Apple FYQ4 Quarterly Results : October 18, 2011Notes from the conference call
4:59 - Waiting for the call to start. This will be a bittersweet result for Apple, since it it will have been the last full quarter in which Steve Jobs was CEO and alive, although its results were mostly exceptional.
5:02 - Apple gets started; currently the usual safe harbor warnings to shield its comments from legal liabilities.
5:04 - Tim Cook opens. Our first quarter since the passing of Steve Jobs. The world has lost a visionary, a genius, and an amazing human being. His spirit will forever be the foundation of Apple. Only Apple brings hardware, software, and services together so well. Expressing our gratitude for the condolences following Jobs' passing.
5:04 - CFO Peter Oppenheimer recaps details: "very proud" of these results.
5:05 - Operating margins were 30.8% of revenue. Net income up 54%, EPS of $7.05.
5:05 - Macs: 4.89 million. Setting record by over 750,000. More than six times IDC's forecast of growth for the overall PC market. Asia-Pac saw the biggest growth. Very strong growth in MacBook Air and strong MacBook Pro.
5:06 - Recapping 6m Lion downloads. 3-4 weeks of Mac channel inventory.
5:07 - 6.6m iPods vs. 9.1m a year ago. Though down a year ago, they were ahead of expectations. iPod touch over half. Apple's share in US of MP3 players is over 70% in US, and leads in most countries. 4-6 weeks of inventory.
5:07 - iTunes rev almost $1.5b. Over 16 billion songs, 550m TV shows. Over 80 million iBook downloads.
5:08 - iPhones: 17.07m vs. 14.1m. Asia-Pac the biggest: sales more than doubled. Expected iPhone sales to drop after rumors followed the WWDC news of iOS 5 in the fall. 4-6 weeks of inventory. Accessories up over $11 billion (?).
5:09 - Deferred carrier additions until after the iPhone 4S launch; added Sprint and KDDI in October. Topped the JD Power smartphone satisfaction ranks for the sixth consecutive study.
5:10 - Lowe's as an example of iPhone deployment: staff use them for demos and training. L'Oreal and other companies use it. "Extremely enthusiastic" about Siri on the iPhone 4S and other features.
5:11 - Working hard to get iPhone 4S in customers' hands as soon as possible. 22 more countries by the end of this month.
5:12 - iPads: 166% boost to 11.12 million. Distribution in 90 countries. About 2.5 million iPads in inventory, up 1.54 million; in line with 4-6 weeks channel inventory guidelines.
5:12 - 92% of Fortune 500 using or testing iPads. 52% of Global 500.
5:13 - Examples: United, All Nippon Airways for flight attendants. Sonic Automotive using it for check-ins and analytics. Biogen and others using them too.
5:13 - Over 250m iOS devices shipped so far as of this quarter. "Very excited" to have launched iCloud last week.
5:14 - 18 billion app downloads; App Store 33 additional countries. [previously at 16b]
5:15 - Retail at 1.1 million Macs, increase of 25% (?). 50% new to Macs. 21 new stores outside of the US on top of total gains. Hong Kong store had some of the highest revenue ever. 357 stores, 336 average. $679m margin.
5:16 - Focusing on international: next quarter is 40 stores, 75% of them outside of the US. Replacing high volume stores with larger ones in the US.
5:16 - Higher margins due to lower component costs. $253m in stock-based compensation. Tax rate of 24.7%.
5:16 - Cash: $81.6b versus $76.2b in the spring quarter. Net paid for acquisition of Nortel patents.
5:18 - Every six years, Apple adds a week to keep its quarter in line; this year it's 14 wks. Op Ex expected to be $3.52b. Tax rate to be 24.25%. $9.30 EPS estimated.
5:18 - Over $108 billion in fiscal 2011. Blew past historical records. 72m iPhones, 32m iPads in the quarter. $26.9 billion in net income. Even faster than revenue growth.
5:20 - Q&A. Any worries of shortages during holidays? "We're confident that we'll have a large supply," but I don't want to predict when we'll reach a supply balance. Confident we'll set an all-time record for iPhones this quarter.
5:21 - The 2.4m drop was "much less" than we were expected; that's why our revenue exceeded our guidance. We knew there was great anticipation of June or July, because that had been the pace we had set before. Reduction largely happened in the "back half" as speculation hit "extreme highs."
5:23 - 40% gross margin -- why you don't think you can do better in December given how the iPhone 4S and component prices are doing? Oppenheimer: both of these will be offset by cost structures and lower prices for new iPhones and iPods. Strong US dollar also much different than the summer.
5:25 - China update? China was 2% of rev in 2009, then up to 12%, now 16% in the most recent quarter. Grew 270% year over year. $13 billion for the fiscal year in China. Vs. $3 billion in fiscal 2010.
5:26 - Over 200 mono-branded stores in China. Over 7,000 points of sale for the iPhone in mainland China. In my lifetime, I've never seen a country with as many people rising into the middle class buying what Apple makes. An "area of enormous opportunity." No. 2 of top revenue countries. Placing additional investment: more stores and "other things."
5:27 - Focuses on other areas with promise, such as Brazil: up 118% year over year. Over $900 million. Russia is also beginning to be more and more promising. Middle East is also an opportunity. The iPhone has really opened them up and gotten them looking at other products. iPad will be doing the same. China: "sky's the limit."
5:29 - Track record that's unparalleled in the industry. Used our finances to make strategic investments. Have chosen to diversify some. Do business with as few people as possible to go deep. Can't do that when you go with many, many people.
5:31 - Commentary on Amazon Kindle Fire threat? We've seen several competitors to the iPad over time, with different form factors and price points. "None of these have gained any traction." Our share actually went up. IDC: we were up for 3 out of every 4 tablets sold. When you assess it and look at iOS 5, iCloud, iTunes, App Store, 140K native apps versus hundreds, I'm "extremely confident" in our pipeline.
5:32 - Reiterating on the sales slump. Many rumors towards the end of the summer quarter; was almost a "rumor of the day."
5:33 - Size of the tablet market? How big can it be? Thought from the beginning that it would be a "huge market." Even bigger than we thought. 40m on a cumulative basis. Forecast out in time; I still believe it will be larger than the PC market. Not a guidance, just something I very much believe. Many more that can access it, and the ease of use is phenomenal. "Huge opportunity" for Apple over time.
5:35 - Can't run the experiment twice; can't tell you what would've happened without rumors. It was a "substantial" impact, which is why we mentioned it. "Mother of all uplifts" in shipping 4m on iPhone 4S weekend versus 1.7m a year ago. "Couldn't be more pleased" with where we are.
5:36 - iPad seasonality? Expect new records for the iPad and iPhone in the fall. Macs should set records and set a 23rd consecutive quarter of outgrowing the market.
5:37 - Will Siri be a general way to communicate, or is it a specific feature? We see this as a "profound innovation." Over time, many, many people will use it in a substantial way. What percentage of that I don't know, what percentage of searches I don't know, but our gut is that it will be "substantial." That's the feedback we're getting from customers.
5:39 - Hearts go out to those in Thailand affected by flooding. There are several factories that aren't operable that might affect us, but their recovery time isn't known. Weather hasn't let us assess that. Our primary exposure is on the Mac, since the number of drive components sourced from Thailand is a significant portion. Can't give you a precise accounting, but it's something I'm "concerned" about. Overall industry shortage of disk drives expected. How it affects Apple I'm not sure, but we've factored it into our guidance.
5:40 - Don't want to comment on litigation in particular and its motivation. We spend a lot of time and money in coming up with "incredible innovation." "We don't like it when someone else takes those." Unfortunately, we've been pushed into the court system.
5:41 - Particularly don't want to comment on Apple's goals (i.e. royalties vs. just injunctions).
5:43 - Cut prices on the iPhone because we wanted it acceptable to a broader market. Both the iPhone 3GS and cheaper iPhone 4. Both still "fantastic products" and have an advantage in the prepaid market. Both for postpay and prepay markets; they're both very important to us. It's been our thinking for awhile to do that.
5:44 - On drive supply: we take concerns very seriously. Factored into guidance [again]. In the general market: NAND [flash], RAM, and LCDs are in a "very positive" supply situation that will lead to a favorable price. Others are at or above historical trends. Generally, a very positive market. Asterisk of the Thailand disaster aside. The risk is more focused on the Mac.
5:47 - Gross margin for the fall will still be around 40%. We're going to be very aggressive in the future. Did well in the past 2 years. Just going to keep coming back every day to do the same in the future.
5:49 - 40,000 points of sale for the iPad worldwide. For refernece: 50,000 iPod, 120,000 iPhone. Gives you a feel for the extent of the rollout. There are countries left to do, but we're in the main countries . Slowdown on iPad? "Crystal clear" on iPhone, not the case of the iPad. During the quarter, we did enter a supply-demand balance and stayed there for the rest of the quarter.
5:50 - "Couldn't feel better" relative to share. Usage: 97% of tablet usage in the US is from iPads [comScore]. Placing efforts outside of the US; already doing that. Wouldn't have done $900m in Brazil with no effort. Some countries have protectionalist [sic] pricing if there isn't local product.
5:51 - Same strategy we used in China as elsewhere. Decision is whether we use everything we did in China: there, we did retail, online stores, everything we knew how to do. We wouldn't be doing that in each of the other countries, but portions of it.
5:53 - Do believe we're seeing cannibalization from the iPad. Some are buying the iPad rather than a Mac. A "materially larger" group are choosing to buy one over a Windows PC. We're coming out very, very well in that equation.
5:53 - Even with cannibalization, the Mac set a record. If that's the cannibalization we see, I hope it continues!
5:54 - On cash, we're not the kind to do "silly things" with it. We play conservatively. We use it to do things that are in our best interest. Number of acquisitions, IT. Building out our stores and setting up new product tooling.
5:55 - We're very frugal about money and spending it. "I'm not religious" about holding on to or spending cash. Continually asking "what's in Apple's best interest?" and always doing that. Of $54 billion in cash, two thirds of that is offshore.
5:57 - Not waving a white flag on innovation. "Pipeline that's unbelievable." Buying back shares isn't expected to happen.
5:58 - We want the iPhone to be in many hands as possible, because we think it's the greatest ever. We aspire to much greater volumes than we are. We expect the smartphone market to subsume the cellphone market. "Huge growth" in the smartphone market, but we think we can grow. Eating into the 1.5b total cellphone market is the real goal.
5:59 - Extended quarter will end on New Year's. Usually a good week for us. Variable costs in some areas, but others like rent are fixed.
6:01 - Disparity between revenue and units in Japan, why? A YOY compare adversely affected the revenue. The Mac had such a phenomenal growth that it didn't affect it. The iPhone delay was what led to lower units vs. revenue.
6:03 - Don't want to get into segmentation (i.e. cheaper prices) as that might say what we would do. Got some "fantastic things in the pipeline." Got a fairly good handle on what to do next.
6:04 - Lots of elasticity in iPhones last quarter. In a very few countries, we dropped the price on the 3GS early.
6:04 - Call ends.