蘋果 (AAPL) 2002 Q3 法說會逐字稿

Please stand by. The conference is

about to begin.

Good day, everyone, and welcome to this Apple

computer conference call to discuss third quarter

financial results. Today's call is being

recorded. At this time, for opening remarks and

introductions, I would like to turn the call over

to the Director of Investor Relations and

Corporate Finance, Miss Nancy Paxton. Please go

ahead.

Thank you. Good afternoon, and thanks to everyone

for joining us. Apple issued its third quarter

earnings press release at approximately 1:30 p.m.

Pacific time this afternoon. The earnings press

release and financials are available on Apple's

website at www.Apple.com. And speaking today is

Apple CFO Fred Anderson, and he'll be joined by

Senior VP of Finance, Peter Oppenheimer, and VP

and Corporate Treasurer Gary Whisler for the Q and A

session with analysts.

Please note that some of the information you'll

hear during this call consists of forward-looking

statements and that actual results or trends could

differ materially from our forecasts. For more

information, please refer to Pages 25 through 32

of Apple's latest Form 10-K for the fiscal year

ended September 29, 2001.

In connection with SEC rules on corporate

disclosure, Apple is making this analysts call

open to the media and general public by

broadcasting the call live over the internet.

With that. I'd like to turn the call over to Fred

Anderson

Thank you, Nancy. As we

indicated on June 18th, Apple's third quarter

proved to be very challenging. We did not

experience the seasonal uplift in demand that we

typically experience in the latter part of May and

in June, resulting in quarterly revenues of

$1.429 billion, about 11% below our original

guidance. We achieved diluted earnings per share

of 9 cents, compared to our original guidance of

11 cents, or slightly better.

These results fell in the middle of our revised

revenue and EPS guidance range provided on

June 18th.

For the third quarter, Apple shipped 808,000 CPU

units, which represented a sequential decline of

about 1%. Industry data indicates market weakness

across all major segments in the June quarter, and

a weak quarter relative to the March quarter. On

a regional basis, IDC has forecasted a sequential

decline in total personal computer unit shipments

of 20% in Japan, 16% decline in Europe, and a 2%

decline in the U.S. from the March to June

quarters.

IDC has also projected a sequential slide of 15%

in worldwide PC sales to consumers, and a 6%

sequential decline in the small office market. We

expect IDC to publish its preliminary results for

the June quarter within the next week.

Finally, NPD Tech World has indicated that year

over year retail sales of personal computers in the U.S.

declined in April and May by 17%, and 7%,

respectively. Our results fell short of our

original plan by $171 million in revenue and about

100,000 CPU units. I'd like to explain in detail

this shortfall on both a geographic and a product

basis.

On a geographic basis, about half of the shortfall

in units and revenue was in Europe, with Japan and

the Americas accounting for the remainder. The

most significant areas of sequential weakness were

Europe and Japan where unit shipments were down

24% and 25%, respectively. Industry

research data indicates that education business in

general continues to be soft, due to declining tax

revenues in most state and local jurisdictions.

Apple's total unit shipments to the U.S. education

market were below our original forecast by 7% and

down 17% from the year-ago quarter. The

year-over-year decline is comparable to the 18%

decline that IDC is projecting for the U.S.

education market in total.

Based on IDC's forecast, we believe our share of

the U.S. education market in the June quarter was

about 20%, flat with the year-ago quarter.

On a product basis, 80% of the unit and revenue

shortfall was attributable to the flat panel iMac

and our pro products, including the PowerBook,

Power Mac, and related displays. We were

surprised and disappointed by the shortfall in

these areas.

First, as you'll recall, we shipped 220,000 units

of the flat panel iMac in the March quarter, and

entered the June

quarter with a very healthy backlog. Despite

strong sell-through of the flat-panel iMac in

April, demand slowed markedly in late May and in

June. This trend ran counter to our expectations

of healthy graduation and Father's Day demand for

this product. We were concerned about letting too

much of this product accumulate in the channel,

and, as such, reduced planned sell-in in the

latter parts of the quarter. This allowed us to

exit the quarter with about 19% fewer flat-panel

iMac units in the channel than we had at the

beginning of the quarter.

Sales of Power Mac G4's and PowerBooks were

weaker than expected for several reasons. First,

we did not expect a further deterioration in the

economy, particularly in Europe, which accounts

for a significant portion of Apple's pro customer

business. Second, we did not experience an uplift

in pro sales following the introduction of Photoshop

7 for Mac OS X.

Finally, we did not fully anticipate the number of

customers who we believe are deferring upgrades

until Jaguar and Quark Express for Mac OS X are

available. Now, I'd like to update you on channel

inventory.

Excluding the eMac which shipped into the channel

in June, channel inventories were down

sequentially by 20,000 units. Total channel

inventories, including the eMac, increased by

approximately 8,000 units. Although ending

channel units were relatively flat, weeks of

inventory, including all in-transit and channel

demo units rose to about 6-and-a-half weeks.

Our internal plan calls for us to reduce channel

inventory units this quarter and next, with a goal

of returning to the normal 4 to 5-week level by

the end of the December quarter.

Though the general consumer segment continues to

be a tough one, we continue to feel good about our

retail stores. We opened two stores during the.

quarter, bringing the current total up to 31,

and we're very enthusiastic about opening our

first New York City store in Soho on Thursday of

this week. Unit shipments through the retail

stores were down sequentially from 24,000 units to

20,000 units, while revenues fell to 63 million,

reflecting what we believe to have been a

pervasively weak quarter for consumer spending.

The retail segment loss increased slightly

sequentially to 6 million from 4 million,

reflecting the lower sales volume. We continue to

work toward an internal goal of achieving

break-even results in our retail segment in the

December quarter.

In terms of gross margins, we originally

anticipated a sequential decline of about 100

basis points. However, based on the decline in

cost of certain components, especially DRAM, as

well as earlier than expected achievement of cost

reduction initiative benefits, gross margins were

actually flat with the March quarter, at 27.4%.

We didn't achieve the slight sequential

improvement in gross margin that we expected when

we updated our guidance on June 18th because we

shipped fewer of the new Xserve rack mount servers

than we had projected at that time, and because we

booked more price protection than we had

anticipated.

Operating expenses were 378 million, 5 million

below the previous quarter. In accordance with

generally accepted accounting principles,

approximately 9 million of development costs

related to the Jaguar release of Mac OS X were

capitalized during the quarter and will be

amortized over three years.

Other income and expense was down by about

$1 million from the March quarter, primarily due

to lower average yield on Apple's cash portfolio.

Based on the lower than expected earnings in the

third quarter and our outlook for the fourth

quarter, we now believe that Apple's effective tax

rate for fiscal year 2002 will be 25%, rather than

the 28% we had previously anticipated.

Accounting rules require us to book a tax

provision for the third quarter that will serve to

true up the year-to-date tax provision to the 25%

level. Because we booked tax provisions of 28%

for each of the first two quarters, a tax rate of

18% was required in the third quarter to achieve

the appropriate year-to-date provision. The

change in the tax rate for the June

quarter from 28% to 18% translated into a one

cent benefit to earnings per share.

We exited the quarter with another very strong

balance sheet. Despite making a $100 payment to

an Asian supplier early in the quarter, 83 million

of which was outstanding at the end of the

quarter, we ended with $4.3 billion in cash.

Operational efficiency remained excellent. And

our cash conversion cycle was a minus 36 days.

Looking ahead to the fourth fiscal quarter, we

expect revenue to be relatively flat with the June

quarter, particularly given a somewhat higher

starting point from a channel inventory

perspective and given what we believe will

continue to be a tough economic environment.

We also expect gross margins to be down about 100

basis points compared to the June

quarter, due to more aggressive pricing on

certain products, particularly in Europe, where

the Euro has strengthened substantially.

We expect operating expenses to increase to about

390 million for several reasons. First, we won't

be capitalizing as much software development

expense as in the third quarter. Second, several

recent acquisitions, including Emagic which we

announced earlier this month will lead to higher

R and D. And lastly, we have a greater number of

retail stores - we will have a greater number of

retail stores in operation.

We expect other income and expense to be down about

3 million, due to lower interest income on our

investments, and we expect the tax rate to be 25%.

As a result, we expect to report a slight profit

before nonrecurring items.

We will be recording a nonrecurring charge for

restructuring in the fourth quarter. We recently

implemented a reduction of about 7% of the

workforce in our manufacturing plant in

Sacramento. We may also do some limited

additional restructuring during the fourth quarter

as we continue to fine-tune the organization.

Additionally, we hold investments in the stock of

both Earthlink and Akami, the market value of

which was about $41 million below book value as of

the end of June. GAAP requires an impairment

charge to be recognized when it is believed that

an investment has experienced a decline in value

below book value that is other than temporary. We

will continue to carefully evaluate these two

investments and will write them down, should we

determine that the decline below book value is

other than temporary.

Despite a challenging third quarter and continued

economic uncertainty in the near term, we continue

to feel very positive about the long-term

opportunities for Apple. We believe our expanding

retail initiative will continue to attract

switchers to the Macintosh platform. We're

encouraged by the reactions of customers from a

variety of markets to Mac OS X and we continue to

have what we believe are the industry's best

products in our pipeline. You'll see some of what

I'm talking about tomorrow, as we kick off Macworld

New York.

With that, I'd like to open the call to questions. 00:14:45

Thank you, sir. Today's question

and answer session will be conducted

electronically. If you'd like to signal to ask a

question, please press star 1 on your touch-tone

telephone. Once again, that's the star key

followed by the digit 1. And we'll take our first

question from Rebecca Runkle with Morgan Stanley.

Good afternoon. That was that was

quick. How are you doing.

I'm doing well. Thank you.

Good. Thank you so much for

everything. Just a quick question. First, in

terms of foreign currency, could you walk us just

more specifically through what the foreign

currency impacts were in total through the P and L?

You mean for the third

quarter?

For the third quarter, yep.

Yeah. Well, let me first say

we normally hedge out six months of future cash

flows in terms of our foreign currency business,

okay?

Uh-huh.

And so what we would have done,

based on that policy, is locked in, through a

combination of forward contracts and options,

the - basically, the next six months of, you

know, expected foreign currency cash flows back

several months ago.

So what I'm saying is that the June

quarter was locked in several months ago when

the dollar was stronger. Okay?

Uh-huh.

And now we've had a significant

run-up in the - weakening in the dollar and

strengthening of the Euro and yen, and

particularly the Euro. And so I can't tell you

exactly what the impact was in the quarter, but

given that the pricing of products, you know,

reflected weaker foreign currencies than the rates

that we had hedged at for the June

quarter, there was some favorable benefit in

the June quarter.

Thanks, Rebecca. Could we have

the next question please?

Our next question comes from

Kimberly Alexy with Prudential Securities.

Yeah, thanks. Fred, a couple

questions. The first is that with your revenue

guidance, obviously part of what you're suggesting

is that with the inventory work-down, you know,

you're a little bit more cautious on the September

quarter, but can you give us any signs in terms of

confidence levels or early indications on

back-to-school and how you're feeling about that

in the context of the guidance?

And then maybe also focusing on the - the margin

commentary, maybe touch on what your outlook is

for component costs into the third quarter, and

also, if you could just give us an update on how

you're thinking about promotional activity. As a

general rule of thumb, it seems like you've been

stepping that up, particularly at the store level

recently, and I'm just trying to get a sense of

sort of any changes there on the horizon.

And then lastly, any kind of data you can give us

on the Wintel switchers campaign and whether or

not you think that's off to a good start. Thank

you.

Okay. Let me take the Wintel

switcher campaign first.

I would say that anecdotally, we believe it's off

to a good start. We don't have hard data yet, but

what we do know is that many of our channel

partners, as well as our Apple retail stores, are

reporting that we have a lot of Windows users

coming into the store and saying, "Hey, I'm a

switcher, I'm a Windows user and I'm here to take

a look at the Mac." But, you know, Ron will be

giving an update at the analysts' meeting on our

retail initiative tomorrow, so I'll leave that for

further elaboration to him at that time.

In terms of the outlook for the September quarter,

what I want to reinforce is that, you know, in

the June

quarter we expected basically a flat sequential

industry performance, and IDC and whether you look

at NPD Tech World, whatever, is saying, "Hey, you

know, there's been a decline in the June

quarter versus the March quarter," and we didn't

expect that. And so, you know, basically, we

didn't hit our original targets in the June

quarter because we didn't get the uplift in late

May and June that we had expected. And so I think

given the current weakness, and particularly in

the consumer PC market, I think it's prudent for

us to be very cautious relative to our guidance

for the September quarter, and not to anticipate a

normal amplitude of uplift for back-to-school in

the September quarter.

That doesn't mean there won't be some uplift, you

know, in terms of the seasonal pattern, but, you

know, we're not counting on the normal amplitude

of the seasonal uplift.

As it relates to education, we held share, we

believe, you know, based on IDC's saying that they

were projecting the education market to be down

year over year in units shipments by 18%, and we

were down 17%. So we think we held our share at

about 20%.

As you know, the September quarter typically is

comparable to the June

quarter in unit shipments into education, with K-12

not being quite as strong in the September

quarter as the June

quarter, but higher Ed being stronger. And so

I would tell you that we're anticipating, you

know, a fairly comparable September quarter for

education to the June

quarter, with the exception of the overlay of

the main order, which we currently expect to -

plan to begin shipping in the September quarter.

So hopefully I've answered the kind of outlook for

the September quarter.

I think you asked -

Just the margins and pricing. Any

kind of - I mean, you know, if you could talk

about component pricing and strategy.

Sure. Exactly. Relative to

margins, I would say again, we were cautious on

gross margins, guiding down a hundred basis

points, approximately. And the reason for that is

because we're going to have have to make some

pricing adjustments in Europe and certain other

locations as a result of the strengthening of the

Euro, and yet we have our hedge portfolio already

in place. If you follow me. Because we hedge out

six months before the run-up in the Euro. And so

that's going to cause a little bit of a hit

relative to the June

quarter, we'll have a little bit of a hit in

the September quarter.

As to component costs - and we're expecting a

little more aggressive pricing on possible or

planned introduction of new products during the

quarter.

And in terms of component costs, I would say we're

expecting a relatively stable environment for

component costs relative to where they are right

now.

Great. Thank you.

You're welcome.

Thanks Kimberly. Could we have

the next question, please.

Yes. Our next question comes from

Andrew Neff with Bear Stearns.

Thanks, Fred. Just two things, if I

could. One, just on the retail strategy, you

mentioned you're going to open two stores -

you've opened two stores already. What's the

plan, as far as you can talk, for that? How far

out can you go? Any plans for stores outside the

U.S.?

Okay. We're planning to - in

the current calendar year, we'll close with 50 stores.

We currently have 31 and we'll have - open our

32nd store in Soho here in New York City on

Thursday. We're really excited about that. And

we don't have any current plans to open stores

outside the United States.

Where does that number go to,

eventually? Does 50 go to - is 50 your -

You know, here's what I would say is

that just like, you know, we said last calendar

year, our Phase I plan is 25 stores, and we

actually did 27. Then we said we're going to take

a breather, because we want to do this in a very

controlled fashion, and evaluate what the results

were of those first phase of stores. We've done

that. Ron Johnson is going to update you tomorrow

at the analysts' meeting. He's making a

presentation on what we learned, and the plans for

this year. And then again, we're doing this in a

very controlled fashion and so I'm sure we'll then

evaluate, after phase II - meaning this calendar

year - what we want to do for phase III, and we

haven't made that determination yet.

Are you seeing any reaction from the

existing resellers in those markets that's - and

how are you addressing that?

You know, Ron will cover that

tomorrow, but - and I don't want to steal his

thunder but I'll tell you the following: that

we've done a lot of analysis based on results of

the first six months ended June of this calendar

year, and what I would tell you is that the

results in the markets where we have our stores

are very - for the channel partners, are very -

overall, in total, are very comparable to what

they are where we - in markets where we don't

have our stores. And so I think that's good news.

Ergo, the conclusion would be that our new retail

effort is not, you know, hurting the performance

of our channel partners.

Okay. Thanks very much.

Thanks Andy. Could we have the next

question, please?

Our next question comes from Walter

Winnitski with First Albany.

Yes. Thanks. I have a couple of

questions. Fred, is it possible to quantify the

channel impact - channel reduction impact in Q4

in unit or revenue terms?

Second, I think I heard you say that the goal was

to take inventory down to 4 to 5 weeks by the

December quarter?

That is correct.

And would that imply some kind of an

adverse impact in the December quarter as well

on -

No.

- booked revenues?

No. Let me be real clear. Let

me back up to - again, because I hope you picked

up on it. When we said, you know, we ended with

relatively flat overall, including the eMac

channel inventory at the end of June versus March,

but it was 6-and-a-half weeks of channel inventory

based on, you know, our sell-through versus 4 and

a half weeks in the prior quarter, because

obviously that means we had higher sell-through.

We try to take - if you look at it trailing -

right? - the average of the last five weeks of

the quarter, as your denominator, and so that

would say that the sell-through in the last 5

weeks of the June

quarter was lower than the last 5 weeks of the

March quarter.

But the point I really want to make is, that

includes demonstration units at all of our channel

partners, and what do we have, maybe 5,000 points

of distribution globally? And for all of our

products? So - and it includes all the

in-transits, you know. Not only en route from

transportation, but across docks at CompUSA and so

forth. So, you know, that doesn't mean we have

anywhere near 6-and-a-half weeks of new for-sale

product at our points of distribution, in terms of

storefronts. So is that clear?

Yes. Could you quantify that impact

of this quarter, what it would be, in units? What

you're planning on doing, maybe, or revenues?

So basically, we're - we're

looking at a gradual progression down toward that,

again, 4 to 5 range, and so if we have a

1-and-a-half week, you know, reduction in channel

inventory planned over the next two quarters, I

certainly would hope that we could achieve at

least half of that reduction in the September

quarter, and then the last remaining half of that

reduction, so, you know, call it three-quarters of

a week to get you down to, you know, five and

three-quarters weeks, in the September quarter,

and get you down to at least 5 weeks in the

December quarter.

Now, I'm not ruling out that we might do better

and get to that level in the September quarter,

but I just want to, you know, indicate that our

current planning would say we'll do it gradually

over the next two quarters, but get halfway there

this quarter.

Fred, have you done any thinking

about the impact on sales and the fact that in

light of some good products on the iMac side, the

demand just isn't there, that you could be looking

at a situation similar to the Wintel world,

where people are just stretching out and PC life

cycles have grown and it doesn't matter how

stylish or good of product you have, they're not

going to be in the market for a while?

You know, I have to back up and

say, I had incredible confidence, going into the June

quarter, because let's look at, again, where we

were.

We had a really strong backlog of flat-panel

iMacs, the neighborhood of about 70,000 units, and

slightly over a hundred million dollars in value,

going into the June

quarter, when we started it.

We had a product that had great market acceptance

with that flat-panel iMac, and we expected it to

have strong legs throughout the quarter. We knew

we were introducing a lot of new products. I just

very quickly tick them off. The new eMac for

education. And then we brought it in June, toward

the end of the quarter, to the consumer market.

We had refreshes on the PowerBook, the Power Mac,

and, you know, we also introduced a new what we

think is awesome, in terms of value and price

performance, rack-mount server in terms of the

Xserve.

So, you know, we - to your point - felt like,

gee, we just got awesome products going into the June

quarter and we didn't make our original

guidance. And we're disappointed. But I think

that it was an industry situation, rather than

anything unique to Apple. And what I mean by that

is, the particular weakness on the consumer

market, which, you know, IDC is projecting to be

down 15% sequentially.

And we're disappointed by the performance of our

pro products, particularly the Power Mac, and, you

know, we just see continuing weakness in the -

clearly in the pro - or creative markets where,

you know, Apple has a stronghold.

But I will tell you that in - I know Tim is going

over this data tomorrow, so I'm not going to steal

his thunder, but, you know, buying intention, as

you'll see tomorrow, remains very strong based on

independent data we have for the Macintosh, in

terms of our creative markets. So we don't think

we're losing those customers. It's just they're

deferring because their business isn't good, and,

you know, they're seeing - if you're an

advertising firm - their ad revenues dropping.

So I have to, you know, agree that it's a very

tough market right now.

Okay. Thanks.

Thank you, Walter. Could we

have the next question, please?

Our next question comes from Don

Young with UBS Warburg.

Yeah. Just a clarification, to start

with, if I could, Fred.

You had projected much lower channel inventories

on your pre-release, which I think was around

June 18th and I'm wondering why the big

difference, with just two weeks to go in the quarter,

was the estimate then on what was on hand off

or was the sales in late June a disaster.

Don, if I could just clarify on

that point. What I did say on June 18th was I

expected channel inventory to remain relatively

flat in terms of units from the end of the March

quarter to the end of the June quarter, and I had

at that time three weeks of sell-through

information that I did not have, and I'm sorry, I

ended up being off - I said relatively flat, and

we ended up being up 8,000 units, which I consider

relatively flat.

Well, I thought you had said

five-and-a-half weeks because the.

No, sir. I did not.

Okay.

In fact, the problem is,

because we compute it, you know, like on a

trailing five weeks, the deviser, I wouldn't have

had three of those last five weeks that I stayed

clear of trying to convert it to weeks because I

didn't know what the average weekly sell-through

would be as the devisor and I wanted to gauge it

based upon absolute unit channel inventory. I was

very careful and I think if you go back and check

the recorded conference call, that it will

demonstrate that what I'm saying is accurate.

So the - the end of June sales must

have been particularly weak.

I didn't comment on channel

inventory. I would say that, you know, we didn't

miss by far. We were off 8,000. I expected at

that time the channel inventory in terms of the

number of weeks would be up, but I didn't want to

characterize my expectation based on weeks of

inventory because I wouldn't have had three of the

five weeks of the devisor.

Fred, the other thing I wanted to go

into a little bit was the whole marketing

strategy, and maybe we'll talk about it -

Sure.

- at the analysts' meeting tomorrow

but it just seems the way Apple launches products way

before they ship, generates a ton of demand, has

an unhedged component exposure, can't really gauge

the demand because you get that front-end surge

but then you work through it and then there's no

demand behind it. Has management thought about

approaching the whole launch of new products a

little bit differently than what you did with the

most recent iMac?

You know, Don, I really haven't

had any discussion with Steve Jobs or the

marketing team on that. As far as I know, we

don't have any plans to change, you know, our

product launch practice.

Okay. Thank you. See you tomorrow.

See you. Thanks, Don.

Thanks, Don. Could we have the

next question, please?

Yes. Our next question comes from

Richard Gardner with Salomon Smith Barney.

Hey, Fred. Just wanted to ask you -

and I know you're probably going to defer until

tomorrow, but what do you think the medium to

long-term operating model for this company is, now

that you're so far off of original expectations

for the September quarter in terms of operating

margins and profitability?

And why would you not reconsider your current

plans for store openings for the rest of the year,

given that it looks like your operating model

really is kind of in limbo right now and you

really don't know, you know, what the revenue

growth is going to look like, and yet you're

adding additional fixed costs to your model.

Well, let me first address the

stores. So if we end with 50 by the end of the

calendar year, we will open, including the one

this Thursday, an additional 19 stores. I will

tell you that those are in process. The

overwhelming majority of them.

And I think that the locations are awesome, and I

am very confident that this retail initiative,

which is, as I said, very phased and under

control, is going to actually contribute to

Apple's long-term growth. I'm very confident of

that.

Let me make one other point.

It's my recollection that we had, on the retail

division, sales, 11 million in manufacturing

profit during the quarter. And so if you were to

assume - and Ron will address this tomorrow -

that half of our business is incremental, that

would be 5-and-a-half million just, you know,

dividing by two the 11 million in manufacturing

profit, which would say we're very close, even in

the last quarter, the June

quarter, to break-even in terms of the overall

consolidated impact of our retail initiative on

Apple.

As to the long-term operating model, I just - you

know, given the current environment of the

personal computer industry right now, you know,

that's something I don't really want to get into,

as you anticipated, in terms of giving any

guidance on that right now. I think, you know, we

have limited visibility. I don't really want to

go beyond the guidance that we've given on the

September quarter.

I will tell you that Apple is still committed to

making the investments necessary to gain market

share and grow the company. We're very

financially strong, with 4.3 billion in cash. We

didn't have the kind of quarter that we expected

or hoped for in the June

quarter, but we're still profitable. And I

would just remind you that as far as I know, there

are only two companies in the PC sector that are

profitable: Dell and Apple. And so I think that

we're not mortgaging the future. We're continuing

to invest in the key growth initiatives for the

company. And to do that and lay the foundation

when we - you come out of this industry downturn,

and at the same time remain profitable, albeit,

you know, slight profitability that we're guiding

to for the September quarter, I think, you know,

is acceptable to management, in terms of striking

the right balance.

Obviously, we'd like to be doing better, and we're

going to strive to do better, but, you know, we're

giving guidance that we feel in this environment

is appropriate.

But we don't have any current plans to alter the

operating model.

Thanks, Rich. Could we have the

next question, please?

Our next question comes from Howard

[Gleisher] with Metropolitan West.

Hi. Thanks very much. Two quick

questions, both related to SG and A.

I do notice - and maybe it's just my perception,

of, you know, the very strong push in the

switchers' campaign, but I don't see the growth in

SG and A year to year. I'm wondering what - where

you're able to cut back. Is there just cost

savings, or how you're able to pay for that

without showing increasing SG and A or maybe my

perception is different than reality.

If I could answer that one.

Sure.

We have really, really tight

expense controls in the company. And what we've

been doing, you know, is cutting back on our

infrastructure costs, both, you know, people and

non-people expenses, wherever possible, and that's

been how we've been able to basically offset so

far this year the increased investments in areas

like our new retail initiative, right?

Increased R and D. And, you know, increased

advertising, as you've seen, certainly in this

last quarter with the switcher campaign.

But I also think we're kind of focusing it.

Steve, I think, has a great philosophy, in that he

likes to put all the wood behind one arrow, if you

will, and so, you know, he's got a lot of those

resources behind the switcher campaign right now,

which we think is really critical that we - you

know, when we - we're trying to go for this other

95%, not only with our retail stores but also for

all of our channel partners, and, you know,

anecdotally, you know, we're getting good feedback

on this, that it is resonating, although we don't

have hard data yet, with Windows users.

So I think it's more that rather than increasing

dramatically, our advertising, that what we're

doing is really focusing it on this switcher

campaign right now.

And then this might be a little

controversial, but if -

By the way, the switcher

campaign is only running in the U.S., too, so let

me be clear on that.

Okay. Then - but, you know, if you

have the confidence that you can get market share

up and you can do that by having switchers, and

you have an environment today where your

competition - all of your competition in the PC

space, other than Dell - and I know that's a big

other, but other than Dell - you know, is in

disarray, why don't you spend even more to get

market share when there's a lot of uncertainty, HP

and Compaq, who knows what's happening with

Gateway, you have an unique opportunity and you

have a very new product line that you pointed out.

If you - if you wait too much longer, then the

uniqueness and the novelty of the product may not

come through as well in the campaigns.

Yeah. We're trying to strike

the right balance. Clearly, if we weren't

concerned about retail profit - I mean, excuse

me, short-term profitability, you could pursue a,

you know, full speed ahead. But, you know, we're

just really trying to balance the long-term with

the short-term, remaining profitable as a company

in the short term, and so it's a tough balancing

act right now.

But, you know, there is some merit to the point

you're raising.

Or is it that you're not yet sure

that this switcher campaign can actually work

long-term?

We don't have hard - enough

hard data yet, as I've said, but anecdotally,

early reports are that it's a good program.

Thank you.

Thank you, Howard. Could we

have the next question, please?

Yes. Our next question comes from

Charles Wolf with Needham.

Hi, Fred.

Maybe Ron is going to cover this

tomorrow, but I was interested in the number of

visitors to the store in the June

quarter and the percentage of purchases by

non-Mac visitors of the total Macs sold in the

stores. Is he going to cover that?

Charlie, he is. If I could

just defer that to tomorrow, Ron's going to give

about a 30-minute presentation and be available

for the Q and A, and I know there - you know,

rightfully so, there's continued interest in the

retail store, but if I - I've already answered a

few things that he was going to cover and if I

covered too much, I've preempted his presentation,

so if I could defer that, I'd appreciate it.

Fine. The other question I have is

you mentioned restructuring charges in the

September quarter. Can you give us any idea what

the magnitude might be?

Currently, we think that - we

believe that it will be less than 10 million.

Okay. Fine. Thanks a lot.

You're welcome.

Thanks, Charlie. Could we have

the next question, please?

Yes. And just a reminder, it is

star 1 to signal for a question. Next we'll be to

Richard Chu with SG Cowen Securities.

Thank you very much. A couple

things. I'd like to go back to the channel

inventory point again.

I'd like to just understand finally, is it - what

you're saying that you need to reduce the weeks of

the channel inventory looking backwards on a

five-week computation basis by the end of

September. In order to get there, is it your

sense that you need to get actual physical units

down from the end of June levels?

Yes. Let me be clear. We

calculate channel inventory two ways. I mean,

obviously channel inventory that you end with is

for future sales. I think you would agree. And

so what we try to do is calculate it both on a

five-week backward look - okay? - and also this

next quarter forward looking. So take the average

weekly sell-through by taking your sell-through,

your forecasting, dividing by 13.

Now, it happens to be they both - both

calculations converge very close to 6.5 weeks in

terms of channel inventory at the end of the June

quarter.

We feel that, you know, the channel inventory, you

know, if you were to strip out demo units and you

were to strip out in-transits and so forth, we're

not in any dangerous situation like we were back

in the - if you remember the September quarter of

2000. It's not that way at all. It's just that

we're a little longer than we'd like to be.

As I've said previously, we like to try to manage

in the 4 to 5-week range, and so I think 5 is fine

in terms of a desirable target, so we're about a

week-and-a-half above that level, and we'd like to

bring that down over the next two quarters. And

that implies that absolute unit channel inventory

will decline, that's planned to decline, in terms

of the guidance we've given, in the September

quarter, and then again in the December quarter.

Okay. And you made reference to

price protection being larger at the end of June.

Than I had expected on

June 18th, yes.

Okay. Is it - for the quarter as a

whole, can you size that relative to recent

quarter levels, and does your guidance for

September contemplate similar levels or higher

levels of price protection?

Wow!

Given especially what you said with

respect to the need to take down price

structures -

Yeah.

- given currency, et cetera.

You know, I would like to just

not get into that. Let me tell you why. Because

obviously the price protection that we have

accrued at the end of the June

quarter takes into account planned product

introductions for the September quarter. As I

stated earlier. But now you want to go out to the

December quarter, which gets into planned product

introductions in the December quarter, and, wow,

that's a little far out, and so I don't want to

give a precise answer to that.

But I -

Do you couple that - from product

introductions as opposed to pricing action.

I can't - I can't - well, you

know, normally we don't take pricing actions

except when we introduce replacement products,

just so you understand. The only time we've ever

done that was when we - Motorola, back two, three

years ago, was not able to get us enough G4 chips,

if you remember, and so we had to go change the

SKUs that we had made available, and that resulted

in some de facto price changes, and we then had a

price increase due to increase in LCD prices and

DRAM, as you know, in the spring of this calendar

year.

And so aside from those two, I can't remember us

ever just making a price change as a company,

since I've been with the company, other than in

conjunction with a product transition.

So they're tied to product transitions, is what

I'm trying to tell you.

Okay. Thank you. We'll talk to you

tomorrow.

Yeah.

Thanks, Richard. Could we have

the next question, please.

Yes. Our next question is a

follow-up question from Andrew Neff with Bear

Stearns.

Just a quick question on the cutbacks

you're doing in terms of layoffs. You'd made a

point in the past couple quarters that, you know,

you had not done layoffs and there seems to be a

significant change in terms of your view of

things.

Well, no, I - let me just be

clear. I said limited - what I'm saying is, and

we have been doing over the last year, there

hasn't been any across-the-board layoff at Apple.

Let me be very clear. But we have, you know -

that's what I was saying. Someone asked, "Well,

how are you able to fund some of these new

initiatives, increased R and D, your new retail

initiative?" It's been that we've been cutting

back in infrastructure areas, and it included

some, you know, termination of people in areas

where we felt they weren't an important commitment

of resources that would drive the growth of the

company. And so we've been reallocating resources

all along, over the last year, on a limited basis,

which has certainly helped us to be able to hold

our expenses fairly flat.

And I'm just suggesting that we'll - we'll

continue those kinds of activities potentially in

the - in the September quarter, and clearly, we,

you know, announced the layoff on July 7th of 7%

of our people in the Sacramento factory.

Okay. And the second question was

just a follow-up question. Just in looking at the

flat-panel iMac, are you - you know, I guess are

there - I guess we'll see some of this tomorrow,

in terms of what's been rumored, but what do you

do to stimulate significant growth going forward?

I mean, is there - what do you have in the

pipeline, or are there things in the pipeline that

can lead to that, given that this is probably

falling short of our expectations sooner than you

would have thought.

Yeah, if I could just come back

to the other point. I mean, you may have also

noticed, just to tie together what I said, that

our head count as a company has not been declining

overall, which kind of supports my reallocation of

resources. In fact, our head count was up

slightly from the end of the March quarter to the June

quarter. So I just wanted to kind of put that

in an overall context for you. So I'm sorry. Go

ahead to your next question.

Okay. Just saying in terms of what

our - how are you planning to address the

flat-panel iMac coming in short of expectations so

early in the cycle of a new product? I guess

we'll see some of that tomorrow, but are there any

other things that you have that could help

generate significant growth over the next couple

quarters or next year?

I think we have - we're

continuing to invest heavily in new products. I'm

not going to get into, you know, what's coming

this quarter or in the December quarter. As you

know, we don't talk about future products. But,

you know, clearly we're very focused as a

management team on bringing great products to

market that can help drive the growth of the

company.

Okay. Thanks very much, Fred.

Thank you.

Thanks, Andy, and thanks to

everyone for joining us. And as we've mentioned a

couple times today, we'll be hosting a financial

analysts' meeting tomorrow, beginning at

approximately 11:00 a.m. eastern time, 8:00 a.m.

Pacific time. And the meeting will be audio

webcast and can be accessed through the analysts

meeting link at www.Apple.com/investor.

As for today's call, a recording will be available

for replay for seven days, beginning at 5:00 p.m.

Pacific time today, and the number for the replay

is 719-457-0820, and the confirmation code is

465947. And members of the press with additional

questions can contact Lynn Fox at 408-974-6209.

Financial analysts' can contact Joan Hoover or me

with additional questions. Joan is at

408-974-4570 and I am at 408-974-5420. And thanks

again, to everyone for joining us.

This does conclude today's 00:51:46 conference. You may now disconnect.