Prediction: There will be many questions, but no comments on an Apple tablet.
5:01pm: The call will be starting shortly, they are waiting for a few people not yet connected.
5:04pm: We are beginning.
5:05pm: Nancy Paxton, Peter Oppenheimer and Tim Cook amongst those to speak.
5:06pm: Peter Oppenheimer: Best quarter ever, highest quarterly revenue and earnings ever. New Mac and iPod sales records.
15.16 billion revenue, 82% growth, net income up 50%, 30.1% gross margin. $3.38 billion net income, $850 million higher than previous highest result.
3.36 million Macs sold, a 300,000 higher result than previous high.
iMac sales up over 70% year over year.
5:07pm: Customer feedback on widescreen display, new Magic Mouse, performance increases very positive.
Portable demand very strong. 16% educational increase in sales.
5:08pm: 3-4 weeks inventory in the channel. 21 million iPods sold, a slight decrease, but 55% increase in iPod Touch resulted in an overall increase of 9% increase in players sold. 70% market share in players. Overall iPod revenue growth of 1%.
5:09pm: 11 million songs in iTunes. 8,000 films. 2,000 in high definition, 10,000 music videos, 50,000 TV episodes. App Store: 3 billion downloads to date in 77 countries. 4-6 week iPod inventory.
5:10pm: 8.7 million iPhones sold last quarter - new record, 100% year over year increase.
$5.58 billion in accessories sold. $5.4 billion in sales for iPhones. 17 new carriers added last quarter, iPhones now available in 86 countries.
5:12pm: Strong results in Japan, Australia, UK, France and Germany. Strong corporate acceptance of iPhone. 70% of Fortune 200 companies support iPhone.
13% increase in Apple Retail Store. 689,000 Macs sold via retail. 50% of customers continue to be new Mac owners. 10 new stores opened including Upper West Side, NYC and Paris. 283 stores in 10 countries now.
$7.1 million average revenue per store, compared to $7.0 million the prior year. 50.9 million visitors.
586,000 personal training sessions conducted, 280,000 one-to-one training sales.
5:13pm: $39.8 billion cash on hand. Cash flow from operations: $5.8 billion. Investment priority remains reservation of cash on hand.
5:14pm: September 2009 accounting changes allow for a change in accounting for sales of iPhone and AppleTVs. Those changes were applied retroactively, results revised in prior periods from 2007 on. They believe this will help compare results moving forward.
5:15pm: Under old accounting rules, iPhones and AppleTVs were accounted as subscription devices, with sales deferred initially, and recognized over 24 months. Under the new rules, sales of devices are accounted for initially through hardware sales, subtracting for revenue for upgrade rights. They have removed $25 from the sale price of iPhone and $10 for AppleTV to account for future upgrades.
5:16pm: As a result, virtually all revenue is now accounted for at time of sale, and a great decrease in deferred revenue.
5:18pm: In addition to quarterly filing, a 10(k) was filed for 2009. 8(k) filed to restate historical information.
5:19pm: Non-GAAP results no longer to be released. Forward-looking statements to begin now.
11 billion and 11.4 billion revenues expected, compared to 9.1 billion last 2Q. Gross margins to be about 39%. OPEX to be about 1.64 billion including $190 million related to stock compensation. Tax rate expected to be 29%. EPS: $2.06 to $2.18 compared to $1.79. (Earnings-per-Share).
In closing, they are very pleased with results (as they should be).
QUESTIONS AND ANSWERS:
Q: Besides the law of large numbers, any reason to expect Mac growth rates to not continue at present rates?
A: Thrilled to see 33% growth rate, which is 2x the market. Doesn't want to predict the future other than financial guidance. Did point out 40% growth in Italy, France, Switzerland, and Spain. 70% in Australia, 100% in China.
Q: AT&T = 40% of iPhone market. AT&T has had some bad press recently. What are the benefits of sticking with them?
A: AT&T is a great partner. They have more mobile broadband usage than any other carrier, worldwide. He believes that vast majority of markets have a great experience. AT&T has acknowledged issues in some cities and are addressing them. Apple confidant about progress to be made.
Q: Gross margin question: Give us more detail for prior quarter and next quarter.
A: Reporting new results under new accounting principles. Previous guidance was made under old principles, so not necessarily applicable. $15.68 billion revenue exceeded guidance by more than $4 billion - roughly half attributed to performance of company. Accounting change accounted for the other half of the increase. Attention was focused on converting to the new accounting rules, they are proud of their finance team for converting quickly and restating prior financials.
At this point, my audio cut out for about 30 seconds, so I may have missed a question.
Q: Can you elaborate on component pricing changes.
A: DRAM prices to increase. 3.5" hard drives also constrained, all other components in adequate supply.
Q: Does guidance include any unannounced products?
A: If alluding to Wednesday event, nothing to share today.
Q: Now that iPhone available for a couple of years, can you talk more about March quarter seasonality.
A: Ended quarter with 2.7 million units in the channel. That number includes demos and in-transit inventory already invoiced to carriers. In terms of seasonality:
Macs: Sequential decline, typical for the quarter compared to December holiday quarter.
iPods: Same expected, especially with iPod sales decrease expected due to iPhone and iTouch.
iPhones: Less experience, but given that 4Q ended after Christmas, would expect a small decline.
Q: $5.88 free cash flow, higher than EPS. Any change expected in free cash flow versus earnings.
A: Cash flow very strong. GAAP earnings $3.4 billion, very strong. Cash increased by $5.8 billion. They don't see that changing. They are good with receivables, payables and inventory management. Cash conversion cycle of -40 days for quite some time now.
Q: With regard to the iPhone, did Chinese sales meet expectations? Will they add more partners?
A: Units by country typically not reported, but given visibility, sales began in China end of October, beginning of November. Earlier this month, 200,000 activated to date were reported. Sales ramping up, focused on quality of point of sales and customer experience. Prefer to move slow during brand building. Sees significant potential, but wouldn't want to forecast where sales would go. Very happy with current partner. Thrilled to be underway.
Q: Can you comment on comfort level with iPhone inventory levels? Is 4-6 weeks the right number?
A: Channel inventory did grow 230,000 units compared to last quarter, they are very comfortable with the numbers. Could have sold more but elected not to as inventory managed very tightly. Macs under 5-6 week goal. iPod slightly under. Phones: they don't have a target during the rapid expansion of the number of carriers and countries being added. They are comfortable with current numbers, though.
Q: Update on litigation, especially with Nokia suit? Can you confirm there's no material risk due to suit/settlement thereof?
A: Longstanding process to not comment on pending litigation.
Q: Gross margin: Forecast 40% down to 39% for this year. 60% iPhone margin, how do we reconcile the gross margin percentage going down?
A: Difficult to talk about gross margin YOY as product cycles, commodity cycles, currency and other factors are volatile.
Q: iPhone application approval process is under constant criticism for delays and arbitrary guidelines. Is the problem the model themselves of Apple being a gatekeeper, or just the implementation? Second: Any feedback from iPhone owners who shop preferring an alternative?
A: Perspective is important. 100,000 apps. 90% approval within 14 days of submission. Process to protect consumer privacy, protect inappropriate content from children, etc. Pornography rejected outright, graphic violence approved with age ratings. Most delays are due to bugs. The "noise is higher than the reality". 90% approved in 14 days is pretty good.
Q: On the second question, any feedback from store buyers?
A: I have not, haven't seen it in the research.
Q: Everyone knows you are unveiling something exciting soon. How do you feel about new categories? Do you see things as large as the iPhone or Mac market, or is that setting sights too high?
A: Don't want to take away joy of seeing our latest creation, so I'll delay until Wednesday.
Q: Another tablet question attempt.
A: Stay tuned.
Q: Want to revisit China and emerging markets. These regions share characteristics in common - lower income levels, etc - should products be released in a uniform way or should products be released based on a country-by-country basis and tailored accordingly?
A: Like what they've seen in China so far. Income not as high in Western / European markets, but there's a large middle class in China. Can't look at averages, but instead at income distribution. If you look at Greater China, revenues tripled year-over-year (China, Hong Kong, Taiwan). 58% of revenue last quarter from outside of US. It's clear the growth rates are much higher outside of the US.
Q: Plans for store openings in 2010. What are expectations for non-retail stores CapEx. If growing, what projects?
A: $1.9 billion in CapEx expected. $400 in retail. $1.5 billion elsewhere. Areas of focus excluding retail are facilities, infrastructure, systems and manufacturing.
Q: On App Store, what are you hearing from developers and customers, what are you seeing in paid versus free downloads?
A: For competitive reasons, they don't want to share all of the answers to that question, but they are way ahead of competitors with 100,000 apps, dwarf any competitors. One of the key reasons why iTunes set a record for the quarter.
Q: Corporate clients doubled. Are people writing specific corporate apps? Does it drive iPhone users to Macs in corporate world?
A: Early to comment on the halo effect. iPhone saw significant acceptance rate after the announcement of the 3GS and OS 3.0. 70% of the Fortune 100 are actively deploying iPhone. 50% of FT 100 are doing the same. Those are some pretty staggering numbers when you think about the time period of 2.5 years in the business. We feel great about what's happening there.
Q: For iPhone: have you seen any change in financial market as you move on from exclusive agreements in countries?
A: Sales are largely incremental as carriers are added. UK carriers added, see a significant change. Added in France, market share in France over 60% for the time frame of October/November. Scandanavian countries and Canada added carriers, they expect similar good results. On the other hand, they've selected countries that they thought that would happen for. They don't want to apply that will happen everywhere or they are heading that direction everywhere.
Q: On sales / technical side, is there something they do to drive corporate acceptance?
A: On the product side, yes, tons of features in the latest OS that enterprise wants. Sales staff added to assist the carrier staff in selling iPhone, so yes, a key focus.
Q: Long term strategy, update on acquisitions of Lala and Quatro? On tax rate, given increasing contribution of gross from international, any downward pressure?
A: To the second question: Did have lower tax rate for the first quarter. Expected to be 29%, down about a point thanks to higher mix of foreign earnings. To the first question: In terms of Quattro acquisition, Quattro will help developers to earn more money apps, especially free ones. They occasionally acquire small companies for their talent and technology.
Q: Talk about usage of cash. What's the company's desire to repurchase shares, dividents, etc.
A: No current philosophy change on cash, but nothing is forever. iPhone / iTunes stores running a bit over break even.
Q: Clarification: On new accounting standards will there be $25 deferred moving forward, or also on a look-back basis?
A: Revenue realized as purchase price less $25 for hardware. Final $25 to be revenue due to expectation of upgrades. That's the part that's subscription accounted for. That $25 deferral ($10 for AppleTV) back applied, with rest of revenue now realized immediately, which is why the past results are restated, with substantially fewer deferrals and much higher revenue recognitions. $110 million recognized out of the $25 per iPhone sold over the last couple of years.
Q: On Asia-Pacific/Japan CPU sales - they were particularly strong. YOY growth rate 3 times that rate.
A: In Japan, iPhone runaway hit. 400% YOY increase for past quarter. Mac growth above market, but they believe they can do better. iPhone up 500% in Asia-Pacific region overall. Korea and several other countries have been added recently in Asia-Pacific region.
Q: What revenue and EPS would have been under previous accounting policy for past quarter?
A: Not something they have the time to talk about. However, revenue under new accounting was $4 billion higher, about half of that driven by the accounting change.
Q: Followup re: mobile advertising in app store. What role will advertising in mobile have on business? Can you talk about changing relationship with Google?
A: We work with Google in some areas, compete in others. Mobile advertising in its infancy. Look forward to providing developers with a great opportunity thanks to Quattro.
Q: Will mobile advertising be a significant revenue source, or similar to iTunes / App Store to drive demand?
A: We are in the infancy of mobile advertising, I don't know. We'll have to see.
Q: To customer sections. In Pro segment: are you seeing improvement there? Is it Mac Pro, or higher sales of iMac and MacBook Pro?
A: Saw small YOY increase in sales of Final Cut, Aperture, Pro audio space. They use that as a proxy as to how many machines are being sold into the pro space. They describe that as an economically challenged segment currently.
Q: Education: latest thoughts? What in K12 helps you, and in higher ed with declining endowments, is the student purchase good or bad?
A: US 16% sales increase in education YOY, best increase since recession began. Very few orders due to stimulus funds, they hope that might increase, but don't know. They feel they are the only technology company that understands teaching and learning and think they sell a lot more than "boxes".
SUMMARY:
Nothing unexpected here - this call was never going to be about Wednesday's announcement. They certainly have had an impressive quarter, financially.
Q: $5.88 free cash flow, higher than EPS. Any change expected in free cash flow versus earnings.
A: Cash flow very strong. GAAP earnings $3.4 billion, very strong. Cash increased by $5.8 billion. They don't see that changing. They are good with receivables, payables and inventory management. Cash conversion cycle of -40 days for quite some time now.
Q: With regard to the iPhone, did Chinese sales meet expectations? Will they add more partners?
A: Units by country typically not reported, but given visibility, sales began in China end of October, beginning of November. Earlier this month, 200,000 activated to date were reported. Sales ramping up, focused on quality of point of sales and customer experience. Prefer to move slow during brand building. Sees significant potential, but wouldn't want to forecast where sales would go. Very happy with current partner. Thrilled to be underway.
Q: Can you comment on comfort level with iPhone inventory levels? Is 4-6 weeks the right number?
A: Channel inventory did grow 230,000 units compared to last quarter, they are very comfortable with the numbers. Could have sold more but elected not to as inventory managed very tightly. Macs under 5-6 week goal. iPod slightly under. Phones: they don't have a target during the rapid expansion of the number of carriers and countries being added. They are comfortable with current numbers, though.
Q: Update on litigation, especially with Nokia suit? Can you confirm there's no material risk due to suit/settlement thereof?
A: Longstanding process to not comment on pending litigation.
Q: Gross margin: Forecast 40% down to 39% for this year. 60% iPhone margin, how do we reconcile the gross margin percentage going down?
A: Difficult to talk about gross margin YOY as product cycles, commodity cycles, currency and other factors are volatile.
Q: iPhone application approval process is under constant criticism for delays and arbitrary guidelines. Is the problem the model themselves of Apple being a gatekeeper, or just the implementation? Second: Any feedback from iPhone owners who shop preferring an alternative?
A: Perspective is important. 100,000 apps. 90% approval within 14 days of submission. Process to protect consumer privacy, protect inappropriate content from children, etc. Pornography rejected outright, graphic violence approved with age ratings. Most delays are due to bugs. The "noise is higher than the reality". 90% approved in 14 days is pretty good.
Q: On the second question, any feedback from store buyers?
A: I have not, haven't seen it in the research.
Q: Everyone knows you are unveiling something exciting soon. How do you feel about new categories? Do you see things as large as the iPhone or Mac market, or is that setting sights too high?
A: Don't want to take away joy of seeing our latest creation, so I'll delay until Wednesday.
Q: Another tablet question attempt.
A: Stay tuned.
Q: Want to revisit China and emerging markets. These regions share characteristics in common - lower income levels, etc - should products be released in a uniform way or should products be released based on a country-by-country basis and tailored accordingly?
A: Like what they've seen in China so far. Income not as high in Western / European markets, but there's a large middle class in China. Can't look at averages, but instead at income distribution. If you look at Greater China, revenues tripled year-over-year (China, Hong Kong, Taiwan). 58% of revenue last quarter from outside of US. It's clear the growth rates are much higher outside of the US.
Q: Plans for store openings in 2010. What are expectations for non-retail stores CapEx. If growing, what projects?
A: $1.9 billion in CapEx expected. $400 in retail. $1.5 billion elsewhere. Areas of focus excluding retail are facilities, infrastructure, systems and manufacturing.
Q: On App Store, what are you hearing from developers and customers, what are you seeing in paid versus free downloads?
A: For competitive reasons, they don't want to share all of the answers to that question, but they are way ahead of competitors with 100,000 apps, dwarf any competitors. One of the key reasons why iTunes set a record for the quarter.
Q: Corporate clients doubled. Are people writing specific corporate apps? Does it drive iPhone users to Macs in corporate world?
A: Early to comment on the halo effect. iPhone saw significant acceptance rate after the announcement of the 3GS and OS 3.0. 70% of the Fortune 100 are actively deploying iPhone. 50% of FT 100 are doing the same. Those are some pretty staggering numbers when you think about the time period of 2.5 years in the business. We feel great about what's happening there.
Q: For iPhone: have you seen any change in financial market as you move on from exclusive agreements in countries?
A: Sales are largely incremental as carriers are added. UK carriers added, see a significant change. Added in France, market share in France over 60% for the time frame of October/November. Scandanavian countries and Canada added carriers, they expect similar good results. On the other hand, they've selected countries that they thought that would happen for. They don't want to apply that will happen everywhere or they are heading that direction everywhere.
Q: On sales / technical side, is there something they do to drive corporate acceptance?
A: On the product side, yes, tons of features in the latest OS that enterprise wants. Sales staff added to assist the carrier staff in selling iPhone, so yes, a key focus.
Q: Long term strategy, update on acquisitions of Lala and Quatro? On tax rate, given increasing contribution of gross from international, any downward pressure?
A: To the second question: Did have lower tax rate for the first quarter. Expected to be 29%, down about a point thanks to higher mix of foreign earnings. To the first question: In terms of Quattro acquisition, Quattro will help developers to earn more money apps, especially free ones. They occasionally acquire small companies for their talent and technology.
Q: Talk about usage of cash. What's the company's desire to repurchase shares, dividents, etc.
A: No current philosophy change on cash, but nothing is forever. iPhone / iTunes stores running a bit over break even.
Q: Clarification: On new accounting standards will there be $25 deferred moving forward, or also on a look-back basis?
A: Revenue realized as purchase price less $25 for hardware. Final $25 to be revenue due to expectation of upgrades. That's the part that's subscription accounted for. That $25 deferral ($10 for AppleTV) back applied, with rest of revenue now realized immediately, which is why the past results are restated, with substantially fewer deferrals and much higher revenue recognitions. $110 million recognized out of the $25 per iPhone sold over the last couple of years.
Q: On Asia-Pacific/Japan CPU sales - they were particularly strong. YOY growth rate 3 times that rate.
A: In Japan, iPhone runaway hit. 400% YOY increase for past quarter. Mac growth above market, but they believe they can do better. iPhone up 500% in Asia-Pacific region overall. Korea and several other countries have been added recently in Asia-Pacific region.
Q: What revenue and EPS would have been under previous accounting policy for past quarter?
A: Not something they have the time to talk about. However, revenue under new accounting was $4 billion higher, about half of that driven by the accounting change.
Q: Followup re: mobile advertising in app store. What role will advertising in mobile have on business? Can you talk about changing relationship with Google?
A: We work with Google in some areas, compete in others. Mobile advertising in its infancy. Look forward to providing developers with a great opportunity thanks to Quattro.
Q: Will mobile advertising be a significant revenue source, or similar to iTunes / App Store to drive demand?
A: We are in the infancy of mobile advertising, I don't know. We'll have to see.
Q: To customer sections. In Pro segment: are you seeing improvement there? Is it Mac Pro, or higher sales of iMac and MacBook Pro?
A: Saw small YOY increase in sales of Final Cut, Aperture, Pro audio space. They use that as a proxy as to how many machines are being sold into the pro space. They describe that as an economically challenged segment currently.
Q: Education: latest thoughts? What in K12 helps you, and in higher ed with declining endowments, is the student purchase good or bad?
A: US 16% sales increase in education YOY, best increase since recession began. Very few orders due to stimulus funds, they hope that might increase, but don't know. They feel they are the only technology company that understands teaching and learning and think they sell a lot more than "boxes".
SUMMARY:
Nothing unexpected here - this call was never going to be about Wednesday's announcement. They certainly have had an impressive quarter, financially.
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