Live Update: Apple Financials

Jason Snell, Dan Moren, and Matt Deatherage
27 January, 2010
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Apple impressed everyone with its announcement this week of its latest financials, with $US15.7 billion in revenue and a massive increase in profits. Here’s the play-by-play from this week’s analyst conference call.

1:29 [8:29 am AEDT] – Jason Snell: Hi everyone. Jason Snell here. The earnings are just coming out now, at the close of market.

1:30 – JS: You can see the SEC release here.

1:31 – JS Apple reports 15.7B in revenue. That’s a record by a huge amount.

1:31 macjournals (Matt Deatherage): These numbers are way above what anyone expected. Gene Munster now live on CNBC.

1:33 – macjournals: AHA! Apple is NOT using subscription accounting for THIS QUARTER, making numbers much larger compared to previous ones.

1:35 – macjournals: Apple press release.

1:36 – macjournals: Jobs: “The new products we are planning to release this year are very strong, starting this week with a major new product that we’re really excited about.”

1:36 – JS: So basically Apple is going back and rewriting its past numbers to remove subscription accounting.

1:37 – macjournals: Apple: 3.36 million Macs sold, up 33%. 8.7M iPhones, up 100%. 21M iPOds, down 8%.

1:40 – Dan Moren: Apple never liked using subscription accounting very much: they always felt it reduced the impact of the iPhone, which obviously has been one of their key products.

1:40 – JS: Mac sales keep accelerating.

1:41 – JS: That’s yet another record sales quarter for Macs. And that iPhone number is huge when you consider that in the past, the holiday quarter has NOT been the strongest quarter for iPhone sales.

1:41 – macjournals: I’m waiting for Apple to put its data summary on so I can update my spreadsheets and the like, but I’ll have to revise all the numbers, not just pull past quarter numbers from other sheets. So, more work, but arguably a better result for them.

1:41 – JS: Yes, and taking subscription out of the picture will bring “real numbers” back into play, not the tip of the iceberg, which is what we used to see.

1:42 – macjournals: Jim Goldman is now comparing Apple’s new numbers to non-GAAP numbers from previous quarters, which may be valid but I want to hear them say it before I believe it

1:43 – JS: Our initial story is live now.

1:43 – macjournals: It’s not completely clear to me that the new GAAP results without subscription are exactly comparable, so I want to be cautious.

1:43 – DM: At least that “major new product” mention in the press release helps assuage my fears that we were all going to line up to hear about new versions of iWork and iLife.

1:44 – macjournals: You’d do it anyway. :-P

1:45 – DM: I *am* a sucker.

1:45 – macjournals: Let’s try that avatar

1:45 – macjournals: Ah, cool. :-)

1:46 – JS: This is sort of the pre-game show. The conference call will start at 2 PT.

1:46 – JS: So, 14 more minutes, folks. :-)

1:47 – macjournals: This is a lot of number revising. For example, instead of revenue of $9.870 billion in the last quarter, the new system has revenue of $12.207 billion in the last quarter.

1:48 DM: A billion here, a billion there—pretty soon you’re talking about real money.

1:49 macjournals: The year-ago quarter now lists as $11.88 billion in revenue instead of $10.167 billion. Unit sales, thankfully, remain unchanged.

1:51 Jason Snell: Mr. Macjournals, do you know if Apple is making quarter-by-quarter revised revenue data available anywhere?

1:53 – macjournals: OK, here we go:

1:54 – macjournals: Mac unit sales in the Americas region were up 30% year-over-year, though down 5% sequentially. In EMEA (Europe, Middle East, Africa) they were up 34% year-over-year, 40% sequentially.

1:55 – macjournals: The significant hit: retail (!). Mac unit sales in retail down 39% year-over-year, and an eye-popping 53% sequentially. That’s even as Apple Retail revenue was up 142% year-over-year and 71% sequentially.

1:56 – DM: Which perhaps suggests Apple selling more high-profit items via the stores.

1:57 – JS: I think if you consider that this is the holiday quarter, and traditionally that’s meant a lot of iPod sales, that might make sense. The iPod touch is more expensive but probably does lower volumes.

1:58 – macjournals: It also points to a lot of iPhone sales, since now they’re booking the full revenue (including carrier subsidy, I would imagine) at the time of sale.

1:59 – macjournals: In revising spreadsheets, we’re seeing small changes to numbers we didn’t expect to change. Like small changes to Mac Desktop revenue numbers, though we’re not aware that any of the previous numbers had any “subscription” component. This is why we think that the new FASB guidelines affect more than just that one area.

1:59 – JS: I’ve tuned in the classical music!

1:59 – DM: Welcome to the call, Jason.

2:00 – JS: I love how the financial call gets classical music. I guess it sounds like money!

2:00 [Comment From AugieD369] Do you think the accounting change means that iPhone and iPod Touch software updates pricing could change?

2:00 – DM: I always thought this was Tim Cook’s personal playlist.

2:01 – JS: AugieD, my understanding is that the rules have been clarified and now Apple can offer updates without running afoul of that particular accounting snafu.

2:01 [Comment From Richard Baguley] wouldn’t “we’re in the money” be more appropriate than classical music?

2:01 – DM: More likely it’ll mean free iPod touch updates than paid-for iPhone updates, right?

2:02 – macjournals: That would seem more likely, Dan, but that would require that Apple find some merit in having wider adoption of iPod OS updates than in collecting the money.

2:02 – DM: It does allow them to make sure that users on the same page, feature-wise. There were a lot of iPhone 3.0-dependent apps, for example.

2:02 – JS: We are still waiting the arrival of Apple executives.

2:03 [Comment From melgross] What’s interesting about the retail figures is that while Mac sales are down 53% sequentially, they are only down by 5% in the USA overall. What’s the disparity? Are Mac rtail sales outside the US so much higher? Or, are Apple and other’s web sales somuch higher? What about third party sales such as Bet Buy?

2:03 – macjournals: OK. More numbers. Mac desktop unit sales up 70% year-over-year, up 57% sequentially. People like new iMacs.

2:03 – JS: Our story on the results is here.

2:03 – macjournals: melgross: The “USA” geographic figure excludes Apple’s own retail stores, and most Mac resellers don’t also get to sell iPhones.

2:03 – DM: (Word on the streets is Tim Cook and Peter Oppenheimer are boogying down to The O’Jays’ “For the Love of Money” in Cupertino right now. Unconfirmed.)

2:03 [Comment From melgross] If sales in Best Buy and others are up, thats good news, because it means that Apple’s sales are moving beyond Apple’s limited ability to put up stores here, and especially, overseas.

2:04 [Comment From Robert] Will Steve Jobs be at this conference call?

2:04 – macjournals: Mac portable sales up 18% year-over-year but down 6% sequentially.

2:04 – JS: Robert: Sometimes he appears as a “surprise guest,” but as that phrase might suggest, he’s usually not there.

2:04 – DM: Okay, here we go.

2:04 – JS: And we’re about to begin!

2:05 – DM: Here’s Nancy Paxton for introductory remarks, which mainly reminds us that this includes forward-looking information and we’ll hear from Peter and Tim.

2:05 – DM: (And Gary, though he’s usually very quiet.)

2:05 – JS: Here’s what Jobs said in the PR: “If you annualize our quarterly revenue, it’s surprising that Apple is now a $50+ billion company,” said Steve Jobs, Apple’s CEO. “The new products we are planning to release this year are very strong, starting this week with a major new product that we’re really excited about.”

2:05 – macjournals: Jason: At this time, I do not see Apple having provided revised numbers for past quarters, but we’ll see them going forward as past comparison numbers.

2:05 – DM: And here’s Peter Oppenheimer.

2:06 – JS: Now they’re explaining how they are confusing everyone with their new accounting practices. Thanks, guys.

2:06 – DM: Thrilled to report best quarter ever, posting Apple’s highest quarterly revenue and earnings and set new sales records for Mac and iPhone. Reporting current results and historical comparisons under new accounting rules discussed in last call, will discuss more after results.

2:07 – DM: Net income 3.38 billion, up 50 percent over year ago quarter, and almost $850 million higher than prior record.

2:07 – macjournals: Average Selling Prices (ASPs) of Mac units fell on average 6% year-over-year, but iPod ASPs rose 9%. iPhone ASPs were down 5%.

2:07 – DM: Mac’s up first. Record Mac sales of 3.36 million beating previous record by over over 300,000. Quarterly Mac sales grew 33% year over year. 17% growth in market overall.

2:07 – JS: I believe that Apple has set a new record for Mac sales 9 of the last 10 quarters. Pretty amazing growth

2:07 – DM: Response to new iMacs introduced in October were very strong, contributing to 70% year over year growth in desktops.

2:08 – JS: As usual, the latest updates drive a lot of sales. And this quarter, that was the new iMac line and the unibody MacBook.

2:08 [Comment From Suman Chakrabarti] Some premature profit taking going on: AAPL was up to 207, but now down to 202. Why not wait for it to rise more before selling?

2:08 – DM: Portable sales increased 18% year over year, based on strong sales of MacBook and MacBook Pro. Very strong demand following October release of new MacBook. Very strong results in education: overall Mac sales increased 16% year over year and set new records for both K-12 and higher ed.

2:08 [Comment From Brian] One would expect Mac sales to dip slightly (*more than this) going from back to school Q into the Christmas Q. Christmas is usually more about iPod than Mac. Mac is red hot though, especially internationally.

2:09 – JS: I was surprised at the Mac increase too, Brian.

2:09 – DM: Sold almost 21 million iPods, but sales declined year over year. But year over year growth of iPod touch sales resulted in revenue growth of 1%. And share of US remains at over 70%. Continued to gain share internationally, based on latest data.

2:09 – macjournals: The holiday quarter is traditionally stronger than back-to-school for Mac, due to both end-of-year purchases and gift-giving

2:09 – DM: iTunes Store also had a record breaking quarter with strong sales.

2:10 – DM: App Store continues to be unparalleled success with more than 3 billion downloads in 77 countries. Ended quarter within target range of 4-6 weeks of iPod channel inventory.

2:10 – JS: Talking about the 100% increase over the year-ago quarter in iPhone sales.

2:10 – DM: iPhone’s turn. Sold over 8.7 million iPhones in quarter, which is a new company record and an increase of 100% over previous year over year quarter.

2:10 – DM: Sales value of 8.7 million iPhones was over $5.4 billion.

2:10 [Comment From Jay Martin] I wonder if the lower iPod sales but increased Touch sales indicates a shift in the market..

2:11 – DM: Added a bunch of new carriers, and iPhone distribution in 86 countries.

2:11 – DM: Very strong year over year growth in major markets like Japan, Australia, UK, France, and Germany.

2:11 – macjournals: Jay: Apple certainly argues that that’s exactly what’s happening.

2:11 [Comment From DEEmery] I agree with Jay Martin, everyone I know who got iPods this year got Touch models.

2:11 – DM: Demand is strong in the corporate world as well, ranking iPhone #1 in customer satisfaction in J.D. Powers’ survey.

2:11 – JS: I’m hoping we get some detail on touch sales….

2:11 – DM: Turning to retail stores.

2:12 – macjournals: Jason: Your hope will be denied

2:12 – macjournals: (“Don’t ask about specific model sales. They’re not going to tell you.”)

2:13 – DM: Revenue 1.97 billion. Increase of 13%. Stores sold a record 680,000 Macs. Half of the Macs sold were to customers who had never owned a Mac before. 10 new stores opened, including in Louvre in Paris and Upper West Side in New York. Total of 283 stores in 10 countries. Completed 32 store remodels, bringing to 100 remodels in calendar year. Avenue revenue per store was $7.1 million. Retail margin was $481 million, up from $409 million in year ago quarter. Record 50.9 million visitors in quarter, compared to 46.7 million in year ago.

2:13 – JS: Actually, occasionally they give hints about the composition of unit sales when it serves them, Matt. :-)

2:13 – DM: Also conducted 586,000 personal training sessions. Now have 62 stores outside US and are on track to open 40-50 stores in FY 2010. Half expect to be in international locations.

2:13 – macjournals: But just hints, and they already gave that hint.

2:13 – DM: Total gross margin was 40.9%. Opex $1.69 billion and included $168 million in stock-based compensation. Tax rate was 29%. Better than expected.

2:14 – JS: I think the average selling price of an iPod going up to $161 says a lot about the amount of touches sold vs. other models

2:14 – DM: Cash plus short-term and long-term securities $39.8 billion. Increase of $5.8 billion over previous quarter. Cash flow from ops was about $5.8 billion. Continuing to focus on short-dated high-quality investments.

2:14 – DM: As previously discussed, FASB changed the accounting standards covering iPhones and Apple TV as well as other products with multiple deliverables.

2:15 – DM: Because iPhone and Apple TV both started in 2007, they’ve retrospectively adopted for all prior periods. Fiscal 2007-fiscal 2009 have been revised. Believe it provides useful information and better reflects economic performance of business.

2:15 – macjournals: No news on where to get these revised results from 2007-2009 yet; probably in new SEC filings.

2:16 – DM: Both iPhones and Apple TV used to be accounting for subscription accounting because of future unspecified software upgrades for free. Under that method, revenue and associated product cost were deferred at time of sales and recognized over 24 months, which resulted in deferred revenue in cost on balance sheet.

2:16 – DM: New principles account as two deliverables: hardware and software at time of sale, and the right to receive future software upgrade when and if available.

2:16 – DM: So they have to account for how much the updates are actually worth over the life of the product. Estimated upgrade value to be $25 per iPhone and $10 per Apple TV.

2:17 – DM: Recognized as revenue immediately. So pretty much all of the revenue and product cost are recognized at time of sales. Therefore, much less deferred revenue and no deferred cost on revised product sheets related to previous quarters.

2:18 – DM: New accounting principles also alter the way some other accounting was done, including education and other shipments, and international payments. None were significant. So certain education sales were recognized over multiple years, because could not meet the strict requirements for immediate recognization.

2:18 – DM: Significant portion of that revenue is now recognized at the time of sale.

2:18 [Comment From Ryan] more impressive – AAPL’s stellar and consistent performance, or Dan Moren’s typing speed??

2:18 – DM: Results of Dec. quarter and revised results of past three years show new principles. New 10-K filed for 2009 for revised version.

2:18 – macjournals: Ah. Apple filed an 8-K form with the SEC today listing all revised quarterly results, and will also make them available on

2:19 [Comment From Glenn Fleishman] Hey does this mean that Apple doesn’t have to charge for updates or is that Sarbanes-Oxley and unrelated to realizing revenue?

2:19 – DM: Happy with new accounting principles since they’ll better enable them to reflect the economics of the business. No longer providing non-GAAP measures.

2:19 – DM: Here’s the outlook for the March quarter.

2:19 – JS: They just said they’re happy to have these new accounting principles. I think they don’t have to charge anymore. But they might. Who knows?

2:19 – macjournals: Glenn: they no longer have to choose between “paid updates” and “subscription accounting,” but that doesn’t mean all updates will be free.

2:20 – DM: Revenue will be between $11 billion and $11.4 billion, compared to $9.1 billion in March quarter of last year. Gross margin of about 39%, including $40 million related to stock-based compensation. Expect OI&E to be about $30 million. Tax rate to be about 29%. Targeting EPS $2.06-$2.18 compared to $1.79 in year ago quarter.

2:20 – DM: Remain focused on delivering innovative products and great value to customers. Incredibly excited about new product pipeline.

2:20 – DM: And now we’re on to question and answer!

2:20 – JS: Woo hoo!

2:20 [Comment From melgross] It’s interesting that they’ve been predicting lowered margins for a year now, but they keep rising.

2:21 – DM: How long before a tablet question? Open the betting pool!

2:21 – JS: Apple always is very conservative in its guidance.

2:21 – DM: Gene Munster from Piper Jaffray: Besides the law of large numbers, any reason to think Mac growth rates won’t continue in just reported ranges?

2:22 – DM: Tim: Thrilled to see Mac at 33% growth rate. About 2x the market. Wouldn’t want to predict what will occur in the future. But some of the market that Apple’s in, March was spectacular. Italy, France, Switzerland and Spain all grew at 40% or higher. Australia was up 70%, China was up almost 100%. Some markets we’re doing extremely well in. We believe that we’re shipping the best prodcuts that we’ve ever shipped before.

2:23 – DM: Munster: Followup: 40% units are on AT&T. Obviously, AT&T has had bad press. Remind us virtue and benefits of sticking with single carrier.

2:23 – DM: Tim: AT&T is a great partner. Working with them since before announcing the first iPhone. Important to remember that they had more mobile broadband usage than any other carrier in the world. In the vast majority of locations, we think iphone customers are having a great experience.

2:23 – macjournals: (someone asked if the principles of free upgrades would apply to Mac OS X also.) I don’t think so—Apple gets several million in revenue from Mac OS X upgrades, and it makes a point to Wall Street about how invested Mac users are in staying current. They have little reason to do that, but now they can introduce some new features in Mac OS X “updates” rather than “upgrades.”

2:23 – JS: Cook sounding conciliatory toward AT&T. Understands that AT&T’s got a lot of network load, thanks to iPhone. Says it’s a good partner. Says they’re working on it and Apple has high confidence in AT&T. Very interesting.

2:23 – DM: Tim: As you know, AT&T has acknowledged that they’re having a few issues in some cities, and they have plans to address these. Have personally reviewed these plans, and they have high confidence that AT&T will address them.

2:24 – JS: That was as big a hug as I think you’ll ever see Apple give to AT&T

2:24 – macjournals: There are only rumors that Apple is courting Verizon. One lone blog reports it, unsourced, and everyone else reports that the one blog said it, and suddenly it seems like “news.” Get me a source and maybe I’ll believe it.

2:24 – DM: Richard Gardner with Citigroup: Gross margins. Looked like under prior accounting method, gross margin would have been above 37%, more than 34% guidance in last call. Take on gross margin during both March and Dec. quarters.

2:24 [Comment From Joe] 40% margin, wow. That’s high even for Apple, and in this industry no less.

2:24 [Comment From Fernando] Melgross, if there’s a phrase that can define Apple is: “Underpromise, overdeliver”

2:24 – macjournals: Jason: there you go, iPod Touch sales up 55%

2:25 – JS: iPod touch up “Very strongly,” 55%!

2:25 – DM: Peter: Reporting results for Dec. quarter under new accounting principles. So not comparable to previous guidance. Actual revenue fo $15.68 billion exceeded guidance given by over $4 billion. Roughly half of that was attributed to performance of business. Accounting change accounted for other half of $4 billion.

2:25 [Comment From DEEmery] From ATT’s perspective, they took a risk ceding that much control to Apple. This only appears obvious in hindsight (looking at what the iPhone has done to the industry at large.)

2:26 – DM: Peter: Focused attention on converting to the new accounting. Didn’t spend as much time diving into gross margin, but can say that Dec. quarter gross margin of 40.9% was better than expected due to three factors. 1) Better commodity environment than anticipated. 2) Better warranty performance and lower freight and duty costs. 3) And did benefit from higher revenue and leveraged fixed costs.

2:27 – DM: Peter: For March, expect margins to be about 39%, down due to three factors. 1) higher component market. 2) Very typical seasonal decline in revenue. Not as much as leverage on fixed costs. Won’t have the benefit of a couple of small one-time items in Dec. 3) US dollar has strengthened in new calendar year from Dec. quarter.

2:27 – macjournals: Gardner likes to ask about component costs, and Cook likes to answer.

2:27 [Comment From melgross] I get it Fernando, but the numbers are going up when Apple’s been saying they were going down. It doesn’t track, even for them.

2:27 – DM: Gardner: Which component prices are going to be up?

2:27 – macjournals: Apple has been preparing for some commodity prices to rise when they have fallen, so that makes margins better than anticipated

2:28 – DM: Tim: For this quarter compared to last, continuing to see market is very constrained in DRAM and expect that will drive prices higher sequentially. Vast majority of other commodities, appears excess inventories that caused prices to fall last year, have been depleted. More in supply-demand balance. Once exception is 3.5″ drive which will be supply constrained.

2:28 – DM: Credit Suisse: Clarification: does guidance include impact from unannounced products this quarter? (Tablet question!)

2:28 – macjournals: Good question about iPhone seasonality coming up

2:28 – JS: Sneaky.

2:28 – JS: “I don’t have anything to share today, so please stay tuned.”

2:28 – DM: Peter: Alluding to event on Wed. and don’t have anything to share with you today, so please stay tuned.

2:28 – macjournals: (the answer, even though they won’t give it, is “yes, our guidance includes whatever we’re going to announce.”)

2:28 – DM: Credit Suisse: Given iPhone has been around, how do we think about seasonality and channel inventory?

2:28 [Comment From Danielsw] Interesting how all the AT&T gossip isn’t being reflected from the horses’ mouths.

2:29 – DM: Tim: Ended quarter with 2.7 million units in the channel. Remind you that includes demos and also includes in transit inventories that have been invoiced with carrier. More conservative counting than others. In terms of seasonal, Peter will comment.

2:29 [Comment From RamJaw] Looks like has worked well so far. Some very smart questions asked.

2:29 – JS: They’re listening to us, Matt!

2:30 [Comment From Suman Chakrabarti] I remember seeing an estimate that about $10 billion of revenue backlog existed due to subscription accounting. Now Apple has restated previous earnings, removing that backlog. How much do you want to bet that since all that is in the past, it will be completely glossed over and ignored by the usual suspects?

2:30 – macjournals: Cross our fingers, Jason and RamJaw

2:30 – DM: Peter: Talk about all three product areas. For Mac, expect sequential decline, very typical in March from Dec. holiday quarter. For iPod, expect the same. Traditional iPod sales will decline, so sequential decline may be larger than previous years. For iPhone, still gaining experience. Given quarter ended after Christmas, would expect to see sequential decline in Mar. quarter from Dec. which they think is seasonal.

2:30 [Comment From Craig Hockenberry] iPhone sales up 19% vs. iPod touch sales up 55% – that’s a major shift in iPhone OS breakdown.

2:30 – DM: Barclay’s Capital, Ben Reitzes: Do you see any dynamics that would change the way you’re generating pre-cashflow vs. earnings?

2:31 – JS: We don’t know what the old sales were, Craig, but I agree, we may be getting closer to 50/50 iPhone and iPod touch.

2:31 – macjournals: Craig, they play those numbers close to the vest, so I don’t know that it’s all that big a shift. They said a year ago that iPod Touch was really taking off.

2:31 – DM: Peter: Cash generation in quarter was very strong. GAAP earnings under new accounting have a very small deferral for iPhone/Apple TV, just under $3.4 billion. Cash inreased by $5.8 billion. Cashflow from ops about equal to total cash generation. Speaks to power of business model and asset management. I don’t see that changing. Very good with receivables and inventory managements. Operating on cash conversion cycle about -40 days for as many years as I can remember and I’m not looking to see that change.

2:32 – macjournals: (You would be in a better position since you sell apps that could pass system stats back to you in trouble reports or whatever!)

2:32 – DM: Reitzes: With regard to iPhone and China: did that meet expectations? How is that looking into this year? More partners in that area over time?

2:33 – JS: 200,000 iPhones “activated” in China… (of course lots were already there via gray market). Cook says they’re building the brand in China in the long term, and very focused on the long term there. Playing a long game in China and happy with China Unicom.

2:33 – DM: Tim: We typically do not disclose units by country, but given visibility, I’ll do so. Started selling in China at end of Oct, beginning of Nov. Earlier this month had activated over 200,000 units. Ramped point of sales across that time to end at about 1500 by the end of Q1. Very very focused on quality of point of sales and customer experience. Prefer to move slow because building brand for the long term. Very focused on the long term for that market, because of significant potential. Wouldn’t want to forecast sales or partner, very happy working with China Unicom.

2:33 [Comment From Sam Penrose] Huge increase YOY in iPhone, no?

2:33 – JS: Hi Sam! Yeah, more than double.

2:33 [Comment From Craig Hockenberry] In July 2009, breakdown was stated as 60/40 – I agree with Jason, probably closer to 50/50 now.

2:33 – DM: Sanford Bernstein: Comment on comfort level on iPhone inventory?

2:35 – DM: Tim: Channel inventory grew by about 230,000 units from beginning to end of quarter to around 2.7 million. Completely comfortable with it. Could have sold a lot more and elected not to because managing inventories very tightly. Not putting a target of 4-6 weeks on iPhone. Ended under the Mac number on inventory, and within the iPod. Did pull inventory on iPod down by about 150,000 units. Obviously expansion through quarter on iPhone carriers and launched China and Korea and needed more inventory than started with, but totally comfortable.

2:35 [Comment From Alex Brooks] Looks like poor iPhone sales in China. Considering Vodafone UK sold 100,000 in a single week.

2:35 – macjournals: For some comparison, when Cook talks about “150,000″ iPod units in the channel, I think they expect to sell somewhere around 780,000 iPods per week in the current quarter, so that’s about 1-2 days worth of iPods.

2:35 [Comment From Sam Penrose] ITunes/App store nice little businesses swamped by amazing HW sales.

2:35 – DM: Sanford Bernstein: Any update on litigation from Nokia? Confirm that there’s no material risk to Apple’s financial from litigation expense?

2:35 – DM: Tim: Don’t comment on pending litigation.

2:35 – JS: Tim’s lawyer whispered that in his ear.

2:36 – JS: Alex, I think that’s why they talk about the long game in China. Plus, as I said, there’s a huge gray market presence of iPhone in China, so there’s less demand than you might think.

2:36 – DM: SB: On gross margin. Guiding on margin to be down: how do we think through that given that year over year growth is going to be very strong? How do we reconcile notion on year over year that overall gross margin is going down?

2:36 – macjournals: No whispering necessary; that was an easy “no comment.”

2:36 – JS: I suspect half the original iPhone models ever made ended up in China :-)

2:36 – JS: (I was kidding, macjournals. Sheesh.)

2:36 [Comment From Jay Martin] With all due respect to our media friends here, I think the AT&T “problem” was played out in the media as worse than perhaps it really was – and isn’t helped by Verizon’s advertising…

2:37 – DM: Peter: It’s very difficult for us to talk about gross margin on a year-over-year basis because in different product and commodity cycles, currency mix can be different, and more. Do see gross margin coming down a bit on a sequential basis, but answered that in Rich’s question.

2:37 – macjournals: Ah, God bless Charlie Wolf.

2:37 – DM: Charles Wolf: iPhone application approval process has come under constant criticism for delays/arbitrary guidelines. Is the problem the model itself or the implementation? Any feedback from customers?

2:37 – macjournals: 10% of apps take longer than two weeks to approve? that’s a bigger number than I expected.

2:38 [Comment From Ian Betteridge] I wonder what Apple’s annual earnings are on its $39 billion cash. That’s such a large amount the income should be considerable – like having an additional product line.

2:38 [Comment From Alex Brooks] Valid points Jason. But consider that the UK market must be approaching saturation in the key audiences and China has a few hundred million more people in those audiences. Maybe just slow uptake.


2:38 [Comment From Fernando] Finally an app approval process question.

2:39 – DM: Tim: Important to keep this in some perspective. Over 100,000 apps in store. Over 90% of apps are approved within 14 days of submission. Created approval process to really make sure that it protected consumer privacy, safeguards children, and to avoid apps that degrade core experience of phone. Some types of content, such as porn, are rejected outright. Graphic combat scenes might be approved with age rating. Most rejections are actually bugs in code, and this protects both customer and developer. Think what we have hear is something that the noise is much higher than reality occasionally. With over 90% approved in 14 days, seems pretty good.

2:39 – JS: The noise is much higher than the reality when it comes to app rejections.

2:39 – JS: Hmm.

2:39 – DM: Wolf: Any feedback from iPhone owners? Are they comfortable?

2:39 – DM: Tim: Don’t see anything in the research.

2:39 – JS: Analyst suggests THERE ARE MEN ON THE MOON.


2:40 [Comment From RamJaw] Sounds like they won’t be changing their review process any time soon.

2:40 [Comment From Glenn Fleishman] Ian Betteridge: the $39b is only partly cash/short-term liquid investments. If they invest conservatively, as stated, they are getting very very low return. 200k China Unicom activations doesn’t really mean 200k sales — might have been much higher *sales* in China, being jailbroken.

2:40 [Comment From reppep]

2:40 – DM: RBC Capital Markets: In view of fact that did indicate something exciting soon. How do you feel about new product opportunities ahead? Can you see things that are as large an opportunity as iPhone, iPod, Mac, or are expectations are too high?

2:40 [Comment From Brian L] But, why would customers on the moon NOT be aware of the impending announcements?

2:40 – DM: Tim: I wouldn’t want to take away your joy of surprise on Wed. when you see our latest creation.

2:40 – macjournals: At first glance, I think Cook’s answer is fair enough, but Wolf didn’t ask the hard question about how sustainable the model is, nor about inconsistencies or rejection due to content that more people would disagree is questionable.

2:40 – DM: RBC: Will you give us guidance on new product when you unveil?

2:40 – DM: Peter: Stay tuned!

2:40 – JS: Agreed with you, Matt – I think it’s fair so far as it goes. But the question didn’t go far enough.

2:41 – macjournals: I don’t know if they’d try to wiggle out of a more thorough question.

2:41 [Comment From Fernando] 10% of whatever weekly number they’re reviewing is pretty high. Even if most app rejections are bugs, the model isn’t sustainable (especially if the unannounced product uses such model).

2:41 – DM: Katie Huberty with Morgan Stanley: Revisit discussion on China and emerging markets. These regions share characteristics that are different from mature markets. Percentage of customers that purchase phone service on a prepaid basis, lower average incomes, etc. Is it appropriate to roll out iPhone in a homogeneous or global way, or might there be a country-by-country basis in the future?

2:42 – JS: Tim says Apple is bullish on China.

2:42 [Comment From Craig Hockenberry] My estimate is that 77 M devices have been sold (55% iPhone, 45% iPod touch.)

2:42 – DM: Tim: Have just really gotten going in China, and really like what I see so far. Although average income is not as high as U.S or other markets, there is a significant middle class and up. Have to look at not just averages, but at the distribution of income within country. Had been selling in Brazil for a while, and learning about it as well. Brazilian economy is different from Chinese economy, because duties and taxes are very significant there. Tends to compound the price.

2:43 – JS: And Apple is watching Brazil, but the taxes are high. Apple likes the growing middle class in developing countries. And is showing growth in China.

2:43 – DM: Tim: Very focused on these markets, and if you look at greater China last quarter (China, Hong Kong, Taiwan), revenues tripled year over year in that geography, which is phenomenal by any measure. 58% of revenue from last quarter was from outside U.S. and growth rates are much higher outside US. Must do well in these markets to continue to grow.

2:43 – DM: Morgan Stanely: Mentioned plans for store openings in 2010.

2:43 – macjournals: CNBC claims, from somewhere, that Apple earned $5.8B in revenue from wireless carriers. Not sure where they pulled that from.

2:44 – DM: Peter: Capex about $1.9 billion. Unchanged from what they said last quarter. About $400 million in retail, about $1.5 billion in not-retail. Facilities, infrastructure, some of systems areas, manufacturing.

2:44 [Comment From Brendan] In the last call (shortly before the iMac refresh), a hint was given that air freight charges for the quarter would be higher than normal, indicating that new products would be in stores soon. We haven’t heard this today, so either (a) air freight won’t be necessary because there is plenty of product already on US soil, or (b) it won’t be shipping in the current quarter. Right? Wrong?

2:44 – DM: Shannon Cross from Cross Research: On App Store, more color on what you’re hearing from developer and customers? Paid vs. free apps. How have you seen success of App Store?

2:44 – JS: Smaller devices don’t cost as much to ship, Brendan. ;-)

2:45 – macjournals: Also, keep in mind that the iPhone was announced six months before it went on sale, like Brendan said. I’d vote for that rather than the other.

2:45 – DM: Peter: For competitive reasons, we don’t want to share answers to much of that question. What I will share is that we are way ahead of competitors with over 100,000 apps on the store, dwarfing anybody we’re competing with. Helping us with both iPhone and iPod touch and one of the key reasons iTunes set a record during the quarter.

2:45 – JS: Once again, you can read our news story on this topic here:

2:45 – DM: Cross: Corporate clients have doubled. People writing specific apps? iPhone adoption helping Mac adoption?

2:45 [Comment From Will Croft] I guess CNBC meant the $5.58 billion from device sales, accessories and carrier subsidy payments – so total ecosystem, not just carrier revenue.

2:45 [Comment From Glenn Fleishman] Matt, the $5.8b number was iPhone revenue, not divided by carrier, direct sales, etc., I think. Trying to dig that up now.

2:46 [Comment From Glenn Fleishman] Ah, cash increased by $5.8 billion.

2:46 – macjournals: (I obviously have the sound off on CNBC so I can listen to the telephone call, so I’m only reading the captions, which don’t make as much sense as the CNBC audio, which often doesn’t make much sense on its own)

2:47 – DM: Tim: Early to comment on the halo from iPhone to Mac. Did feel strongly that that existed with the iPod. On a corporate basis, iPhone saw significant acceleration of acceptance after the iPhone 3GS and iPhone 3.0 in mid part of the year. As Peter mentioned, 70% of Fortune 100 are actively piloting or deploying iPhone. About 50% of FT 100 are doing the same. Pretty staggering numbers when you think about the time period we’ve been in the business (just 2.5 years) and several of the requests from enterprise only implemented last summer.

2:47 – DM: David Bailey from Goldman Sachs: For the iPhone, any change in financial model when moving beyond first carrier in previously exclusive markets?

2:48 – DM: Tim: Primarily what we’ve seen is that sales are largely incremental as they add carriers. Have added carriers in U.K., will see significant change. Added carriers in France, and market share increase in France is over 60%. Will see same in Canada, I think. However, have also selected in most cases countries that we thought that would happen in. Don’t want to imply that would happen in every market or that they are headed that way in every market.

2:48 – JS: Wow, that was a meandering answer.

2:48 – DM: Bailey: Something you’re doing specifical on sales/tech support side to drive higher growth on corporate?

2:49 – JS: When you add carriers, you add customers, but we won’t always do that. So basically, nice try, but we’re not tipping our hand about U.S. carriers…

2:49 – DM: Tim: Have implemented tons of features in latest OS for iPhone that several of our enterprise customers have desired. Have added sales staff to assist carrier staff in selling iPhone in several of the major geographies.

2:49 [Comment From Lorin Rivers] Why isn’t it bigger news that there are UNICORNS IN CHINA?

2:49 – JS: There’s only one, Lorin. the China Unicorn.

2:50 – DM: JP Morgan: Any update on recent acquistions of Lala and Quattro: more services longer term? On tax rate, given increasing contribution to growth outside of US, tax rate dropping?

2:50 – DM: Peter: Did have lower tax rate on first quarter. One part of the guidance under GAAP it’s annual. At this point, expect about 29% for FY 2010. Down because of higher mix of foreign earnings. If foreign earnings grow beyond what we’ve thought about for the year, tax rate might be lower.

2:51 – DM: Peter: In terms of Quattro and Lala acquistions. We acquired Quattro to give developers a seamless way to make money off their apps, especially free apps. Acquire companies over time for tech and talent.

2:51 – macjournals: In other words, Lala and Quattro will nourish us for a long long time.

2:51 – DM: UBS: Are apps still a break even business? As economy starts to improve, can you start to talk about uses of cash?

2:52 – JS: See more ads in free apps soon.

2:52 – DM: Peter: Our philosophy on cash is known. No change in that philosophy to share today, but nothing’s forever. Regarding App Store and iTunes Store, running a bit over break even and that hasn’t changed. Very excited to be providing developers with a fabulous opportunity and think that’s helping with iPhone and iPod touch.

2:52 – macjournals: (yes, that was a Len Cariou/Star Trek: Voyager) reference. Deal with it.

2:52 – DM: UBS: Any fixed costs that will grow with it?

2:53 – DM: Peter: Variable cost structure is high and investing a lot in these stores. As revenue grows, continuting to invest more to give customers and developers a great experience.

2:53 – JS: Wow, Star Trek Voyager references? You may be uninvited from this liveblog! :-)

2:53 – DM: Keith Bachman, Banc of Montreal: On new accounting standard, $25 of deferred revenue going forward?

2:53 – macjournals: My pop culture references are incomparable.

2:54 [Comment From Drew] I know they don’t want to tip their hand, but if their reasoning for staying exclusive to AT&T is that it may not add to sales, that’s laughable.

2:54 [Comment From Glenn Fleishman] Jason, i thought I was the only one to get that reference of Matt’s, which was highly disturbing, and i didn’t want to have a geek alert sounded.

2:54 – DM: Peter: Talked about how we’re accounting for iPhone sale in two elements: initial hardware and software and the second being the right to receive future upgrades when and if they become available. Estimated that to be $25. In terms of what we’ve done here, in revision of financial statements, went back and applied $25 deferral to all iPhones sold in the past and a $10 deferral to all the Apple TVs sold. Substantially less deferred revenue on those balance sheets and no deferred costs.

2:54 [Comment From Alex Brooks] Jason, you just know that Matt has a smug look on his face right now.

2:55 – DM: Peter: We are recognizing deferred revenue from $25 deferral each quarter on the balance sheet. To make sure models are correct, essentially recognized about $110 million in Dec. quarter for the $25 we deferred for all the iPhones we’ve sold over the past two years. Deferred $25 on the 8.7 millions sold in the quarter, so that came out of revenue, but then we put in $110 from the amoritization from the past two year sales.

2:55 – JS: This accounting stuff makes my head hurt.

2:55 – DM: Bachman: On Asia, Pacific and Japan, CPU sales were particularly strong. Revenues growth rate about 3x higher than units. Looks like a pretty strong mix in computers. Some more color?

2:55 – macjournals: It makes everyone’s head hurt.

2:56 – JS: Asia-Pac is highest growing Mac region.

2:56 – DM: Tim: In Japan what’s going on is that iPhone is a runaway hit. Up over 400% year on year during the quarter, so that’s driving revenue growth in Japan. Mac growth is above market, but believe we can do better in that area. In Asia/Pacific, doing incredible job, Mac growing 54%; highest performing region in terms of growth. iPhone up over 500% in Asia/Pacific. Talked about China, but also added Korea during quarter and several other countries throughout the year after Q1 of last year.

2:57 – DM: Tim: iPhone really drove a lot of total revenue growth.

2:57 – DM: Bachman: What revenue/EPS would have been under previous accounting?

2:57 – macjournals: Oppenheimer praising the finance team for getting all the restatements done is really Apple saying “We wanted to drop subscription accounting the moment we could.”

2:58 – DM: Peter: Didn’t say that and not something that we had time to try and figure out. Team did an amazing job to implement new accounting within 4 months of FASB ratifying. Comments made were that revenue of $15.68 billion of revenue was $4 bilion up over forecast.

2:58 – JS: Here’s the Google question.

2:58 – DM: Deutsch Bank: Follow up on earlier questions over mobile advertising in the APp Store. What role if any mobile advertising will have in your business model going forward. Characterize changing relationship with Google.

2:59 – DM: Peter: Work with Google in some areas, compete with them in others. Mobile advertising is in its infancy, and with the great folks that they’ve acquired from Quattro, look forward to providing developers with a great opportunity for advertising.

2:59 – macjournals: Yeah, “providing developers” plays into this suspicion I have that soon, iPhone OS may be the first widespread OS (maybe Mac OS X too) with an actual advertising API. That could be significant.

2:59 – DM: DB: Is it a significant revenue earnings going forward, or drive demand for devices?

2:59 – DM: Peter: Honestly don’t know. We’ll have to see. Work hard to provide developers with a great opportunity and see where that takes us.

2:59 [Comment From Alex Brooks] Apple is being very transparent on Quattro. They trying to scare someone?

2:59 – DM: FTN Equity Capital: In Pro segment, what are we seeing since last call and in upcoming year. Improvement? Helping Pros or MacBook Pros?

2:59 – JS: Mobile advertising “in its infancy,” they say.

3:00 – DM: Tim: We saw a small year over year increase in Pro. Final Cut, Aperture, pro audio. Use that as a proxy for how many Pro machines are sold. Economically challenged area currently. Hope that we see improvement as we move forward, but not projecting it.

3:00 [Comment From Lanny Heidbreder] “You just made $15 billion in hardware. Planning on becoming a software company soon?”

3:00 – JS: You gotta love it.

3:01 – DM: FTN: Education, in the past the budgets have gotten worse. What’s going on that helps you with the problems? In higher ed, is student purchase the focus there?

3:01 – JS: I love it when they ask for “more color.”

3:01 – macjournals: I’m pleasantly surprised (and pleased) at the lack of time-wasting tablet questions.

3:01 [Comment From Craig Hockenberry] Jason, it will be all grown up when a AdvertisingKit is added in the iPhone 4.0 SDK.

3:01 [Comment From Tim Mityok] An Advertising API? As if we need another thing to defend against the “open” Android platform (which has steadfast followers, but nowhere near the volume of either apps or sales).

3:02 – JS: FWIW, there’s plenty of advertising on Android too. But the easier you make it for developers, the more they’ll like the platform. (weeps quietly for humanity)

3:02 – macjournals: Tim: an advertising API would give developers an OS-supported way to get and display advertisements if they chose, meaning everyone wouldn’t have to roll their own, though of course that would still be an option.

3:02 – DM: Tim: Great thing is, talking about the Mac specifically, combination of K-12 and higher ed in the US was up 16% year over and year; best growth rate since before the recession. Feel great about the way we came out of the quarter. Very few orders that were supported with stimulus funds. Hope that will change in the future, but don’t know if that will happen or not. Our whole ed business is based on really understanding teaching, learning, and student achievement and we think we’re the only tech company that really gets. Sell a lot more than just boxes.

3:02 – DM: Tim: I think with staying very focused on that market, think we can continue to do well.

3:02 – DM: And that was the last question.

3:02 – JS: And that’s it, folks.

3:02 – macjournals: An API could also enforce size limits, number per display, and such—if Apple chose to do so.

3:02 – JS: Come back on Wednesday at 10 a.m. PT

3:02 – JS: We’ll be doing an event! From San Francisco! Involving… something.

3:02 – DM: Yeah, looking forward to resting my fingers for a LITTLE while.

3:02 – JS: Until then, thanks for coming!

3:02 – Dan Moren: An exciting new product, Jason.

3:02 [Comment From Alex Brooks] Thank you guys, very informative!

3:02 [Comment From Joe] Awesome job, Dan. I bow to your typing skill.

3:03 [Comment From CJB] Thanks Jason

3:03 [10:03 am AEDT] – Jason Snell: Farewell!

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