected more than consumer business, reflected by ASPs. Business accounts often delaying purchases.

2:19 PT - DM: SDN: Numbers for this quarter?

2:19 PT - DM: Tim: -6% in institutional business. K12 lower; higher ed, around 0%.

2:20 PT - DM: SDN: In terms of mix, any additional details on first 30 days of mix-shift with price changes on laptops?

2:20 PT - DM: Tim: Units grew faster than revenue in portable area, so ASPs did fall some. One reason is price cuts, another is transitional cost of major transition replacing the whole line-up in a day. We are seeing a mix-down versus historic, part of that is promotional customer who is buying up the line is delaying purchases in this economy. 7 to 9 points ahead of the market, and thrilled with those numbers.

2:20 PT - JS: Basically, Apple cut MacBook prices (presumably to stimulate sales) and the result was that the average selling price of a Mac laptop went down to roughly $1,250 from $1,350 in the previous quarter and $1,440 in the year-ago quarter.

2:21 PT - DM: Goldman Sachs, David Bailey: Some idea of how $99 iPhone is doing relative to other price points? Change in mix since the launch?

2:21 PT - DM: Tim: As we made the changes, both launch of 3GS and price drop on 3G, saw significant acceleration in total unit sales. Want to hold mix data, since it's competitive data. Demand for 3GS has been very robust. Working very hard to fill that demand.

2:22 PT - DM: GS: Update on progress with large enterprise accounts with iPhone?

2:22 PT - DM: Tim: Great opportunity for us. Seeing growing interest with release of 3GS and iPhone 3.0 due to hardware encryption and improved security policies. Doing well with small business and with large organizations that allow people to purchase phones for individual use. Almost 20% of Fortune 100 have purchased 10,000 units or more. Multiple corporations and government orgs that have purchased 25,000 each; iPhone approved in over 300 higher education institutions. JD Power has ranked iPhone highest in overall satisfaction with business customers. Think we're at the tip of the iceberg with what iPhone can do with business customers.

2:24 PT - DM: Richard Gardner, CitiGroup: Guiding up 4-7% sequentially, plus deferred revenue, why guiding below normal seasonailty?

2:24 PT - DM: Peter: Give you guidance we have reasonable confidence in achieving. For Mac, while we usually see increase from June to Sept quarters and we expect to see one this year, expect sequential increase to be less than previous years since every portable refreshed last quarter and desktops in the March quarter. Additionally, education institution sales remain under pressure from budget shortfalls. As regards to iPod, similar to June, traditional MP3 players should decline year over, iPod touch will grow significantly. Last year, sold very few phones in June quarter because of July launch. This year introduced 3GS in June, selling 5.2 million in the quarter, very optimistic going June to September, but just don't have experience with seasonality with this distribution.

2:26 PT - DM: Ben Reitzes: Gross margins. Exceeded expectations, guiding above 30%, now at 34%. Long term estimate of 30% no longer holds? Model higher than 30%, due to better execution or business model change?

2:27 PT - DM: Peter: Very proud of team execution. Regarding gross margin, for Sep quarter, had a chance to go through complete process and guiding to 34% for Sep quarter, which is down from the 36% from just reported. Declined sequentially from back-to-school promotion, higher component cost, and new laptop product transition. First: many key components, cost is rising. Second: continue to focus on delivering state of art products at price points competitors can't match.

2:28 PT - DM: Reitzes: With regard to surge at end of quarter of iPhones: what is inventory situation like?

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