Live event: Apple’s first quarter earnings 2012

Macworld Australia Staff
25 January, 2012
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Welcome to Macworld Australia’s coverage of Apples fiscal first-quarter 2012 earnings report and conference call. Results to come shortly.

You all can listen in here:

2:03pm Revenue was 46.3B, YoY growth of 73%. The increase was fueled by iPhone, iPad, and Mac sales growth, aided by the 14th week mentioned previously.

2:04pm Operating margin was 17.3B. Net income 13.1B—half the net income in all of FY2011. Quarter’s earnings per share: 13.87.

Starting with Mac products and services: 5.2M Macs, new record for desktops and portables.

Total Mac sales benefited from the 14th week, but average weekly sales were up strongly YoY. Mac sales outgrew the market in all markets, especially in Asia—58 percent YoY increase there.

MacBook Pro, MacBook Air, and iMac fueled that growth.

Mac App Store still a great success. 100M apps downloaded in less than a year.5.4M iPods, compared to 19.4 in the year-ago quarter. Total iPod sales were ahead of our expectations; iPod touch accounts for more than half. iPod owns more than 70 percent of U.S. MP3 market share.

We ended the quarter with 4-6 weeks of iPod inventory. iTunes Store revenue: 1.7B.

iPod touch = more than half of all iPods sold. iPod sales still going down though. iPod average selling price is $164.

We launched iTunes Music Store in Brazil + 27 other countries.More than 20M songs from major labels, and thousands of indep. artists.

Now, iPhone. 37M iPhones, compared to 16.2 in previous Sept quarter. 128% YoY growth, compared to 40% growth for market overall.

140 million downloads from iTunes on Dec 25

A little under 6 million iPhones in channel at end of quarter, below target range.Recognized revenue from handset and accessory sales increased 130% over year-ago quarter.

Nearly all of the top Fortune 500 companies now approve of iPhone use for employees.

We were pleased to start shipping 4S in China and many other countries—90 total, our fastest rollout ever.

iPad: Record sales of 15.4M during quarter, vs. 7.3M in year-ago quarter. 111% increase.

iPad was extremely popular with holiday buyers; we remain very excited. Rev from

iPad+accessories increased by 99%, to $9.1B, vs. 4.6B in year-ago quarter.

iPad sales beat our expectations. Exited with 4-6 weeks of iPad channel inventory.

Nearly all the companies in Fortune 500 are actively using iPad to improve workflows, business processes, and customer engagement.

iPad is extremely popular with students, teachers, and administrators, too.1.5M iPads are already in use in education institutions, including 1000 1 to 1 deployments.

With iBooks Author, anyone with a Mac can create iBooks textbooks, cookbooks, picture books, and more.

Over 600,000 copies of iBooks Auithor downloaded already.

As of today, over 3M of iTunes U have been download
Combining iPhone, iPad, and iPod touch, 315M cumulative iOS device sales, with 62M in the quarter.iOS 5 and iCloud both launched and loved in the quarter, Oppenheimer says.

85M customers signed up for iCLoud.

More than 62 million in the quarter, 315 million total iOS sold.App Store: 550k apps available, including 170k apps for iPad.

By end of this month, devs have earned 4B cumulatively.
Now turning to Apple Retail Stores, which also generated record results. 6.1B.$4 billion to developers in App store sales

The stores experienced strong YoY growth, new records in all major product lines. iPhone sales doubled YoY in stores. iPad sales in stores were also up YoY.The stores experienced strong YoY growth, new records in all major product lines. iPhone sales doubled YoY in stores. iPad sales in stores were also up YoY.

Half the Macs sold in the quarter were to customers who never owned a Mac before.

Opened four new stores, including the new Grand Central store.
Average reve per store was 17.1M, compared to 12M in year ago quarter.Segment margin reached 1.8B, and 30.3 % of revenue, also new records.

110M visitors to stores, 45% increase.

22,000 visitors per store per week, on average.

Our Easy Pay checkout process has enhanced our ability to handle such high traffic. And now with Personal Pickup, customers can order from the online store and pick up in stock products within an hour at the store of their choice.

Totally gross margin: 44.7 percent, above guidance.

Operating expenses were 3.36B, including 357M in stock-based compensation.

Cash: Our cash totaled 97.6B at end of quarter.

Vs. 81.6 at end of Sept quarter, an increase of 16B.

About 64B of the cash was offshore at the end of the quarter.
Cash flow from operatinos over 17.5B
We’re actively discussing uses of our cash balance, but have no specifics to share.We’re not letting it burn a hole in our pockets, Oppenheimer says.

Outlook for next quarter:

Oppenheimer “Not letting cash burn a hole in our pockets”

Rev of 32.5B, vs 24.7 in March quarter last year.

Gross margin: 42%, 60M for stock-based compensation.

OPEX: 3.05B, including 350M for stock based compensation.

Tax rate: About 25.25 percent. EPS of $8.50.

73% sales growth<

Strongest product lineup in Apple’s history.

Now, questions.

Ben Reitzes with Barclays Capital: Describe iPhone momentum as you ended quarter?

Tim Cook, CEO: We were thrilled with 37M iPhones we sold, up 128%, against a market growth rate of 40%.

Tim: Substantially above the 20M unit previous record.
We attribute to a breathtaking customer reception with iPhone 4S and iOS 5 and Siri, and this incredible camera with advanced optics.We also attribute it to the strong demand; despite it being a bold bet, we were short of supply for a while.That situation has improved some, since the end of the quarter, but we still are short in some key geographies currently.We also attribute the performance to delayed purchases from the prior quarter.

(People waiting for the new iPhone to come out.) I think we made the correct decision to go with a broad range of iPhones.

Geographically, we saw strength in every key region, in particular in the US and Japan.

We could not be happier. We thought we were betting bold. As it turns out, we didn’t bet high enough. Our customers are loving iPhone, adn we’re very happy with that.

Cook: No sales of 4S into China during quarter.

Tim: iPhone 4S was most popular iPhone during the quarter.

Consistent with most launches, we typically see a higher mix at the front-end of a launch.

Next question from Katie Huberty at Morgan Stanley:

Tim, can you talk about whether pent-up demand at end of December and today is those countries like US and Japan that ahd phone all quarter, or just countries that recently got the iPhone?

Second part of question: Does the component environment and supplier capacity allow you to start to address that catch-up demand, address China, and help you start to rebuild inventory in March?

Tim: I don’t want to comment on current sales trends, because we’ve included that in our guidance. Given that we just launched in China, I would say the demand there has been staggering. We are selling through our reseller stores and online stores, not through our own retail store, and demand is off the charts.

The other countries that we launched in earlier this quarter were smaller countries in a demand sense.

>We’ll see how the quarter goes from supply/demand, we did make progress as we moved from the end of the quarter until now, as I alluded to earlier. We’ve caught up in some countries, but there are still some where we’re not caught up.

In terms of component environment, generally speaking it’s favorable. That was one of the things that allowed us to overachieve on gross margins, and we predict that it will stay favorable on most key commodities, with the exception of hard drives, which was affected by the tragic situation in Thailand.

I don’t predict Apple having a supply issue, but we will pay more for drives.

Next question from Richard Gardner at Citi.

More detail on hard drive situation—meaningful impact on Mac sales?

You expect to pay more for drives, impact on revenue?

Tim: For the December quarter, not a material supply or cost impact to any of our product line.

For March, we’re not expecting any material supply impact, but drive prices have increased, and we’ve included that in our guidance.

Richard at Citi part 2: We saw drops in some components. How favorable will pricing be in some key commodities in this quarter?

Tim: Last quarter, we did receive better costs than we had in our guidance for display cost, flash, and DRAM. We expect that trend will continue where supply exceeds demand, and price trends thus should be favorable.

The big exception is the hard drive.

Peter Oppenheimer adds: Gross margin guidance on component guidance: We do see it helping us, but we think gross margin will be down 270 basis points. Loss of leverage on lower revenue will be the cause, along with non-recurrence of one-time items from December quarter.

Richard: How big were the non-recurring items? Peter: With leverage, it was about a quarter of the upside we saw. Half came from better commodity pricing. Remaining quartering came largely from iPhone sales.

Next Q: Goldman Sachs: Q on iPad: Strong shipment number, but what about impact from lower-priced tablets?

How do you think about competition from lower-priced tablets like Amazon’s?

Tim: We are really happy with 15.4M iPads we sold. We took down channel inventory slightly, so underlying sell-thru was slightly higher. Consistent with long-term belief that this is a huge opportunity for Apple over time. I clearly believe that there will come a day that the tablet market in units is larger than the PC market. In fact, it’s interesting to note that in the US, it’s clear from IDC’s recent data on Desktops in US, that tablets exceeded desktop PC sales in last quarter.

You can already see different indicators that there is significant momentum in the space. In terms of competitiveness, ecosystem for iPads is in a class by itself.

We strongly beiieved in optimizing apps for tablet from Day 1.

We think the competition has just a few hundred tablet-optimized apps.

People really want to do multiple things with their tablets, so we don’t really see these limited function tablets and e-readers being in the same category.

They’ll sell a fair number of units, but people who want an iPad won’t settle for a limited function [tablet].

Last year was supposed to be the year of the tablet, and I think most people would agree with was the Year of the iPad for the second year in a row. We’re going to continue to innovate like crazy in this area, and continue to compete with anyone that is currently shipping tablets, or that might enter in the future.

Follow-up q: Digging into iPhone number a bit more, what you’re learning about iPhone elasticity with new price points for 3GS in post- and pre-paid markets?

How are you thinking about that now that you’ve had a full quarter with these prices?

Tim: Each of the models, 3GS, 4, and 4S were important in achieving the total unit sales.

The 4S was clearly the most popular.

In the post-paid market there’s a much smaller difference between what the customer pays. It’s larger in pre-paid market. It’s too early to tell how this will play out over time, but we’re thrilled with the total resul.

Next question comes from Toni Sacconaghi with Sanford Bernstein.

Follow-up that you’re actively discussing uses of cash. Is that any different from what you’ve done historically, or is that statement suggesting that you’re thinking more constructively about cash?

Peter Oppenheimer: We have always discussed internally and with our board our cash. We recognize that it’s growing for all the right reasons. Our discussions are active, about what makes the most sense to do with the cash.

Nothing to announce today.

Toni asks if there’s a timeframe for those discussions.

Follow-up from Toni Sacconaghi with Sanford Bernstein. Revisiting gross margin questions. In each of the last ten years, it’s increased from Q1 to Q2. In the past three years, increasing by 200 basis points. You’re predicting bucking that trend dramatically.

Is the loss of leverage that significant?

Peter: The factors that will affect it are primarily: loss of leverage from revenue; the one-time items that won’t recur, and the stronger US dollar.

I would also say (Peter adds) that 44.7 is a high high, higher than we’ve seen in 15 years. It’s hard to compare this year vs. last because we’re in different commodity and currency levels, not to mention different product cycles.

TV question!

Gene Munster, Piper Jaffray asks we just got back from CES, and everyone has a connected TV.

Apple TV seems dated.

From high level, how to think about living room strategy?

Tim: Apple TV product is doing very well, and last fiscal year ended in Sept, we sold a bit above 2.8M units. Jast in past quarter, we broke a record, at over 1.4M.

In the scheme of things, if you dollarize it, we still classify it as a hobby.

We continue to add things to it—I couldn’t live without it, Tim says.

Tim can’t live without his Apple TV. “We continue to pull the strings to see where it takes us.”

We’ll see where this product takes us. No other comment.

Gene follow-up: Early read on CEO role, Tim?

Tim: I love Apple, and am reminded every day how lucky I am to work with this incredible team. I’m lucky.

Gene presses on strategic side. Tim points to the incredible results and says he feels good about where we are.

Next question from Banc of Montreal, Keith Bachmann:

When you talked about cash balances, can you give us perspective on how you’re framing the differences in terms of dividends and buybacks?

Peter: We’re examining all uses of our cash balance, what we might do in supply chain, acquisitions, and otherwise.

Peter: No perspective to share on dividends or buybacks, other than actively considering everything.

Follow-up q: One thing you didn’t mention was discussions around iCloud, and I wanted to try to get some perspective. How is it adding value, and what are the metrics you’re using to determine if it’s driving success?

Tim: I think Peter shared earlier the number of customers signed up for iCloud—over 85M. It’s incredible that this has happened in just a few months. We’re thrilled with it and the response from customers has been incredible. It solved a lot of problems that customers were having and made their lives much easier. I see it as a fundamental shift recognizing that people had numerous devices, and they wanted the bulk of their content in the cloud and easily accessible from all devices.

85M customers in three months is big. It’s an important part of our strategy for the next decade.

Next question: Can you give us an update in terms of where you are with distribution for the phone? And what are the prospects in terms of carrier reach in China?

Tim: Over 130,000 points of sale throughout world, up 35% YoY.

Tim: We have consistently added distribution. We added carriers last quarter, with KDDI in Japan and Sprint in the U.S., both can speak for their own results.

We are extremely pleased with both companies.

1.4M Apple TVs, 15M iPods. So: “Hobby.”

China: China Unicom continues to be a key partner, nothing new to announce today on expansion.

Follow-up q: Rev guidance for March quarter—why would revenue be down more than normal into March?

Peter: Let me start with units, and then revenue. iPhone, we expect to have a significant YoY increase, and be down sequentially, from the 14-week December quarter. iPad, we expect the same outcome.

For Mac and iPod, we expect to be down sequentially, typical with seasonality.

With revenue, let’s talk about five reasons why I expect us to be down a greater precent sequentially this year.

2. That 14th week fell in March quarter last year, not this year, and that’s a big week.

3. Last year, we increased iPhone channel inventory by 1.7M units into March quarter, and that benefitted quarter.

4. Launch of iPhone 4S in the just-ended quarter, with all the pent-up demand, helped the quarter a lot.

5. The U.S. dollar has stengthened, particularly against the Euro, and this will have an impact on our sequential compare.

All that being said, we just reported an amazing quarter, and we feel very good about the momentum of our business

Next question: You’re not going to talk specifically about cash, but regarding acquisitions—your strategy, as with the recent one of Anobit.

Peter: Our acquisitions have tended to be smaller or mid-sized companies with great engineering or other talent; a great start on a product or tech that we’d like to bring into Apple, sometimes including IP.

We tend to do several a year; we’re very disciplined in how we do it, and our track record is very strong.

Q follow-up: How are they integrated in? (The companies you acquire.)

Tim: We don’t believe in lots of divisions like other companies. We run the company as one. The semiconductor team works for Bob Mansfield, who does all hardware engineering for whole company.

Tim, continued: Anobit has some fantastic tech talent, and we’re fortunate to have them join us.

(Those were from Shannon Cross from Cross Research)

Next question: I hear that you’re focused on China. There’s 500 carriers in the world. What are your ambitions, in terms of adding them? In terms of geographic expansion, you have addressed part of China and it sounds like Brazil is next. But what about India and Russia?

Tim: We are today selling in Brazil, through an online store and reseller partners, including key carrier partners. In Russia, through carrier partners and reseller partners. And in India, the same.

The 2nd country on the list would be Brazil. Huge opportunity for us there. I don’t envision Apple Retail appearing there in the near term, though.

In India, where we’re small, revenue went up more than 3x last quarter—but on a small base.

We’re beginning to see traction on most of these, but we recognize that we have to focus so that we can get to large revenue figures like Greater China.

In terms of more carriers, we have been adding them, and I anticipate that we’ll continue. Nothing specific to announce today. We’re looking at the same list you are.

In terms of major carriers, the number is much smaller—and the same is true with countries. But they’re all important.

Next question: from JP Morgan, Mark Moskowitz. Returning to tablet market. iPad growth outpaced a lot of expectations. Do you think that Apple benefitted from lower-cost, reduced feature-set tablets, where folks checked them out and traded up to iPad instead?

Do you see that happening with MacBook Air this year?

Tim: I looked at the data, particularly in the US, on a weekly basis, after the Kindle Fire launch. I wouldn’t in my view say that there was an obvious effect on the numbers plus or minus.

I’ve heard that theory from some customers, that they went in thinking they’d get a Fire and decided on the iPad instead.

Whether that’s happening on a large basis, I don’t know.

Looking at our data in the US, there was no obvious change in the data, for what it’s worth.

There is cannibalization of the Mac by the iPad, but we continue to believe that there is much more cannibalization of Windows PC’s, and many more of them to cannibalize, with the iPad.

The thing that is very different about the iPad, is that you can see it virtually everywhere. The Enterprise, a large percent of the Fortune 500, that’s true globally as well. In education/k-12, twice the number of iPads sold vs. Macs. And consumer has moved in a huge way to iPad.

The thing that is very different about the iPad, is that you can see it virtually everywhere. The Enterprise, a large percent of the Fortune 500, that’s true globally as well. In education/k-12, twice the number of iPads sold vs. Macs. And consumer has moved in a huge way to iPad.

We couldn’t be happier that we’ve sold 55M iPads to date, and we’ve only been in the business since April 2010.

Follow-up: Given your customer data, are you seeing any sort of phenomenon now, are you seeing accelerated refresh rates within the customer base? Or halo effect?

TIm: In enterprise space, for example, we’ve seen iPhone be a catalyst; iPad moves after iPhone, and in several accounts the Mac follows that. One product pulls the other, pulls the other. At a macro level, how much it’s happening is hard to put our finger on. But many customers are all pointing that out. We’ve seen this phenomenon before with the iPod halo to the Mac.This isn’t new to us.

Next question: Mike Abromsky, RBC Capital Markets: Android vs. iPhone: Is this a two-horse race like Mac vs. Windows?

Tim: I wouldn’t classify it like Mac vs. Windows at all. The Mac has outgrown the market for over twenty quarters in a row. But still has a single-digit percentage of worldwide market. Where iOS if you look at phones and tablets and iPod Touch, we’ve sold over 315M. Over 62M were done in last quarter alone. : I don’t have comparable numbers on Android; I haven’t found a way to get very crisp quarterly reporting that’s straightfoward and transparent.

You can see from a momentum perspective that, in the US for Oct and Nov, that just the iPhone at 43% and Android at 47%. The Neilsen data for Oct-Dec shows iPhone at 45 vs Android at 47.

Comscore shows iPhone 42, Android at 41.

It seems like all the data that I’ve seen in the US would say that it’s a very close race.

All of us believe that iPad is way ahead there, too.

There’s no comparable product to the iPod touch out there.

iOS is doing extremely well. Not a two-horse race. There’s a horse in Redmond that always suits up and always runs.

What we’ve focused on is innovating, and making the world’s best products.

Follow-up from Mike Abromsky: Android has approached 4G and larger screens. You’ve articulated a firm view of display dimensions. Has popularity of larger screens on Android phones changed/impacted your view on screen size? And on 4G?

Tim: I wouldn’t comment on future, which I’m sure is a shock. We just sold a record 37M iPhones. We could have sold more if we had more supply.

Warap up: People love what we’re doing

And that’s it! Thanks for tuning in to our live coveragem be sure to check back at for summary articles to follow.

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