Apple (AAPL) Q2 2012 Earnings Call April 24, 2012 5:00 PM ET

Operator Good day, everyone, and welcome to this Apple Incorporated Second Quarter Fiscal Year 2012 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am. Nancy Paxton Thank you. Good afternoon, and thanks to everyone for joining us. Speaking today is Apple CFO, Peter Oppenheimer; and he'll be joined by Apple CEO, Tim Cook; and Treasurer, Gary Wipfler for the Q&A session with analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings per share and future products. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed

in Apple's Form 10-K for 2011, the Form 10-Q for the first quarter of fiscal 2012 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. I'd now like to turn the call over to Peter Oppenheimer for introductory remarks. Peter Oppenheimer Thank you, Nancy. We're very pleased to report the results of our outstanding second fiscal quarter. We established new March quarter records for iPhone, iPad and Mac sales, leading to our highest March quarter revenue and earnings ever. Revenue for the quarter was $39.2 billion, representing year-over-year growth of 59%. That's a new record for a March quarter and is second only to the all-time record revenue we reported in the most recent December quarter. The year-over-year increase in March quarter 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 $11.6 billion, increasing 94% over the prior March quarter's result. The quarter's net income translated to earnings per share of $12.30. Turning to the details of the quarter, I'd like to begin with our Mac products and services. We established new March quarter records for both desktops and portables, combining for a total of 4 million Macs sold. This represents growth of 7% year-over-year compared to IDC's latest published forecast of 2% growth for the global personal computer market in the March quarter. We began and ended the quarter with between 3 and 4 weeks of Mac channel 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 release of 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 the Mac App Store in late summer this year. Moving to our music products. We sold 7.7 million iPods compared to 9 million in the year ago quarter. Total iPod sales were ahead of our expectations, and iPod touch continued to account for over half of all iPods sold. iPod's share of the U.S. market for MP3 players remains at over 70% based on the latest monthly data published by MPD, and iPods continue to be the top-selling MP3 player in most countries 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. The iTunes Store generated all-time record results with revenue of almost $1.9 billion in the March quarter, an increase of 35% year-over-year, thanks to continued strong sales of music, video and apps. We now have a catalog of over 28 million songs and 45,000 movies.I'd now like to turn to iPhone. We were thrilled to sell 35.1 million iPhones compared to 18.6 million in the previous March quarter. That represents 88% year-over-year growth compared to 42% growth for the smartphone market overall in the March quarter based on the latest published estimate from IDC. We experienced very strong iPhone sales growth in all of our segments, led by our Asia Pacific and Japan segments where sales more than doubled 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 the iPhone 4S in China in January and the addition of China Telecom as an iPhone carrier in March. IPhone 4S is now available in over 100 countries and is sold through over 230 carriers. We ended the quarter with about 8.6 million iPhones in channel inventory, a sequential increase of about 2.6 million units, which placed us within our target range of 4 to 6 weeks of iPhone channel inventory. Recognized revenue from iPhone handset and accessory sales was $22.7 billion during the quarter 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. iTune business line managers across industries see the opportunity to leverage both company and employee-owned devices to improve productivity and efficiencies through iOS in-house app development. In fact, the majority of the Fortune 500 companies who have approved iPhone on 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 March quarter compared to 4.7 million in the year ago quarter, an increase of 151%. Customers are loving the new iPad with its stunning Retina display, A5X chip with Quad-core graphics and the 5-megapixel iSight camera. The new iPad is now available in over 40 countries, and we saw a very strong growth in iPad sales around the world with sales more than doubling in each of our segments. Recognized revenue from sales of iPad and iPad accessories during the quarter was $6.6 billion compared to $2.8 billion in the year ago quarter, an increase of 132%. We ended the quarter with about 2 million iPads in channel inventory, a sequential decrease of about 300,000 units, which placed us below our target range of 4 to 6 weeks of iPad channel inventory. The education market's interest in iPad continues to grow. In the March quarter, we sold more than 2 iPads for every Mac to our U.S. K-12 customers while also generating a record quarter for Mac sales. The San Diego School District purchased 10,000 iPads in the March quarter and plans to purchase over 15,000 more in the June quarter for middle school and high school programs. iPad continues to open doors to new customers with whom Apple previously had no relationship. As we enter the K-12 institution buying season, we're hopeful that iPad will be a popular choice. iPad's momentum in business and government also continues to build. The United States Air Force Air Mobility Command is deploying thousands of iPads to serve as electronic flight guides, storing technical publications and operations information for flight crew members and trainers. Companies such as Docbeckhoff [ph] and Bellflower Beatty [ph] are using iPads in the field for project management and viewing blueprints. And thousands of iPads are being deployed as mobile sales tools by companies such as Roche, Amgen, Bayer and Daiichi Sankyo. Combining iPhone, iPad and iPod touch, we surpassed 365 cumulative iOS device sales, selling more than 50 million in the March quarter. The iOS ecosystem continues 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 March less than 4 years after the launch of the App Store. And iCloud is off to an incredible start, currently with more than 125 million customers signed up since its launch in October. I'd now like to turn to the Apple retail stores, which also generated record March quarter results. Revenue was $4.4 billion, an increase of 38% over the year ago quarter and was second only to the record quarterly revenue generated in the December quarter. The stores experienced very strong year-over-year growth in iPad and iPhone sales, and they sold 826,000 Macs compared with 797,000 in the year ago quarter. And about half the Macs sold in our stores during the March quarter were to customers who had never owned a Mac before. We opened 2 new stores in the quarter, including our first Netherlands store in Amsterdam and a beautiful new store in Houston. We exited the quarter with 363 stores, nearly 1/3 of which are outside the United States. With an average of 361 stores open, average revenue per store was $12.2 million compared to $9.9 million in the year ago quarter, an increase of 23%. Segment margin reached a new March quarter record of over $1.1 billion, which was 26.1% of retail revenue. We welcomed 85 million visitors to our stores during the quarter compared to 71 million visitors in the year ago quarter, an increase of 19%. That translates to an average of 18,000 visitors per store per week. Total company gross margin was 47.4%, which was 540 basis points higher than our guidance. About half this difference was driven by lower-than-expected commodity and other 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 we don't expect to recur in the June quarter. Operating expenses were $3.2 billion and included $361 million in stock-based compensation 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 the December quarter, a sequential increase of $12.6 billion. And about $74 billion of the cash was 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 dividend of $2.65 per share when we report our third quarter results in July. And we will provide information on the record and payment dates at that time. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types 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 quarter last year. We expect gross margin to be about 41.5%, reflecting approximately $70 million related 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 be about $175 million. And we expect the tax rate to be about 25.25%. We are targeting EPS of about $8.68. In closing, we're extremely pleased with our record March quarter performance with earnings nearly doubling year-over-year. The new iPad is off to a tremendous start and is our fastest iPad rollout ever. We're 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 we're very excited about the fabulous new products in our pipeline. With that, I'd like to open the call to questions. Nancy Paxton Thank you, Peter. [Operator Instructions] Operator, may we have the first question?