Apple (AAPL) Q1 2012 Earnings Call of January 24, 2012 at 5 pm EST

Apple (AAPL) Q1 2012 Earnings Call January 24, 2012 5:00 PM ETOperator

Good day, and welcome to this Apple Incorporated First Quarter Fiscal Year 2012Earnings Release Conference Call. Todays call is being recorded. At this time, foropening remarks and introductions, I would like to turn the call over to Nancy Paxton,Senior Director of Investor Relations. Please go ahead.Nancy PaxtonThank you. Good afternoon, and thanks to everyone for joining us. Speaking today isApple CFO, Peter Oppenheimer. And hell be joined by Apple CEO, Tim Cook; andTreasurer, Gary Wipfler, for the Q&A session with the analysts.Please note that some of the information youll hear during our discussion today will consistof forward-looking statements including, without limitation, those regarding revenue,gross margin, operating expenses, other income and expense, stock-based compensationexpense, taxes, earnings per share and future products. Actual results or trends could differmaterially from our forecast.For more information, please refer to the risk factors discussed in Apples Form 10-K for2011 and the Form 8-K filed with the SEC today along with the attached press release.Apple assumes no obligation to update any forward-looking statements or information,which speak as of their respective dates.Id now like to turn the call over to Peter Oppenheimer for introductory remarks.Peter Oppenheimer - CFOThank you, Nancy. We are thrilled to report the results of a tremendous quarter, generatingthe highest quarterly revenue and earnings in Apples history. We established numerousnew records during the quarter, including all-time highs for quarterly iPhone, iPad and Macsales. We are very proud of these results and are extremely pleased with the momentum ofour business. ● Revenue for the quarter was $46.3 billion, representing year-over-year growth of 73%. The increase was fueled primarily by strong growth in iPhone, iPad and Mac sales, and was also aided by the inclusion of a 14th week in the quarter, which we indicated previously. ● Operating margin was $17.3 billion, representing 37.4% of revenue. ● Net income was $13.1 billion, increasing 118% over the prior December quarters results, and equaling half of the net income generated in all of fiscal 2011. ● The quarters net income translated to earnings per share of $13.87.Turning to the details of the quarter.Mac Products and ServicesId like to begin with our Mac products and services. We established a new all-time quarterly record with sales of 5.2 million Macs, setting new records for bothdesktops and portables. Mac sales grew 26% year-over-year compared to IDCslatest published forecast of 0 growth for the market overall in the December

quarter. While total Mac sales benefited from the 14th week, average weekly Mac saleswere up strongly year-over-year across the quarter. Mac sales outgrew the market in eachof our geographies with particular strength in our Asia-Pacific segment where sales wereup 58% year-over-year. The increase in Mac sales was fueled by very strong growth ofMacBook Pro and MacBook Air, as well as the continued strong performance of iMac. Webegan and ended the quarter with between 3 and 4 weeks of Mac channel inventory on alook-forward basis.As we announced last month, the Mac App Store has been a great success withcustomers downloading over 100 million apps in less than a year. The Mac App Storeoffers thousands of apps in education, games, graphics and design, lifestyle, productivity,utilities and other categories, and has rapidly become a favorite shopping destination forMac software.Music ProductsMoving to our music products. We sold 15.4 million iPods compared to 19.4 millionin the year-ago quarter. Total iPod sales were ahead of our expectations and iPodtouch continued to account for over half of all iPods sold. iPod share of the U.S.market for MP3 players remains at over 70% based on the latest monthly datapublished by MPD. And iPod continued to be the top-selling MP3 player in mostcountries we track based on the latest data published by GFK.We ended the quarter within our target range of 4 to 6 weeks of iPod channel inventory ona look-forward basis. The iTunes Store generated record results with revenue in the quarterof $1.7 billion. During the quarter, we launched iTunes music stores in Brazil as well as27 other countries in Latin America and Europe, now offering a catalog of over 20 millionsongs from major recording labels, as well as thousands of independent artists. And iTunescustomers were amazingly busy on December 25, generating over 140 million downloads ofapps and content that day.iPhoneId now like to turn to iPhone. We were thrilled to sell a record 37 million iPhonescompared to 16.2 million in the previous December quarter. This represents 128%year-over-year growth compared to 40% growth for the smartphone marketoverall in the December quarter, based on the latest published estimate from IDC.We experienced very strong iPhone sales growth in all of our segments, thanksprimarily to the tremendous popularity of iPhone 4S.Customers have been captivated by Siri, which lets them use their voices to sendmessages, place phone calls, schedule appointments and more. Siri understands what userssay, knows what they mean and helps them with everyday tasks and information requests.iPhone channel inventory increased sequentially by about 200k, leaving us with a littleunder 6 million iPhones in the channel at the end of the quarter, and below our target rangeof 4 to 6 weeks on a look-forward basis.Recognized revenue from iPhone handset and accessory sales was $24.4 billionduring the quarter compared to $10.5 billion in the year-ago quarter, an increaseof 133%. Nearly all of the top companies in the Fortune 500 now approve and

support iPhone on their networks. This includes companies in markets such asfinancial services, consumer products, transportation, healthcare and insurance.iPhone is changing the way companies across the globe use mobile devices for work.In addition to accessing e-mail, calendar and contacts, many of these companies aredeveloping and deploying mission-critical iPhone apps to help improve productivity andgive employees secure and immediate access to information anywhere. Many companiesaround the world have thousands of employees using iPhone and business apps. Somenew examples include Royal Dutch Shell, Credit Suisse, Kimberly-Clark, St. Jude Medical,Providian, Teradata, Nike, [indiscernible] and Facebook. We were very pleased to beginshipping iPhone 4S in China and 21 additional countries earlier this month. iPhone 4S is nowavailable in over 90 countries, making this our fastest iPhone rollout ever.iPadTurning to iPad. We were very pleased with record sales of 15.4 million iPadsduring the December quarter compared to 7.3 million in the year-ago quarter, anincrease of 111%. iPad was extremely popular with holiday season buyers, and weremain very excited about the potential for this market.Recognized revenue from sales of iPad and iPad accessories during the quarterincreased by 99% year-over-year to over $9.1 billion compared to $4.6 billion inthe year-ago quarter. iPad sales surpassed our expectations with sell-throughexceeding sell-in by about 200,000 units. We exited the quarter within our targetrange of 4 to 6 weeks of iPad channel inventory on a look-forward basis.iPad continues its unprecedented adoption in business. Nearly all of the topcompanies within major Fortune 500 markets including pharma, manufacturing,hospitality, consumer products, financial services, healthcare and retail areactively using iPad to improve workflows, business processes and customerengagements. We are delighted to learn how iPad enables businesses to change the waythey work. Real estate agents at Coldwell Banker and Sothebys access sales presentationsand use custom iPad apps in the field. Retail chains such as Bed Bath & Beyond use iPads todeliver key business metrics on the sales floor. Wineries are using iPads in their vineyards tocall up weather data and soil profiles, record quality assessments and make decisions on thespot about whether to harvest their grapes. And in this past quarter, Chinese airline, EVA,has also deployed iPads to pilots and crew for flight manuals, documentation and training.iPad is extremely popular with students, teachers and administrators as awonderfully engaging and powerful tool for teaching and learning. Today, 1.5million iPads are already in use in education institutions, including over 1,000 one-to-one deployments.iBooks 2We were very pleased to announce iBooks 2 last week featuring iBook Textbooksto deliver educational content that is more interactive, current and portablethan ever from leading publishers, including Houghton Mifflin, McGraw-Hill andPearson, as well as thousands of independent publishers. And with iBooks Author,anyone with a Mac can create iBook textbooks, cookbooks, picture books andmore, and publish them to Apples iBook Store. And over 600,000 copies of iBooks

Author have already been downloaded since last Thursdays announcement.iTunes UWe were also happy to announce the all-new iTunes U App last week, allowingstudents using iPads to have access to the worlds largest catalog of freeeducational content, along with over 20,000 education apps and hundreds ofthousands of books in the iBookstore that can be used in their school curriculum.And as of today, over 3 million copies of iTunes U App have already beendownloaded.iOS DevicesCombining iPhone, iPad and iPod touch, we surpassed 315 million cumulative iOSdevice sales, selling more than 62 million in the December quarter. We were verypleased to launch iOS 5 and iCloud during the quarter. Customers are loving thenew features of iOS 5, including Notification Center, iMessage and Reminders. AndiCloud is off to a great start with more than 85 million customers signed up as oftoday. With iCloud, customers can store their music and photos and documentsand keep their personal information and content in sync across all their devices,automatically and seamlessly.The App StoreThe App Store continues to be incredibly successful with over 550,000 appsavailable, including 170,000 apps specifically for iPad. We are thrilled that by theend of this month, our developers will have earned over $4 billion cumulativelyfrom App Store sales, including over $700 million in the December quarter alone.Apple StoresId now like to turn to the Apple retail stores, which also generated record results.Revenue was $6.1 billion, an increase of 59% over the prior year. The storesexperienced very strong year-over-year growth in iPhone, iPad and Mac sales,establishing new records for all 3. iPhone sales were extremely robust, more thandoubling year-over-year thanks primarily to the very successful launch of the iPhone 4S.Sales of iPad were also up significantly year-over-year, thanks to continued strength ofiPad 2 and strong holiday season buying. The stores also sold 1.1 million Macs comparedto 851,000 in the year-ago quarter. And about half the Macs sold in our stores during theDecember quarter were to customers who had never owned a Mac before.We opened 4 new stores in the quarter, including our spectacular new store at GrandCentral, as well as 3 stores in Europe, bringing us to a total of 361 stores. With an averageof 358 stores open, average revenue per store was $17.1 million compared to $12 million inthe year-ago quarter, an increase of 43%.Segment margin reached a new record of over $1.8 billion and 30.3% of retailrevenue compared to $1 billion and 26.2% in the year-ago quarter. Store trafficreached new record levels with 110 million visitors compared to 76 million visitorsin the year-ago quarter, an increase of 45%. That translates to an average of almost22,000 visitors per store per week, reflecting incredible interest in our stores and our

products.Our EasyPay checkout process has significantly enhanced our ability to handle such highcustomer traffic levels. And now, with personal pick up, customers can order Macs, iPods oriPads from the Apple online store and pick up most in-stock products within 1 hour at theApple Retail Store of their choice, making shopping for Apple products that much easier andfaster.Gross Profit MarginsTotal company gross margin was 44.7%, which was 470 basis points higher thanour guidance. About half of this difference was driven by lower commodity andother product costs. Another quarter was due to leverage on the higher revenueand some onetime items benefiting the quarter. And the remainder was due tobetter-than-expected mix largely from the record iPhone sales.Operating ExpensesOperating expenses were $3.36 billion, and included $357 million in stock-basedcompensation expense. OI&E was $137 million, and the tax rate for the quarterwas 25.25%.CashTurning to our cash. Our cash for short-term and long-term marketable securitiestotaled $97.6 billion at the end of the December quarter compared to $81.6 billionat the end of September quarter, a sequential increase of $16 billion. About $64billion of the cash was offshore at the end of the December quarter.Cash Flow From OperatonsCash flow from operations was over $17.5 billion. We are actively discussing usesof our cash balance and dont have anything specific to announce today. In themeantime, we continue to be very disciplined with the cash and are not letting it burn a holein our pockets.Outlook For Q2 2012 (Ending March 31, 2012)As we move ahead into the March quarter, which will be 13-week quarter, Id like to reviewour outlook, which includes the types of forward-looking information that Nancy referred toat the beginning of the call. ● We expect revenue to be about $32.5 billion, compared to $24.7 billion in the March quarter last year. ● We expect gross margin to be about 42%, reflecting approximately $60 million related to stock-based compensation expense. ● We expect OpEx to be about $3.05 billion, including about $350 million related to stock-based compensation. ● We expect OI&E to be about $125 million, and we expect the tax rate to be about 25.25%. We are targeting EPS of about $8.50.

Closing StatementIn closing, we are extremely pleased with customer response to our products and therecord-breaking results in the December quarter. We launched iPhone 4S to rave reviews,delivered iOS and iCloud to millions of customers and surpassed all previous records forquarterly iPhone, iPad and Mac sales. We are very proud to be delivering the strongestproduct lineup in Apples history and we are extremely enthusiastic about our new productpipeline.With that, Id like to open the call to questions.

Apple (AAPL) Q1 2012 Earnings Call of January 24, 2012 at 5 pm EST

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