蘋果 (AAPL) 2006 Q1 法說會逐字稿

Thank you for standing by.

We're about to begin.

Good day and welcome to this Apple Computer first quarter financial results 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 Ms. Nancy Paxton, Senior Director, Investor Relations and Corporate Finance.

Please go ahead.

Thank you.

Good afternoon.

Thanks to everyone for joining us.

Speaking today is Apple CFO, Peter Oppenheimer, and he'll joined by Apple COO, Tim Cook, and Corporate Treasurer, Gary Whistler for the Q&A session with the analysts.

Please note some that of the information you'll hear during this call consists of forward-looking statements regarding revenue, gross margin, operating expenses, other income and expense, taxes, earnings per share, Apple's retail initiatives, iPod shipments, future products including Intel-based Macs, components prepayments, and non-cash stock-based compensation expense.

Actual results or trends could differ materially from our forecast.

For more information please refer to the risk factors contained in the Company's Form 10-K for 2005.

Please also note that any non-GAAP financial measures included in today's call should be viewed in addition to, and not in lieu of Apple's GAAP results.

A reconciliation of any GAAP and non-GAAP measures discussed will be posted on Apple's website, www.apple.com/investor.

I'd like to remind that you the second quarter of Apple's fiscal 2006 will end on April 1st, and will span 13 weeks, rather than the 14 weeks spanned by the first fiscal quarter.

In connection with SEC rules on corporate disclosure, Apple is making this analyst 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 Peter Oppenheimer for introductory remarks.

Thank you, Nancy.

Thank you for joining us.

We are extremely proud to report a tremendous first quarter for Apple.

Revenue of 5.75 billion, increased over 2 billion from last quarter's record revenue, and was up 65% year-over-year.

This quarterly results also exceeded Apple's revenue for all of fiscal 2002.

The quarter's revenue was fueled by record shattering iPod sales, solid Mac sales, and a 14th week of business during the quarter.

Quarterly net income nearly doubled on a year-over-year basis, and also widely eclipsed the previous record established in the September quarter.

Based on unusually strong operating margin of 13%, net income was $565 million, or $0.65 per diluted share on a GAAP basis.

Excluding the impact of non-cash stock based compensation, operating margin was 13.8%, net income was $595 million, and diluted earnings per share were $0.68.

I'll now provide highlights of our two businesses, Mac and Music.

Our Mac business generated 41% of total revenue, and was up 12% from the year-ago quarter.

Mac shipments increased 20% year-over-year to 1.254 million, the highest quarterly total in six years.

We continue to experience strong portable system sales.

We shipped a combined total of 587,000 iBooks and PowerBooks representing 39% year-over-year growth.

We shipped 667,000 desktop systems, representing 7% year-over-year growth.

Mac unit sales exceeded our internal expectations, despite what we believed was the positive sales associated with Intel transition.

Reflecting on the September and December quarters, we were pleased with the lower than expected impact of the Intel transition on sales, and with the momentum of our Mac business.

Our ending channel inventory remained below our target of 4 to 5 weeks, as planned, due to our Intel-based Macintosh announcement at MacWorld.

Our music business generated 59% of total Apple revenue in the quarter, and was up 145% compared to the year-ago quarter.

We sold over 14 million iPods during the quarter, more than 3 times the number we sold in the year ago quarter, and more than double the previous record number of iPods we sold in the September quarter.

We're particularly proud of our execution, given that we replaced two of our three iPod lines including the highest volume iPod mini line, as we entered the holiday season.

Customer reaction to both the iPod Nano, and the fifth generation iPod was stunning. iPod channel inventories were lower than we would have liked during the quarter.

At the end of the quarter, including units in transit, our channel inventory levels were within our four to six week target range, based on our current view of demand for the seasonally lower March quarter.

It was a landmark quarter for the iTunes music store, with the addition of television, music video, and short film content, to the stores vast and growing library of music and audio books.

The iTunes music store continues to be the world's leading on-line music service, and currently operates in 21 countries, that represent over 90% of the global music market.

We have sold over 850 million songs, and 8 million videos to date, and according to Nielson sound scan, Apple accounted for 83% of the share of the U.S. market for legally purchased, and downloaded music during the month of December.

The Apple retail stores reached a significant new milestone in the December quarter by generating $1.072 billion in revenue, compared to $561 million in the year ago quarter.

We opened 11 new stores during the quarter, exiting with 135.

With an average of 129 stores open during the quarter, average quarterly revenue per store was $8.3 million, up 41% from the year-ago quarter.

Retail segment profits rose sharply to $90 million, from $45 million in the year-ago quarter.

And associated manufacturing margin, not reflected in retail segment profit was $199 million, up from $99 million in the year-ago quarter.

We're particularly proud of the momentum we have realized in our stores.

In fiscal 2004 after three years of operation, we generated $1.185 billion in annual revenue through the stores.

In fiscal 2005, we nearly doubled that number to $2.35 billion.

Now in a single quarter, we have surpassed $1 billion in revenue.

We will continue to add new stores at a measured pace, and expect to open a total of 40 new stores during fiscal '06.

In terms of geographic results, including sales from our retail stores, quarterly revenue in Japan, the Americas, and Europe was up year-over-year by 92%, 70%, and 51% respectively.

Gross margin was 27.2% on a GAAP basis, and included $5 million in expense related to noncash stock-based compensation.

Without this expense, non-GAAP gross margin would have been 27.3%.

GAAP operating expenses were $814 million, including $39 million in expense related to stock-based compensation.

Non-GAAP OpEx was $775 million, $55 million higher than our guidance, primarily due to variable expenses associated with a higher revenue level, a greater than expected mix of direct sales, and investments we made in our business.

OI&E was $81 million, and the tax rate was 32%.

Cash grew by $446 million during the quarter, to $8.707 billion.

We made pre-payments of $750 million, related to previously announced agreements, for future supply of NAND Flash memory components.

Without these prepayments, cash would have increased by about $1.2 billion.

The cash generation was primarily a function of strong earnings, excellent working capital management, and employee stock option exercises.

Cash flow from operations during the quarter was about $283 million, which includes the impact of a $750 million prepayment.

Capital expenditures in the quarter were $82 million, including $40 million for our retail initiative.

Looking ahead to the March 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.

For the quarter, which will span the typical 13, rather than 14 weeks, we are targeting the second best quarter in the Company's history, second only to last quarter, with revenue of about $4.3 billion.

This target represents 33% year-over-year growth, and an increase of over $1 billion year-over-year.

We are factoring into our guidance, a seasonal decline in iPods, and the beginning of our transition to Intel-based Macs.

We expect a total quarterly cost of non-cash stock-based compensation to be approximately $49 million.

We expect GAAP gross margin to be about 27.8%, reflecting approximately $5 million, related to stock-based compensation expense.

Without that expense, we expect non-GAAP gross margin to be about 27.9%.

We expect GAAP OpEx to be about $774 million, including about $44 million, related to stock-based compensation, we expect non-GAAP OpEx to be about $730 million.

We expect OI&Es to be about $72 million, and we expect the tax rate to be 32%.

We expect to generate GAAP EPS of about $0.38, which includes an anticipated $0.04 per share related to noncash share-based compensation expense.

We expect non-GAAP EPS to be about $0.42.

During the March quarter, we expect to pay the remaining $500 million of the $1.25 billion NAND Flash prepayment.

We've just completed the best quarter in Apple's history!

And fiscal '06 is off a great start.

Our new Intel-based Macs announced at MacWorld, have been very well received.

We remain extremely enthusiastic about our innovative product pipeline, and we are confident in our strategy.

With that, I'd like to open the call to questions.

Thank you. [OPERATOR INSTRUCTIONS]

We'll take as many questions as time permits, and in the order that you signal.

We'll pause for just a moment.

Our first question comes from Ben Reitzes of UBS.

Good afternoon, thanks a lot.

Couple of things, Peter are you able to quantify the impact of the extra week?

I believe last year you did not have the week after Christmas.

This year you did.

And so was this year's extra week extra big, or is it really hard to say, and then I just wanted to ask more about your guidance.

Let me answer your first question.

Yes, the 14th week this year did span between Christmas Day and New Year's Day, and that is traditionally, and it was this year, a very strong shopping week.

And our earnings, expenses, and revenue were all higher as a result.

Okay.

I mean, is it possible to say like it added 1 or 2 million iPods, or is it just too hard to say?

Ben, I would characterize it as a big week.

All right.

Then with regard to your outlook, could you just tell us a little more about what you're expecting with the Intel transition?

You're coming off a quarter where you guided 4.7, you come in at 5.75, now you're at 4.3.

I mean, shouldn't we assume, why are you being so conservative?

A little more detail on this exact Intel transition issue would be helpful, maybe even if you could go back through the weeks of inventory, and what you might expect further drain, or anything else?

I'll let Tim address our channel inventory, but let me just speak to you in a little broader terms about our guidance.

We factored a number of considerations into developing our guidance.

First, and then this really was your first question, Q1 spans 14 weeks, and Q2 will span the normal 13 weeks, and again, the 14th week that we had this quarter was the week between Christmas and New Year's, which is a very strong shopping week.

Second, for our Mac business, we have factored in the very strong response that we've received for the new Intel-based Macs that we announced at MacWorld.

The limited number of shipping weeks that we will have on MacBook Pro, and the pause that we saw in customer demand for Q1.

For the iPods, we have factored in the extraordinary demand in Q1, which was fueled by iPod being one of top holiday gifts of the season.

Some channel fill that we had, and a seasonal drop in demand, as we go from the holiday quarter to the March quarter.

Did you say channel inventory for iPods were within the range, or even at the low end?

They were within the range, but maybe I'll let Tim make some comments on both Mac and the iPod Inventory.

On iPod channel inventory, as has been widely reported in numerous places, our channel inventory was lower than we would have liked for most of the quarter.

Shipments did improve on iPod across the quarter, and in particular the second half of December, the shipments were very strong.

With the strong shipments, total channel inventory, which included a significant amount of inventory, that was in-transit at the end of the quarter, increased by approximately 550,000 units, as compared to the channel inventory at the beginning of the quarter.

Despite that, the ending channel inventory was still below the targeted range of 4 to 6 weeks, based on December sales.

However, we believe that the channel inventory is within our targeted range of 4 to 6 weeks, based on our current view of demand for the seasonally lower March quarter.

In terms of the Mac channel inventory, we began the quarter below the targeted range of 4 to 5 weeks.

And as we had planned, we ended the quarter below the targeted range in preparation for the MacWorld announcements that we made last week.

I'm going to cede the floor, one more.

I see a situation where you still may have some lower than expected channel inventory, but are you seeing anything out there that is giving you any pause in the economy, or in the consumer markets, other than some of these Apple-related events that you're talking about?

What we are seeing is, we had an extraordinary response last week to our announcements at MacWorld, we were thrilled with the reaction that we've gotten, including the bookings on the new iMac and the Power Book, or MacBook Pro.

Last quarter, we did see a pause, as some customers begin to speculate about the upcoming announcements at MacWorld.

However, the Mac beat our internal expectations, as Peter had said.

We obviously factored some level of pause into our guidance, and we were able to beat that number, and were very happy with it, and the overall momentum of the Mac business.

Thanks a lot.

Thanks Ben.

Could we have the next question, please?

Rob Semple from Credit Suisse is our next question.

Kind of looking at the OpEx guidance, it is now basically in-line with your sales guidance.

I know you don't give a target model anymore, but historically you used try to keep that tracking at about 50% of the growth of sales.

How should we be thinking about that?

Do you need to be spending this much, if top-line growth is going to be slowing like this?

As I said, we are very confident in our business, and our strategy and we are continuing to invest for long-term growth, both in revenue and in earnings.

I've provided very strong guidance for the March quarter, with revenue growing at 33% and double-digit operating margin.

One follow-up on the Mac question.

Obviously if you've had a strong response for the new products, does this mean you're very scared about iBook and PowerBook sales really deteriorating, until those new products are launched as well?

We did see a pause last quarter, and as Peter has said, we factored what we saw last quarter into this quarter's guidance.

We're thrilled with the response that we got last week, and as we said, we've started shipments of the iMac already, and given that we've got an entire quarter to ship it, we believe that we can, we're hopeful we can meet the demand on the iMac.

But also as we announced last week, the MacBook Pro will begin shipping in February, and therefore, it has a limited number of weeks to ship during the quarter, and given that and the very strong response that we saw, we may not be able to meet the demand on the MacBook Pro.

Okay.

Thanks.

Thanks, Rob.

Could we have the next question, please?

Rebecca Runkle of Morgan Stanley.

Thanks.

Good afternoon.

Obviously a phenomenal quarter!

Just want to dig down a little bit more on the CPU side of the equation, you've alluded several times to the fact that you saw a pause.

Since that was the one area where some people could say they were disappointed on the December results, can you just provide a little bit more specificity, in terms of what you saw that gives you confidence that this is purely a pause in front of the product cycle, as opposed to any disconnect on the halo thesis, that many people have?

Let me make some comments here.

First of all, the Mac business, we're at 20% year-over-year, and it did beat our internal expectation, which had factored in a level of pause.

We did see a pause.

We received reports from a number of customers from different markets, that they were postponing purchases pending MacWorld's announcements.

However, our results last week that we saw, and the reaction last week is extraordinary, and that gives us tremendous optimism about the customer reaction on the Intel-based Macintoshes.

It's very difficult to predict how customers will react this quarter.

And so we have obviously factored in, that kind of thinking into our guidance.

A year ago, we had a situation, as you recall, the comparison quarter, where we had a significant shortage of G5 chips in the September quarter, and then we began to fill the channel, and served the pent-up demand as we entered the December quarter.

So the comparison frankly, is also a difficult comparison, and that has to be taken into consideration, as well in looking at the year-over-year results.

I know you guys don't specifically like to talk about specific products anymore, but would you at least confirm that more of the slowdown happened on the professional side of the equation, as opposed to the consumer side of the equation?

Or is that not a trend that you saw?

We had some level of reports from customers in different markets.

I wouldn't want to pin it on one market above the other.

Okay.

Great.

Thank so you much.

Thanks Rebecca.

Could we have the next question, please?

Next question, Bill Shope of JP Morgan.

First of all, on your website you're still offering the iMac G5 and obviously the PowerMac G4, at the same price as the new Intel-based Macs, as you highlighted at MacWorld.

Can you give us an idea of how much inventory you still need to work through for the legacy products, and also help us understand how you'll work through that inventory without discounting?

Well, we don't, Bill, talk about future products, or future pricing, but we've certainly factored our thinking into our guidance, and we will continue to ship the iMac G5 and the Power Book 15" while supplies last.

Just a clarification, on the in-transit inventory that you include in your channel inventory number, that's not recognized as revenue yet, right?

You don't recognize that until that actual arrives at the retailer, or is that incorrect?

No, we recognize shipments of our products in most cases when they are shipped from our factories.

Okay, one final question.

Can you give us a read on margins for the iPod business for the quarter?

Sure.

As you know I don't want to be, for competitive reasons, specific, nor do we want to talk about specific iPod sales, but I will tell that you that the iPod gross margins in the December quarter were above 20%.

Thanks.

Thanks Bill.

Could we have the next question please?

Charles Wolf, Needham & Company.

Yes, I have a few questions.

What was the split on Apple store Mac sales between Windows and Mac users?

Charlie, I'm sorry, I don't have that.

Okay.

Then what was the split between iPod sales, domestic versus international?

Charlie, as I indicated in Bill's question, we don't want to talk about iPod sales by model or geography.

I can tell you that with 14 million sold last quarter, we were thrilled with that result, and there where points in the quarter where we were too low in many of our channels.

Let me ask a final question then.

At the MacWorld keynote last week, Steve indicated that music downloads were running at 3 million per week, I believe.

I assume that that level was reached through a lot of redemptions of gift certificates, is that a reasonable assumption?

Yes, in the December quarter we sold a lot of iTunes music gift cards and certificates over at the store, but we're also having people purchase directly as well.

We couldn't have been happier with the sales of iTunes in the December quarter.

Charlie, that's 3 million per day, not 3 million per week, for clarity.

Oh, yes, right. 3 million per day is right.

Thanks Charlie.

Could we have the next question please?

Shannon Cross of Cross Research.

Hi, everyone.

Can you give us an idea, in terms of availability of components from Intel, and specifically is that leading to any delays, in terms of getting the MacBook Pro out?

Just specifics.

You said February.

I mean, it's earlier rather than later in the month?

Let me answer the question broadly about supply of the iMac and the MacBook Pro.

We've begun to ship the iMac.

We're very happy with how the production ramp is going.

We are extremely happy with the response we had last week, as I said before, as we are hopeful that we can meet the demand for the quarter.

On the MacBook Pro, as planned we are beginning to ship that in February.

And given the number of weeks that would remain in the quarter to ship, and the extraordinary response that we've seen from our customers, we may not be able to meet demand on that product.

Okay.

And with regard to any product constraints in the last quarter, any thoughts on air freighting, any incremental costs that were associated with any shortages?

In the current quarter that's factored into our guidance, we would be air freighting the Intel-based iMacs, in order to get those into customers' hands very quickly.

We also in the results in our Q1, that Peter's talked to, air freighted some number of iMacs, as we had rolled the line-up in October.

Okay.

Then finally, can you give us an idea of how many outlets you now are selling iPods in?

We are over 35,000 at this point, although we do not sell all models in all outlets.

Okay.

Thank you.

Thanks, Shannon.

Could we have the next question, please?

Joel Wagonfeld of First Albany Capital.

Thank you.

Three part question, if I could. #1, is there any chance the new iMac and Power Book have better gross margins, given the scale of the Intel ecosystem for other parts of the componentry?

#2, is it accurate that the impacts of any price protection that you may have incorporated for planned discounts of the legacy G5 and G4 Macs already?

Would that already have been incorporated in the December quarter, and hence it wouldn't negatively impact this March quarter?

Finally I just want to be clear.

Are you saying with your comments on the inventory, that you think supply and demand are now in balance for all of the iPods, including the Nano 4-Gig?

Thanks.

Joel, Peter.

Let me answer your first two questions, and Tim can address your third.

As regards the Intel-based Mac gross margins, we don't want to provide specific gross margins for any of our products, and I've given you pretty detailed guidance for the December quarter.

And I'm sorry, what was your second question?

The impacts of any price protection would have already been incorporated last quarter?

Right.

As I had mentioned earlier, we are not going to talk about product plans, or pricing actions, that we've not already announced.

But I can tell you that on any price protection that would affect our channel inventories, that we contemplate, we provided for in our December quarter.

And future actions, beyond that would not affect the channel inventory, but March quarter sell-in, we have factored into our guidance for the March quarter.

Relative to the channel inventory on the iPod, on an aggregate basis, we believe that we're within our targeted range of 4 to 6 weeks, based on our current view of demand for the quarter.

However, there are stock-outs in different places on different models and also, some countries, are leaner than others.

We're working very, very hard right now to alleviate those situations.

Is the 4-gig still the key bottleneck?

The 4-gig is lean in places.

We're working very hard to get more 4-gig Nanos out there.

Thanks, Joel.

Could we have the next question, please?

Gene Munster of Piper Jaffray.

Good afternoon, in terms of the big picture here conceptually, where you're going with the market share plan here, do you see yourself being a little bit more aggressive in 2006, in terms of your efforts to gain market share, maybe just in terms of breadth of distribution, and other ways that you can gain market share?

Gene is your question, on the Macintosh or the iPod?

On the Mac side.

On the Mac side, we are very confident that we have selected the right course for the future of the Macintosh, and we reviewed processor roadmaps from many different sources, and knew that Intel has the best one by far.

We have got the launch underway, we're very happy that we were able to do that 5 or 6 months before the expectation of doing it.

We'll have the transition completed much earlier than the market anticipated by pulling it in until the end of 2006.

And so we are very, very optimistic about the future of the Mac, and the way that we're headed.

But there are also just a couple of, I mean, that's doing the product side, which I would say is very important, but there's also the distribution side, and the pricing side, and you guys couldn't probably have an opportunity to really put the hammer down in terms of picking up market share in 2006.

So just conceptually, obviously you guys aren't going to talk about pricing, but do you see Apple being more aggressive at trying to gain market share in 2006, or kind of continue the status quo of creating the best products that, you know, happen to be more selective, in terms of distribution, and more selective in terms of price.

We're going to continue to make the best products on the face of the earth.

That's the reason that we're here.

On a distribution basis, we continue to open stores.

We also continue to look at different alternatives in the channels, and when we find things that we like, and we would obviously do those if they're beneficial.

I wouldn't want to comment on the price question.

Okay.

Then last question is, outside the extra week in the December quarter, and outside of people postponing their purchases in anticipation of the Intel-based, is there any reason to think that the seasonality between December and March should be any different than previous years?

On the Macintosh or the iPod?

The overall business.

The overall seasonality between December and March.

Yes, there is a reason to think the seasonality at a total company would be different, because the music business was a much higher percentage of our business in the December quarter, than it had previously been.

And so obviously the iPod would have a different seasonal curve, than the Macintosh would have.

Okay.

That makes sense.

Great.

Thank you.

Thanks, Gene.

Could we have the next question, please?

Richard Chu of Cowen.

Yes, hi, thank you.

Just wanted to repeat, three questions on seasonality on the guidance.

You are assuming, distant alert, I've seen a stronger seasonal decline in the music business than systems.

Is that the point of your comment?

We didn't hear you, would you repeat the last part of your question?

The impact of -- Tim's response to the prior question was effectively that you are assuming a larger seasonal decline in music business than the Mac business.

What I'm saying specifically is that if you look at previous years for Apple, and Q1 results, and just look at the total revenue, we would not expect the total revenue to look the same sequentially, as it had in the past, because we were operating with a much higher music content in the Q1 and the holiday period.

Okay.

If I can follow on, second question, you kept as you've said, the old product price points unchanged.

Can I fundamentally ask why?

That would suggest that you assume users perceive the same value or performance for all the new.

Could you comment on that?

We're selling the iMac G5 and the Power Book G4 15" product while supplies last, and we've factored our thinking into our guidance.

So you, effectively you're saying you see no need to reduce prices, despite the perceived difference in value.

I'm saying that anything that we're planning on doing we've factored into our guidance, and that we are only selling these while supplies last.

Finally, if my rough calculations on the implied music and video download revenue streams are correct, excluding that, downloads and iPod, the remainder of the music revenue streams look like the non-iPod, non-download music revenues increased dramatically, Q4 to Q1.

Could you comment on that, and on the seasonality and dynamics associated with that business?

Sure.

Richard this is Peter.

There are now over 2,000 different accessories that you can buy with your iPod, and fundamentally, those are the revenue streams I think that you're referring to.

We did very well with our sales of these in the quarter, both the Apple branded, and our third-party developers that we sold directly.

We expect to have a good quarter in March, and honestly we're going to learn more about the seasonality of this part of the business, because it's bigger, it's growing.

I've said this before, and I believe it to be the case that many people will buy an iPod, and then later come back to add accessories to it.

And this seems to be a part of our business that has more of a recurring revenue stream.

Much like the iTunes music store.

We're very pleased with what we're seeing, and we're learning more about it.

Can you update us on profitability of the music store?

The music store in the December quarter did operate above breakeven.

Thank you.

Thanks, Richard.

Could we have the next question, please?

Next question comes from Richard Gardner of Citigroup.

Thank you.

Tim, was hoping you could just give us your standard pitch on component pricing and availability during the first and second fiscal quarters for the major commodities that you buy, then also I was hoping that you could give us the mix of web-direct sales in the quarter, please?

On a component basis, Rich, what we saw last quarter was that we had a very favorable component environment, both in terms of LCDs and memory, both of those were more favorable than we had predicted.

As we enter into this quarter, we continue to see the LCDs being in a favorable environment, because supply is greater than demand.

We do expect the DRAM market to stabilize some, as more of the manufacturing capacity is converted to NAND Flash.

Hard drive prices continue to decline, but they're declining at a lower than historical rate, due to some underlying component shortages.

Any comments on Flash?

I'd continue to expect price reductions in the Flash area, as more and more people convert their DRAM capacity to NAND in the short term, but overall, as you can tell by the amount of prepay that we've elected to do, we viewed that particular market as not having as many downturns as some of the other commodity markets, and we believed it was very important to lock supply for the long term.

Okay.

And then web-direct sales in the quarter?

We don't release the exact number, but I would tell you that the web sales were significant in the quarter.

Rich, I'll add that overall our direct sales, which include the web sales that Tim referred to, sales through our retail stores, and direct sales to U.S. education and enterprise and the music store, comprised 49% of total Apple revenue, and that was up from 44% in the year ago quarter.

Maybe, Peter, one more simple one for you.

Can you talk about the location of the 40 new store openings that you've talked about for fiscal 2006, and how many of those are domestic versus international?

Would expect most of them to be domestically, but we'll continue to open stores in Canada, the UK and Japan as well.

Okay.

Thank you.

Thanks, Rich.

Next question, please.

And our next question will come from Steven Fortuna, Prudential Equity Group.

Hi Peter and Tim.

In terms of the seasonality of the iPod , in terms of which you are baking into the guidance, in terms of my model at least, so much of your earnings power for the quarter, and for the year for that matter, depends on upon assumptions one makes for seasonality in the March quarter.

Looks like your guidance, if I'm doing it quickly, an perhaps it's not accurate, about a 45% sequential decline in iPods, it looks like you are baking in that kind of a decline to get to the numbers that you're guiding to.

First of all, am I in the ballpark with that?

Secondly, if you don't comment on the iPod thing specifically, how do you think about the broader CE markets, in terms of typical March seasonality?

Steve, it's Peter.

I'll address that.

I'm not going to provide specific product-level guidance.

I didn't think you thought I would.

But let me just make some comments about last year, and relate it a little bit to this year.

Last year we did see a seasonal drop off, on the combination of our iPod and the iPod mini lines, which was more than offset by the introduction of the iPod Shuffle.

And as was widely reported, and we've commented, the iPod was one of the top holiday gifts this season.

It's natural to think that there would be a decrease in demand in the March quarter, from this exceptional holiday result, which again included a 14th week.

You can go out and get some primary research on what would you see for, you know, various CE products.

And then Peter in terms of, I'll leave that alone, and go on to my last question.

Can you walk through, I think Tim commented on what he expects for components in the March quarter.

Go through, if you could, kind of the puts and takes that you've factored into your gross March guidance?

Sure.

Basically I am factoring in a different product mix, which would include fewer iPods and lower component costs.

Great.

Thanks.

Thanks, Steve.

Could we have the next question, please?

Keith Bachman of Banc of America Securities.

Two questions, if I could.

Tim, I just want to clarify, I think what you said was you started the quarter with low inventory on the CPU side, and you ended a bit low too, so net/net it didn't sound like inventory played a big role in the December quarter on the CPU side.

Could I just clarify that if I could for the first question?

We started below our range, we ended below our range, and we had planned that keep, because of the upcoming announcements that we made at MacWorld.

Great.

The second question, is there any way to conceptually think about how your CPU business may split, in terms of units at all between the Intel side, and the Mac side in this quarter?

Is there any kind of general parameters you could think about, since the vast majority of your platform is still on the IBM processor side, or the G processor side.

Is it 80/20, or is there any kind of color you could give us there?

We're producing the best Macintoshes that Apple ever produced, and there are great products that have PowerPC processors in them, and incredible products that have Intel processors in them, and that we'll just have to see how the customers vote, in terms of the percentages of each.

Let me ask the software part of that question then, Tim, at least at MacWorld.

Quark is running natively, and then the Apple software suite is running natively, and it sounds like [Rosetta] is still going to be a part of the software side of the equation, so you still have the emulation.

Do you think that's going to cause people to pause at all, in terms of the performance that you're going to get?

What we're seeing is that Rosetta runs very well with products like Microsoft Office as an example, and as you commented, we've already ported the iLife suite and it's shipping on the new iMac, the new MacBook Pro, we have already ported iWork.

Obviously the OS is native in all of the applications embedded in the OS, such as Mail and iChat, et cetera, are also ported.

We have also announced as you may have heard, that the bulk of our Pro applications will be available in March natively.

This includes Final Cut and Logic and Aperture, et cetera.

There's a lot of things that are already native.

In fact, since we've announced last week, the websites have reported over 200 native apps already, and well over 1500 widgets, and so we're seeing great momentum from our developer community, and I think by making the announcement, obviously people are even more anxious than they already were to complete the work.

We're very confident that we'll continue to see great momentum in that area.

Any idea when Microsoft and Adobe might be native?

That's a question for them.

However, we've worked closely with Microsoft on, with running with Rosetta, and I would invite you to try that yourself.

We certainly believe that users will be very satisfied with that experience.

Fair enough.

Thanks very much, guys.

Thanks, Keith.

Could we have the next question, please?

David Bailey of Goldman Sachs.

Yes, good afternoon.

You mentioned that iPod margins were above 20% in the quarter?

Is that from lower component costs, or a better mix, and how sustainable is that?

David, I'm sorry I don't want to be specific on any of those parts of your question.

We said that they were above 20% in the quarter, and I will report to you in April what they were for the March quarter.

Okay.

Let me try something on the Mac side.

Do you expect to end the March quarter within your targeted channel inventory range, and if so, how much fill do you think you'll have in the quarter?

How much have you included in your targets?

We don't project channel inventory, David.

We guide to a total revenue number, and Peter has provided that guidance.

Okay.

Thank you.

Thanks, David.

Could we have the next question, please?

Shaw Wu, American Technology.

Yes.

Two questions.

Europe looked like it was very, very strong.

Just wondered if you could provide more color there, in terms of what happened there in terms of I guess the Mac business versus the music business.

The second question in R&D, looks like it took a bit of a spike, in terms of absolute dollars but certainly not so, in terms of percentage of revenue.

Just wondering how we should think of R&D spending?

Should it remain at these levels, or could it trend down?

Thanks.

Shaw, let me address your R&D question, and Tim can talk a bit about Europe.

As I mentioned earlier, we are very confident in our business, and we are investing in the business for long-term growth in both revenue and earnings.

And a big part of that is our investment in engineering.

And you've seen it go up each quarter for the last many quarters, and just expect us to continue to invest not only in engineering, but in opening more retail stores, more advertising and marketing programs, to grow the business.

Shaw, on the Europe side the Mac shipments were up 49% sequentially from September, but as you probably know the September quarter in Europe is a traditionally weak quarter, because of the summer vacations that happen across most of Europe.

In terms of revenue, Europe, with the retail stores, was up over 50%, and frankly there were many countries in Europe that had more, relatively more iPod constraints, and so that revenue number was held down by iPods a bit more than some of the other geographies.

Thanks, Shaw.

Could we have the next question, please?

Steve Lidberg of Pacific Crest Securities.

Good afternoon, guys.

Was hoping first with regards to iPod, if you could kind of outline how you see the opportunity for the iPod, in terms of units, or other market comparisons, on the total opportunity available.

Also, with regards to the creative professional market, can you comment with regards to the health of that market, both from a video perspective, as well as from publishing?

Thanks.

On your second question on the creative professionals, we saw good growth in the video market on a year-over-year basis.

We were very pleased with it.

D & P was weak, and as you know the D & P market itself is not a hugely growing market, and so that's not out of our expectation by any means.

In terms of opportunities on the iPod, we see the iPod as the absolute best player in the market.

We've only recently announced the iPod Nano and the iPod.

There's more video content on the way with the iPod.

So I think there continues to be significant opportunity for the iPod in the overall music business.

Thanks Steve.

Could we have the next question please?

We have a follow-up question from Ben Reitzes of UBS.

Good afternoon again.

Couple things.

Just caught me a little off-guard.

That was pretty quick.

With regard to other music at 491, much better than expected.

I'm just wondering, you know, was there anything in there, that was particularly helpful meaning you're seeing a lot of extra shelves now of iPod accessories in many retailers, maybe if you're able to kind of talk to how much iPod accessories were in that number, and what is going on with the iPod ecosystem going forward, so we can model that line a little better?

Ben, the two largest components of the other music related products and services, are first the iTunes music store, and then the iPod accessories, both the Apple branded, that we sell both directly and indirectly, and the developer iPod accessories, that we sell through the Apple on-line and retail stores.

Both had significant growth year-over-year and sequentially.

The music store, we couldn't be happier with its performance.

As I indicated earlier we are serving customers in 21 countries, where over 90% of music is purchased, and we saw strong growth, both year-over-year and sequentially, not only in music but with the addition of video.

And we look forward to bringing more content both here in the United States, and in other places before too long.

The accessory business continues to grow for us, both in terms of the Apple branded and our developer support.

We now have over 2,000 accessories that you can buy with your iPod, the vast majority that Apple doesn't make.

As I said, we're beginning to see a bit more of a recurring revenue stream there, where people are coming, and adding back that next accessory to their iPod family.

Well, will-- that line is where we'll see the new radio tuner, I believe?

Yes, announced at MacWorld, yes.

Now that radio tuner, any early indications on how that is doing?

Well.

And you can meet demand?

We're very pleased with the response on it, Ben, and we're working very hard to get units out.

We are currently not meeting demand, but we're working really hard to try to do it, I'm not projecting whether we can or not for the full quarter at this point.

I mean, is that like a millions units tracking type of device in the future, that kind of is a subset of iPod sales, is that the potential what we're looking at here with a high attach rate?

We don't give unit level guidance on the products.

I guess you're hoping.

Okay.

Thanks a lot.

Thanks, Ben.

Could we have the next question, please?

We have a follow-up question from Rebecca Runkle.

Please go ahead.

Asked and answered.

Thanks a lot.

Thanks, Rebecca.

Could we have the next question, please?

A follow-up from Gene Munster of Piper Jaffray.

Mine's been answered as well.

Thank you.

Okay.

Thanks Gene, and thanks to everyone for joining us.

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Ladies and gentlemen, that does conclude our presentation for today.

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