Apple (AAPL) Q2 2012 Earnings Call April 24, 2012 5:00 PM ETOperatorGood day, everyone, and welcome to this Apple Incorporated Second Quarter Fiscal Year2012 Earnings 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, maam.Nancy PaxtonThank you. Good afternoon, and thanks to everyone for joining us. Speaking today is AppleCFO, Peter Oppenheimer; and hell be joined by Apple CEO, Tim Cook; and Treasurer, GaryWipfler for the Q&A session with 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 for 2011, the Form 10-Q for the first quarter of fiscal 2012 and theForm 8-K filed with the SEC today along with the attached press release. Apple assumes noobligation to update any forward-looking statements or information, which speak as of theirrespective dates.Id now like to turn the call over to Peter Oppenheimer for introductory remarks.Peter OppenheimerThank you, Nancy. Were very pleased to report the results of our outstanding second fiscalquarter. We established new March quarter records for iPhone, iPad and Mac sales, leadingto our highest March quarter revenue and earnings ever.Revenue for the quarter was $39.2 billion, representing year-over-year growth of 59%.Thats a new record for a March quarter and is second only to the all-time record revenuewe reported in the most recent December quarter. The year-over-year increase in Marchquarter revenue was fueled primarily by very strong growth in iPhone and iPad sales.Operating margin was $15.4 billion, representing 39.3% of revenue. Net income was $11.6billion, increasing 94% over the prior March quarters result. The quarters net incometranslated to earnings per share of $12.30.Turning to the details of the quarter, Id like to begin with our Mac products and services.We established new March quarter records for both desktops and portables, combining fora total of 4 million Macs sold. This represents growth of 7% year-over-year compared toIDCs latest published forecast of 2% growth for the global personal computer market inthe March quarter. We began and ended the quarter with between 3 and 4 weeks of Macchannel inventory, which is below our target range of 4 to 5 weeks.In February, we released the developer preview of Mountain Lion, the ninth major releaseof Mac OS X. Mountain Lion will bring popular apps and features from iPad to the Mac,including Messages, Notes, Reminders, Game Center, Notification Center, Share Sheets,Twitter integration and AirPlay Mirroring. We expect Mountain Lion to be available from theMac App Store in late summer this year.Moving to our music products. We sold 7.7 million iPods compared to 9 million in the yearago quarter. Total iPod sales were ahead of our expectations, and iPod touch continuedto account for over half of all iPods sold. iPods share of the U.S. market for MP3 playersremains at over 70% based on the latest monthly data published by MPD, and iPodscontinue to be the top-selling MP3 player in most countries we track based on the latestdata published by GFK.We ended the quarter within our target range of 4 to 6 weeks of iPod channel inventory.The iTunes Store generated all-time record results with revenue of almost $1.9 billion inthe March quarter, an increase of 35% year-over-year, thanks to continued strong sales ofmusic, video and apps. We now have a catalog of over 28 million songs and 45,000 movies.Id now like to turn to iPhone. We were thrilled to sell 35.1 million iPhones compared to18.6 million in the previous March quarter. That represents 88% year-over-year growthcompared to 42% growth for the smartphone market overall in the March quarter based onthe latest published estimate from IDC. We experienced very strong iPhone sales growthin all of our segments, led by our Asia Pacific and Japan segments where sales more thandoubled year-over-year. We continue to see tremendous momentum in Greater China,
where iPhone sales were 5x the level of the year ago quarter, aided by the launch of theiPhone 4S in China in January and the addition of China Telecom as an iPhone carrier inMarch. IPhone 4S is now available in over 100 countries and is sold through over 230carriers.We ended the quarter with about 8.6 million iPhones in channel inventory, a sequentialincrease of about 2.6 million units, which placed us within our target range of 4 to 6 weeksof iPhone channel inventory.Recognized revenue from iPhone handset and accessory sales was $22.7 billion during thequarter compared to $12.3 billion in the year ago quarter, an increase of 85%.IPhone momentum in the enterprise is above -- beyond email, calendar and contacts. iTunebusiness line managers across industries see the opportunity to leverage both company andemployee-owned devices to improve productivity and efficiencies through iOS in-house appdevelopment. In fact, the majority of the Fortune 500 companies who have approved iPhoneon their networks are members of the iOS Enterprise Program and are actively deploying in-house applications to their employee base.Turning to iPad. We were very pleased with sales of 11.8 million iPads during the Marchquarter compared to 4.7 million in the year ago quarter, an increase of 151%. Customersare loving the new iPad with its stunning Retina display, A5X chip with Quad-core graphicsand the 5-megapixel iSight camera. The new iPad is now available in over 40 countries, andwe saw a very strong growth in iPad sales around the world with sales more than doublingin each of our segments.Recognized revenue from sales of iPad and iPad accessories during the quarter was $6.6billion compared to $2.8 billion in the year ago quarter, an increase of 132%. We endedthe quarter with about 2 million iPads in channel inventory, a sequential decrease of about300,000 units, which placed us below our target range of 4 to 6 weeks of iPad channelinventory.The education markets interest in iPad continues to grow. In the March quarter, we soldmore than 2 iPads for every Mac to our U.S. K-12 customers while also generating a recordquarter for Mac sales. The San Diego School District purchased 10,000 iPads in the Marchquarter and plans to purchase over 15,000 more in the June quarter for middle school andhigh school programs.iPad continues to open doors to new customers with whom Apple previously had norelationship. As we enter the K-12 institution buying season, were hopeful that iPad will bea popular choice.iPads momentum in business and government also continues to build. The United StatesAir Force Air Mobility Command is deploying thousands of iPads to serve as electronic flightguides, storing technical publications and operations information for flight crew membersand trainers. Companies such as Docbeckhoff [ph] and Bellflower Beatty [ph] are usingiPads in the field for project management and viewing blueprints. And thousands of iPadsare being deployed as mobile sales tools by companies such as Roche, Amgen, Bayer andDaiichi Sankyo. Combining iPhone, iPad and iPod touch, we surpassed 365 cumulativeiOS device sales, selling more than 50 million in the March quarter. The iOS ecosystemcontinues to expand and thrive with stores in more than 120 countries.The App Store now offers more than 600,000 apps, including over 200,000 apps specifically
for iPad. We were very excited to announce the download of the 25th billionth app in Marchless than 4 years after the launch of the App Store.And iCloud is off to an incredible start, currently with more than 125 million customerssigned up since its launch in October.Id now like to turn to the Apple retail stores, which also generated record March quarterresults. Revenue was $4.4 billion, an increase of 38% over the year ago quarter and wassecond only to the record quarterly revenue generated in the December quarter. The storesexperienced very strong year-over-year growth in iPad and iPhone sales, and they sold826,000 Macs compared with 797,000 in the year ago quarter. And about half the Macssold in our stores during the March quarter were to customers who had never owned a Macbefore.We opened 2 new stores in the quarter, including our first Netherlands store in Amsterdamand a beautiful new store in Houston. We exited the quarter with 363 stores, nearly 1/3 ofwhich are outside the United States. With an average of 361 stores open, average revenueper store was $12.2 million compared to $9.9 million in the year ago quarter, an increase of23%. Segment margin reached a new March quarter record of over $1.1 billion, which was26.1% of retail revenue. We welcomed 85 million visitors to our stores during the quartercompared to 71 million visitors in the year ago quarter, an increase of 19%. That translatesto an average of 18,000 visitors per store per week.Total company gross margin was 47.4%, which was 540 basis points higher than ourguidance. About half this difference was driven by lower-than-expected commodity andother costs; about 1/4 was due to stronger-than-expected revenue and product mix,including 35 million iPhones; and the remainder was due to some onetime items that wedont expect to recur in the June quarter.Operating expenses were $3.2 billion and included $361 million in stock-basedcompensation expense. OI&E was $148 million.Turning to cash. Our cash for short-term and long-term marketable securities totaled$110.2 billion at the end of the March quarter compared to $97.6 billion at the end of theDecember quarter, a sequential increase of $12.6 billion. And about $74 billion of the cashwas offshore at the end of the March quarter. Cash flow from operations was $14 billion.As we indicated last month, subject to board declaration, we expect to announce a dividendof $2.65 per share when we report our third quarter results in July. And we will provideinformation on the record and payment dates at that time.As we move ahead into the June quarter, Id like to review our outlook, which includes thetypes of forward-looking information that Nancy referred to at the beginning of the call.We expect revenue to be about $34 billion compared to $28.6 billion in the June quarterlast year. We expect gross margin to be about 41.5%, reflecting approximately $70 millionrelated to stock-based compensation expense. We expect OpEx to be about $3.3 billion,including about $385 million related to stock-based compensation. We expect OI&E to beabout $175 million. And we expect the tax rate to be about 25.25%. We are targeting EPSof about $8.68.In closing, were extremely pleased with our record March quarter performance withearnings nearly doubling year-over-year. The new iPad is off to a tremendous start and isour fastest iPad rollout ever. Were thrilled with the global success of the iPhone 4S, which is
now available in more than 100 countries, including China.We remain very confident in our strategy, and were very excited about the fabulous newproducts in our pipeline. With that, Id like to open the call to questions.Nancy PaxtonThank you, Peter. [Operator Instructions] Operator, may we have the first question?