Live Update: Apple Q3 Earnings Call

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2:23 Dan Moren: Peter: I don't want to go into a lot of specificity about adjustments, but did have some that occurred in supply chain and some other product costs that benefited us in June. Larger contributor of the second set of factors that I outlined.

2:24 Dan Moren: Cook: Gross margin for Sep quarter, just introduced iPad and iPhone 4. Delivering great value, but products have higher cost structures. iPhone 4 has a higher cost structure than previous model that was shipping. Pretty aggressive with pricing, and that'll play through on margin line.

2:24 Dan Moren: Next question: Gene Munster, Piper Jaffray.

2:24 Dan Moren: Q: Talk a little about dynamics between last year and this year iPhone launch?

2:25 Dan Moren: Cook: Greatly reduced shipments of 3GS around June 7th (WWDC). Coincided with announcement of iPhone 4. Didn't launch iPhone 4 and 8GB 3GS until June 24th, only 3 days before end of quarters. As a result, significantly lower sales after June 7th, waiting on launch.

2:25 Dan Moren: Cook: In fact if you look at year over year growth rate prior to June 7th, it was around 90%.

2:26 CNBC is downplaying the blowout now, saying that since Apple "tamps down" its estimates, the numbers were in line with what the "optimistic" analysts were expecting.

2:26 Dan Moren: Cook: As you know, we exited quarter with total iPhone sales up 61%. Basically we did a channel adjustment. Pulled previous generation down significantly in channel inventory, increaesed from zero iPhone 4 units and 8GB 3GS and net reduction was about quarter of a million units from beginning of quarter. Run rate associated with sales of new product are larger than those of the old product.

2:26 Dan Moren: Q: So last quarter, 2.7 million units in channel?

2:26 Of course, most analysts project well above what Apple projects, and the numbers were still WAY above the consensus estimate, so this does not withstand scrutiny.

2:26 Dan Moren: Cook: Right, so ended at about 2.45. Previous generation draw down was slightly less than 1.3 million. Combination of iPhone 4 and 3GS was up about 1 million. Vast vast majority of that was in transit, not for sale.

2:27 Dan Moren: Cook: If we would have held inventory slack since beginning of quarter, a little over 250,000 more units. However, really would have wanted to do if had opportunity, would have taken inventory from beginning of quarter to end of quarter, because end of quarter was larger run rate at end of quarter with new products.

2:28 Dan Moren: Q: Shortages of iPad/iPhone 4 right out of the gate: any insight into why there's supply problems at product launches?

2:28 Dan Moren: Cook: Look at previous generation product, guess the number of units to sell many weeks before hand. When we run out, we run out. Tend to manage that agressively on purpose because would like market to move to new product.

2:29 Dan Moren: Cook: In terms of new product, we don't create a shortage for buzz. Not our objective; would like to fill every customers order as much as we can. Demand for iPhone 4 is stunning, would like to catch up with demand, but can't predict when that will happen.

2:29 Dan Moren: Q: Since the issues with the antenna, any changes in demand for iPhone 4?

2:29 Dan Moren: Cook: Let me be very clear: we are selling every unit we can make currently.

2:29 Dan Moren: Ben Reitzes, Barclays Capital.

2:29 Dan Moren: Q: Elaborate on last question: you haven't seen any slowdown in order rates? Or any increase in returns noticeable?

2:30 Dan Moren: Cook: Ben, my phone is ringing off the hook with people who want more supply.

2:30 Dan Moren: Cook: It's hard to test the real question you're asking about the effect, because we're selling every one we can make.

2:30 Dan Moren: Q: On the return issue?

2:30 Dan Moren: Cook: The returns that we've seen on the iPhone 4 are less than the 3GS as Steve said last Friday. The returns for this particular issue are very small

2:31 Dan Moren: Q: With regards to iPad, when do you think supply/demand will be in balance? Refer back to your experience with other products?

2:32 Dan Moren: Cook: We honestly don't know. We had been pleasantly surprised at how fast this product has gotten out of the chute. If you look at how long it took us to sell the first million iPods, 20+ months vs. one month of iPad, it's a phenomenal difference. Not following typical early adopter curve and cross into the mainstream. I don't know how high is high. Our guts tell us this market is very big and we believe that iPad is really defining the market. Want to take full advantage of it so we are investing enormous time and resource in increasing our capability to getting iPad out to as many people as we can.

2:32 Jason Snell: Big endorsement of iPad market there.

2:32 Dan Moren: Q: You surprised about how many wants the 3G iPad? What's the split between 3G and Wi-Fi?

2:33 Dan Moren: Peter: We're not going to disclose the splits, but all models have been very popular. The demand has been just amazing, overall ASP in the June quarter for iPad was $640.

2:33 Dan Moren: Next question: Bryan Marshall.

2:33 Jason Snell: At the rate they're making them, they'd sell 9M total iPads for this calendar year. If they increase the rate, they are saying they'll sell more than 10M in calendar 2010.

2:33 Dan Moren: Q: With regards to upside in Mac as well as iPhone? Pretty impressive that iPad came in this quarter. iPad potentially cannibalize from other products going forward?

2:33 Jason Snell: Well, more than 9M, but let's assume it's at least 1M more ;-)

2:34 Dan Moren: Cook: We do talk about this internally. Only been selling for 3 months, so it's too early to tell. if you look at our quarter, we're thrilled that we reported our best Mac quarter ever in the same quarter that we sold almost 3.3 million iPads.

2:34 Dan Moren: Q: Any updates on how the iAd business is doing?

2:34 Dan Moren: Peter: We've just launched iPad in early part of July. We're going to learn a lot this calendar year and build a foundation for the future. Beyond that, no further specifics to share.

2:34 Dan Moren: Q: An update on how the data center build in North Carolina?

2:35 Despite what Cook said about huge demand for iPhone 4, CNBC just said he "ducked" the question and that Apple said it "can't tell" what impact "antennagate" is having on iPhone 4 sales. Wankers.

2:35 Dan Moren: Peter: North Carolina is on schedule, everything is going fine. Expect to complete it by end of calendar year and begin to use it.

2:35 Dan Moren: Next question: Toni Sacconaghi with Sanford Bernstein.

2:35 Dan Moren: Q: Gross margin question. On guidance last quarter, you said about a quarter of sequential decline came from iPads, abotu 150 basis points. Relative to your expectation on that, what kind of impact did iPads have on your gross margin?

2:36 Dan Moren: Peter: Toni, the factors that we cited last quarter, largely on a collective basis, were as we thought. Did about 310 basis points better than we thought. The biggest piece of that difference really came from selling more iPhones and selling accessories. Other factors were generally about what we though they would be.

2:37 Dan Moren: Q: So you were expecting to be down about 570, you were down about 260…what was the collective impact of those two positive forces? How do we think about these factors?

2:37 [Comment From JSCarlton ] I think he DID duck the question. He didn't address whether demand was down...just said that it was hard to measure.

2:37 Dan Moren: Peter: Ahead of what we thought by about 310 basis points. About half of that was better iPhones/accessory sales. Rest of it came from favorable adjustments were the bigger piece of the remaining half.

2:37 Dan Moren: Q: Comment on whether adjustments were one time? Discretionary?

2:38 Fair enough, JSCarlton, but I would argue it makes little difference when they're already selling more than every unit they can make.

2:38 Dan Moren: Peter: The ones that we benefited from, I don't expect them to reoccurr.

2:38 Dan Moren: Q: Tim, you had talked a little bit about channel inventory. Sounds like you might have 1.4 million in existing channel inventory of the older 3GS. Is that correct and where and how are those being sold currently?

2:38 [Comment From AaronS ] Wouldn't a data center be great for a more cloud focused iTunes (streaming and such)? Could that be some indication of a move that direction during the very beginning of next year, and not sooner?

2:39 Dan Moren: Cook: We had about 1.4 on June 26, end of fiscal quarter. Currently, we have less than that. Sold in most of countries we sell 3GS in.

2:39 Dan Moren: Q: Any progress since end of quarter in increasing total channel inventory?

2:39 Aaron: Apple already has huge infrastructure needs with the existing iTunes Store (including both music, TV shows, and apps), MobileMe, and even old standbys like movie trailers. I don't think you can project that a new data center means cloud-based music, although it gives Apple more options.

2:39 Dan Moren: Cook: I never feel like I'm fighting a losing battle. On iPhone 4 we are selling things as quickly as we make them, so we have more work to do there.

2:39 Dan Moren: Q: If you've taken down inventory of non-iPhone 4 and selling them as quickly as you can, inventory is lower now than on June 26?

2:40 Dan Moren: Cook: Keep in mind we sell the new 8GB 3GS, so 1.4 million that I was referring to are the iPhone 3GS units in the previous generation.

2:40 [Comment From Neven ] Aaron: the data center may be useful for a future streaming service, but not necessary, especially not in the early days.

2:40 Dan Moren: Q: Final question, you talked a little bit about cannibalization of iPads on Macs, and iPod touch on year over year basis. ASPs fell quite a bit on the iPod business. Any cannibilization of iPod touches on IPad?

2:41 Dan Moren: Peter: Toni, our iPod ASPs were down about $7 sequentially, driven mainly by start of back to school promotion which started in June, and stronger US dollar. Did mix up into iPod touch, year over year.

2:41 Dan Moren: Next question: Keith Bachman, Banc of Montreal.

2:41 Dan Moren: Q: Peter, when the iPhone when you were using deferred accounting, deferred balances indicated that margins went up over time. Would you anticipate that iPad margins will increase as we move forward?

2:42 [Comment From Humbledaisy] So, is itnsafe to say that Apple isn't beleaguered anymore?

2:42 Jason Snell: I think it's safe to say that Apple is a titan of industry now, Humbledaisy.

2:42 Dan Moren: Peter: We're purposefully aggressive when we launched the iPad because we believe we had a great product and a great first-mover advantage. Selling them as quickly as we can make them. We are always working to become more efficient and ride down the cost curves, and no different on the iPad.

2:42 Dan Moren: Q: Any comment on the impact of the bumpers? Figuring costs into September, any other impact?

2:43 Dan Moren: Peter: Two impacts of this. First is that we will need to defer revenue for the iPhone 4s that we sell where we've not delivered the bumpers and where we have not heard from the customers wanting to place an order. I expect the accrual we'll need to make (a revenue accrual with no cost) will be about $175 million in Sep quarter and will be recorded as revenue in the Dec. quarter. Will expense cost of bumpers when we ship them to customers and our most important objective is to take care of every customer.

2:44 Dan Moren: Q: Tim, Android shipments increasing, gaining press. Any color about where you see Android as competition to iPhone?

2:44 [Comment From Markus] Cant scroll down with iPad :-(

2:44 Jason Snell: Markus, try scrolling with two fingers on your iPad.

2:44 Dan Moren: Cook: I haven't seen Android results for June, since it's several companies. But iPhone sales were up 61 percent in the quarter, despite the inventory drawdown. And that's against IDC's smartphone expectation of 37 percent, so growing faster than market.

2:45 Dan Moren: Mike Abramsky, RBC Capital Markets.

2:45 [Comment From Markus] Thx! Great :-)

2:45 [Comment From Alex Brooks] Markus: Use two fingers to scroll.

2:45 Yeah, on iOS, to scroll an area within a larger scrollable area (like a small area inside a web page), use two fingers on the smaller area to scroll it and not the larger Web page.

2:45 Dan Moren: Q: Still some questions around sustainability of iPad demand after early adopters and international rollout, because still a relatively new category. Thoughts? May be some competitive subsidized 3G tablets coming in fall, how do you see that impacting the iPad pricing/demand?

2:46 Jason Snell: Someone's iPhone or iPad alarm just went off on the conference call. Is that their warning to get off the call? :-)

2:46 Dan Moren: Cook: On iPad we are absolutely selling every unit that we can make. Looks good in every country that we have launched in and we're excited about launching in additional countries this coming weekend. Anecdotally, it seems that it's beyond early adopter stage, based on watching people using it. It's the fastest that has happened with any product I know of our have been involved with.

2:47 Dan Moren: Cook: In terms of competition, I don't know what they will try. No secret that everybody's working on something, but we're extremely happy with our competitive position and business model that we have, looking at U.S. as an example, where you have a very affordable rate structure that starts at $15 w/ no commitment and very aggressive device price, that seems to be what the end user really desires.

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