蘋果 (AAPL) 2006 Q3 法說會逐字稿

Good day and welcome to this Apple Computer third-quarter financial results conference call.

Today's conference is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Nancy Paxton, Senior Director Investor Relations and Corporate Finance.

Please go ahead.

Thank you.

Good afternoon and thanks to everyone for joining us.

Speaking today is Apple's CFO, Peter Oppenheimer.

And he will be joined by Apple's COO, Tim Cook, and Apple Treasurer, Gary Wipfler, for the Q&A session with analysts.

Please note that some of the information you will hear during our discussion today may consist of forward-looking statements regarding revenue; gross margin; operating expenses; other income and expense; taxes; earnings per share; future products; non-cash, stock-based compensation expense and a special committee investigation relating to the Company's past stock option grants.

Actual results or trends could differ materially from our forecasts.

For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2005, the Form 10-Q for the first and second fiscal quarters of 2006, and our Form 8-K filed with the SEC today.

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 is posted on Apple's website at www.Apple.com/investor.

With that, I would like to turn the call over to Peter Oppenheimer for introductory remarks.

Thank you, Nancy.

Thank you for joining us.

We're very pleased to report the second-highest quarterly revenue and earnings in Apple's history.

The quarter's revenue was 4.37 billion, representing 24% year-over-year growth.

The strong revenue was fueled by the best Mac unit sales in any 13 week quarter in Apple's history and continued healthy demand for our music products.

Operating margin for the quarter was 13%, and net income was 472 million or $0.54 per diluted share on a GAAP basis.

Excluding the impacts of 37 million in non-cash, stock-based compensation expense, operating margin was 13.8%, net income was 499 million and diluted earnings per share were $0.57.

The quarter's robust operating margin was attributable to the revenue growth, a very favorable component environment and solid expense management.

I would like to first talk about our Mac products, which represented 55% of our total quarterly revenue.

Mac product revenue increased 11% year over year, fueled by Mac unit shipment growth of 12% year over year to 1.327 million.

Ending channel inventory was within our target range of four to five weeks.

We continue to be very happy with our progress and our developers' progress in the transition to Intel.

We've now introduced the iMac, MacBook, MacBook Pro and Mac mini with Intel processors.

We're solidly on track to transition the PowerMac and Xserve by the end of this calendar year.

We have released universal versions of Apple's consumer and professional software applications, and our third-party developers have released over 2,900 universal applications.

We expect that over 70% of the 500 applications we consider most critical to our customers will be available in universal versions by the end of September.

We've been very pleased with the response to our new Macs, particularly from our consumer and education customers.

Intel-based Macs accounted for over 75% of the quarter's Mac shipments.

The MacBook, which we introduced in mid-May, has been extremely well-received and coupled with our very popular MacBook Pro has contributed to Apple's increased unit market share of portables in US retail from 6% in January to 12% in June according to NPD.

We are also very happy with our Mac ad campaign and feel it's contributing to our momentum, particularly with consumers.

We believe that many of our creative professional customers have delayed purchases, as they await new Intel-based Mac desktops, universal applications or both.

Our music products posted another quarter of strong results, representing 45% of total Company revenue and increasing 45% year-over-year.

IPod shipments grew 32% year over year consistent with our expectations, and we exited the quarter within our target range of four to six weeks of iPod channel inventory.

We continue to be very enthusiastic about iPod.

Based on the latest data published by NPD, iPod accounts for over 75% of the US market for MP3 players.

IPod is also the top-selling MP3 player in many large markets, such as Canada, Australia, the UK, France, Spain, Italy and Japan according to the latest data published from NPD, GfK and BCN.

Other music product revenue was 457 million, up 90% year over year.

These results were a function of continued strong sales from the iTunes Music Store and very solid performance for iPod accessories.

The iTunes Music Store continues to lead the industry, accounting for 85% share of the market for legally purchased and downloaded music in the US based on the latest data available from Nielsen SoundScan.

We have continued to enhance and expand the iTunes Music Store, now offering over 3 million songs, 9,000 music videos and over 150 television programs to the US market.

We're investing heavily in iPod and iTunes engineering and are very enthusiastic about our products in the pipeline.

The iPod ecosystem continues to thrive with innovative new products, such as the Nike+iPod Sport Kit, which allows runners to get real-time feedback on their performance through their iPod nanos.

It was another exciting quarter for the Apple retail stores.

Fueled by very strong sales of MacBooks and MacBook Pros, the retail stores generated revenue of 715 million, representing 29% year-over-year growth.

The stores generated 29 million in segment profit, excluding 148 million in associated manufacturing profit.

We opened 14 stores during the quarter, ending with 155.

With an average of 146 stores open during the quarter, average quarterly revenue per store was 4.9 million.

Store traffic continued to be very strong with over 17 million customers visiting our stores during the quarter.

Based on the latest retail store survey, nearly 50% of customers buying Macs in our stores are new to the Mac.

One of the highlights of the quarter was the opening of our 5th Avenue store in Manhattan.

The store has quickly become our highest volume store, and we recently welcomed the store's 500,000th visitor.

Customers are visiting the store in record numbers around the clock.

We were very pleased with our education business results, generating the highest quarterly revenue through our US education channel in over 10 years and shipping more Macs than in any other June quarter in the Company's history.

Our higher education customers have been extremely receptive of the MacBook and MacBook Pro, and our back-to-school promotion has already proven very popular with customers.

In terms of geographic results, including sales from our retail stores, quarterly revenue in the Americas, Europe and Japan was up 27%, 22% and 13% respectively.

Gross margin was 30.3% on a GAAP basis -- about 190 basis points higher than our guidance, primarily due to a very favorable component pricing environment and secondarily due to a more favorable mix of direct Mac sales.

Included in GAAP cost of goods sold was 6 million in stock-based compensation expense.

Excluding that expense, non-GAAP gross margin was 30.4%.

GAAP operating expenses were 759 million, including 31 million in expense related to stock-based compensation.

OI&E was 95 million, about 10 million higher than guidance, primarily due to higher-than-expected cash balances and higher-than-expected yields on cash investment.

The tax rate for the quarter was just under 29%.

This differed from our previous tax rate guidance of about 32%, primarily due to a tax benefit recorded for the implementation of tax planning strategy associated with the repatriation of foreign earnings under the American Jobs Creation Act but more than offset a tax charge reported for the repatriation.

This resulted in a net benefit in the quarter of 24 million or $0.03 per diluted share.

We had very strong cash generation during the quarter, increasing our cash balance by 950 million to end with about 9.2 billion.

This was primarily a function of cash flow from operations at just over $1 billion.

Looking ahead to the September quarter, I would 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, we're targeting revenue between 4.5 and 4.6 billion.

We expect the total quarterly cost of non-cash, stock-based compensation to be approximately $40 million.

We expect GAAP gross margins to be about 28.4%, reflecting approximately 6 million related to stock based compensation expense.

Without that expense, we expect non-GAAP gross margin to be about 28.5%.

We expect GAAP OpEx to be about 785 million, including about 34 million related to stock based compensation.

We expect non-GAAP OpEx to be about 751 million.

We expect OI&E to be about 100 million, and we expect the tax rate to be about 32%.

We expect to generate GAAP EPS of about $0.46 to $0.48, which includes an anticipated $0.03 per share related to non-cash, stock-based compensation expense.

We expect non-GAAP EPS to be about $0.49 to $0.51.

We are thrilled to have just reported the second-highest revenue and earnings in Apple's history and are very pleased with our Intel transition progress.

We are also very excited about and confident in the products in our pipeline.

With that, I would like to open the call to questions.

(Operator Instructions).

Andrew Neff, Bear Stearns.

I guess if you could talk to the extent you can about how you are viewing I guess the balance of the year.

In the press release, you talk about exciting new pipeline of iPod products.

And there's a lot of concern obviously out there about what sort of plans you have.

I guess the question is, how important is it for you to hit the holiday season?

Is that in your expectations as you look out at the balance of the year and how innovative can innovative be?

You know that we don't talk about unannounced products.

So, there's really a limit to what I can say.

I will just tell you two things.

The first is, we are very confident in the products in our pipeline.

And I just don't imagine that the creativity of Apple could ever be low.

Can we have the next question please?

Shannon Cross, Cross Research.

Just a question on your gross margin guidance and sort of how you're going to position -- well, you can't talk about that, so let's talk about gross margin guidance.

It looks like there's a substantial decrease quarter over quarter relative to where you came in.

Are we to assume more price aggressiveness and mix shift on the product side is driving that, or do you anticipate a big change in the commodity market environment?

And also, if you can just talk about what you're seeing in commodities in general?

I will start generally, and Tim can provide some further color on the commodity environment.

We expect the favorable commodity environment to continue and have guided our non-GAAP gross margins at 28.5%, which is above our historical target range.

We expect the gross margin percent to decline sequentially, largely driven by a full quarter of the back-to-school promotion; lower international pricing from our June price reductions; and a different product mix, including more MacBooks from the full quarter of availability.

This is Tim.

As Peter said earlier, the component pricing was very favorable in Q3.

It was favorable across almost all categories.

It was a great time to be a buyer.

In terms of the quarter that we are now in in Q4 -- and this is included in the guidance that Peter gave earlier -- we expect that we will continue to have a favorable environment on NAND Flash, on flat-panel displays, on portable hard drives -- all of which those areas are places where supply exceeds demand in the broader industry.

On the DRAM market, we expect it to be relatively balanced and so the prices to trade within a fairly narrow range.

Can we have the next question please?

Ben Reitzes, UBS.

Could you talk, Peter and maybe Tim, about the economic environment consumer versus education in particular?

And maybe give us a view of what you're seeing out there in the economy and given some other worries out there?

We will let Tim talk a little bit about some of our markets, and Gary then will give you a few thoughts on the economy.

In terms of what we saw across the quarter, once we announced the MacBook and began shipping it, we saw very robust consumer and higher education demand.

In the Pro markets, we were slow and we were slow because we believed that customers are delaying purchases, waiting on a PowerMac with an Intel chip in it and in some cases waiting for applications, such as Adobe's Creative Suite.

The ed market had a fabulous quarter.

It was the best June quarter in 10 years, as Peter said earlier.

We grew 11% year over year in the ed market versus an IDC projection of the ed market, which was shrinking by 4%.

The higher ed market, which is a subset of total ed market, grew 31% year over year.

So, we had a very fabulous consumer and higher education market season.

We believe that we are very well-poised going into the back-to-school season with the MacBook being so well-received and also the promotion that we're running with the nano.

Gary?

I'm going to speak a little bit more generally.

From the data we have seen, the US economy and the consumer are holding up pretty well in the face of all this stuff -- the geopolitical uncertainty and the higher oil prices and energy prices and higher interest rates.

But that said and most of you are aware Fed Chairman Bernanke made a few comments this morning suggesting or intimating the economy and consumer was beginning to moderate a little.

But I guess based on Tim's comments, you might not be seeing that yet.

Just one last thing is -- some of the -- you came in above at least my expectations for iPods and Macs but not in some of the other things like other music, peripherals and other.

Granted the year-over-years were decent on some of those, but was there anything holding those back?

Was there anything in particular going on in other music or peripherals?

I would've thought with more Mac sales, that line might have done a little better sequentially.

It looks like the quarter could have even been even more impressive because I think the iPod/Macs overall were pretty good.

So, could you just comment there?

On the software side, the comparison there is to the launch quarter Tiger a year ago.

So it's very, very difficult to compare.

And sequentially, we had iLife announced in Q2.

On the peripherals and other hardware category, we have integrated more and more things that were in peripherals before into the Macintosh itself and shipped it as part of the base configuration.

The other music-related products and services piece, basically a 6% decline sequentially, tracked to the iPod itself.

Can we have the next question please?

Keith Bachman, Banc of America.

I have a question.

The retail side -- there was some volatility between this quarter and last quarter in terms of both the units and revenues and was just hoping you could speak to that a little bit and I have a follow-up.

Thanks.

Yes, units and our Macs in retail were up 40% year over year.

The response in the stores to both the MacBook and MacBook Pro was very, very strong.

As I indicated, about half the Macs we sold were to people that had never owned a Mac before.

So, Peter, just to be clear, was most of that delta if you will between the March quarter and the June quarter of units up 50% this quarter?

And total at retail versus 7 last quarter, was that disproportionately driven by the new Mac notebooks?

We had much more availability of our Intel-based Macs, yes.

As we said in the last call in the March quarter, Ron really began to focus from January at Macworld on the Intel transition.

And we didn't have products in January in particular.

So, with our having availability not only of the MacBook Pro and Intel-based Mac but now the MacBook, he had just a fantastic quarter in the stores, not only with Mac sales but just sales in general.

Peter, you've mentioned what the average revenue was per store for the average store opened.

Could you refresh us on what that was last quarter?

Thanks.

I will have to follow up with you.

I don't recall what last quarter was.

Sorry.

Can we have the next question please?

Robert Semple, Credit Suisse.

Can you walk me through the revenue outlook?

If you take the midpoint of it, I know it's similar to what you did last year.

But last year, you guys were taking down inventories on the iPod side for I guess both the nano and the eventual video launch.

Historically, you've been up a little bit more seasonally than that in September.

Can you just kind of walk me through the thought process there?

Sure.

Our guidance for the September quarter actually is consistent with our past seasonality.

And our range represents growth of 22 to 25% over last year.

Again, last year -- the last year September quarter was the best Mac sales quarter we had in education in 10 years.

Then just switching gears to iPod, I noticed ASP was off about $15 sequentially.

Is that more of a mix issue, or was it because you started the kind of back-to-school free iPod with the Mac a little bit earlier than you did last year?

The main thing that drove that was the introduction in Q2 of the 1 gigabyte nano for 149.

And so in Q3, we had a full quarter of that.

Can we have the next question please?

Harry Blount, Lehman Brothers.

Peter, just in terms of Leopard, are you assuming anything -- any contribution from Leopard in the September quarter for the margins?

I'm sorry for the September quarter?

Yes.

We've not announced the ship dates for Leopard.

Our Developers Conference begins on August 7, next month.

And we look forward to talking about Leopard and showing you many of the new features.

In terms of the retail performance, if I look at revenue per walk-in customer and revenue per store, I'm looking at revenue per walk-in customer is down for the sixth consecutive quarter on a year-over-year basis.

I'm wondering if you have a sense as to why that might be.

And also on the same-store sales, we're also seeing that down year over year the last two quarters.

Right.

Traffic to the stores has just been phenomenal.

We had over 17 million people come through the stores this past quarter.

And as I said in my prepared remarks, our 5th Avenue store has seen over 500,000 people since it's been open in May.

The average store sales were down slightly year over year, but our total revenue from the stores is up about 29%.

The average store revenue was down, a result of iPod sales being relatively flat year over year as we have had a greatly-expanded channel.

But our Mac sales continue to increase and we are up 50% year over year.

Then, Peter, last thing on the housekeeping side of the equation, can you maybe give us a sense of how many distribution points you have for both the iPod and the Mac and then also a rough sense as to how many of the Macs sold in the quarter were tied to the iPod promotion.

Thanks.

On the iPod side, we have close to 40,000 distribution points, which is up slightly from the previous quarter as we have added a few select resellers around the world.

On the Macintosh, we have about 7,000 points of sale.

We're conducting some pilots to potentially expand that.

But we are not making any announcements today about that in terms of the promotion we started back in the beginning of June.

And so, there were not a significant number of those within the quarter.

Can we have the next question please?

Richard Farmer, Merrill Lynch.

Peter, I would like to ask a couple of questions on gross margins please.

In the past, you've commented at least qualitatively on the iPod hardware gross margin.

I wonder if you can provide any color there on how much that might have changed sequentially and year over year.

The same question as it would relate to the Mac hardware in gross margin change.

And then finally, just a broader question on your philosophy and gross margin management longer-term.

It seems like historically, you've been managing a little bit more to lower the prices or increase the feature set so that the gross margins were more stable and that the upside in gross margins was quickly put back into price to stimulate growth.

This quarter and some other recent data points, it seems like you are managing more for margin leverage -- understand the component cost had something to do with that.

But if you look longer-term, are you making a decision here to manage the Company more for margin leverage, or should we think of you as investing a lot of that back into features and price so that the margin leverage we're seeing is more temporary?

In terms of product gross margins, we have a long-standing practice of not releasing specific gross margins -- however -- specific product gross margins.

However, the iPod gross margin was up sequentially in the June quarter, and that was really attributable to the very favorable commodity environment.

The Mac products participated in that too.

Now as regard to our philosophy, I think we are very competitive today, both on our Mac products and iPod.

We will continue to be aggressive with both our pricing and our feature and function.

You know I -- from a long-term perspective, we're not putting out a financial model but I would target gross margin generally in the 27 to 28 some range.

And I've discussed with you in the past the factors that add and subtract to that.

The primary positive factors include direct sales, where we retain the channel margin as well as software and AppleCare and accessories.

The primary adverse factors to gross margin are hardware, including iPod.

Can we have the next question please?

Richard Gardner, Citigroup.

Just two quick questions -- first of all, Tim, I was hoping you might be able to give us a sense of supply/demand balance on the MacBook exiting the quarter.

And secondly, also for Tim, does the fact that Intel rolls out new chips and drops prices more frequently than your prior processor partners require, does it create additional challenges for you on the inventory management front?

Will you be rolling your products more frequently and adjusting the prices more frequently as the bill of materials comes down?

Or will you do it the same way that you have done historically, which is adjust your prices at the time of new product introductions?

Thank you.

In regards to the MacBook, we shipped a significant number of MacBooks, particularly in the month of June.

However, despite that, we did exit the quarter with some backlog.

We're working very hard to fulfill that backlog during this quarter.

For the full quarter, I don't envision having a supply issue that would [gate] that.

In terms of Intel, we are very pleased to be working with Intel.

They have been a great partner for us.

We feel that they have the best processor by far for us to use in the products that we both want to make and are currently shipping.

Frankly, I'm pleased that there are new products coming out there and that we can change over time.

As you know, we don't discuss unannounced products.

So, I really wouldn't want to go into our philosophy about when we would roll with them and how we might change pricing.

Can we have the next question please?

Bill Fearnley, FTN Midwest Securities.

Just a follow-up question on the iPod units.

What was the effect of the Major in Mac promo being moved up in June?

Was that significant to contributing to the iPod units for the quarter?

It was not significant.

Then on the iPod ASPs, how should we be thinking about the blended ASPs going forward for the category?

Should we be thinking that they should stay within the range they've been the last few quarters?

I'm sorry; that's a question we can't answer.

We don't provide product level forecast.

Then on the direct versus indirect mix, could you give additional color on that as well?

Then that's it; thanks.

Sure.

In the quarter, our direct sales, which we define as sales through our retail, stores, online stores directly to customers and the iTunes Music Store were 50% in the June quarter, up from 44% in the March quarter.

Could we have the next question please?

Rebecca Runkle, Morgan Stanley.

Two questions -- first on retail distribution, can you just confirm what pilots you're currently running and have underway and when approximately they began?

And I have a quick follow-up.

The main one that we are running right now is with Best Buy.

We are in a few of their stores -- half of which have Apple people selling product and half of which don't.

We're working with Best Buy to evaluate those results.

We have been doing that for about two months.

And nothing else currently underway?

Not with a major partner.

We have some select things that are of a smaller nature.

Perfect.

Then, I guess, Peter, if we were to go back and look at historical OS launches, will you give us some color in terms of the impact and trending that you saw in the business, perhaps look at it the quarter before an OS release, what types of variations did you see in the business as a result?

And then, during the quarter of the OS release, what types of trends did you see?

You mean for the OS sales itself?

Just in terms of how the OS has trended but then also how it has impacted the overall business.

I'm trying to get to holistically how we should be thinking about historical OS releases and how they have impacted the business model broadly speaking.

First of all, when we released Tiger in the June quarter a year ago, our revenues from Tiger in that quarter from shrink-wrap and license sales -- so not including any allocation for what would've been on a Mac -- was $100 million in the quarter.

Your first-quarter sales are always your best.

We certainly think that Mac OS X is the best operating system.

I think it's a part of -- along with our design, our transition to Intel, our retail stores and other great channel partners are why the Mac has been growing so well and we've been gaining share.

Just to qualify, in the quarter before historical releases, did you typically see any slowdown in CPU sales in anticipation of the new OS?

Well, that's really hard to --

I know that's subjective (multiple speakers) --

-- to evaluate.

The software sales are the best at the front end of a release, and over time they're still good.

Our OS sales even in the June quarter were good.

But they're not what they are in the first quarter of launch.

Can we have the next question please?

Jonathan Hoopes, ThinkEquity.

Looking at the unit shipment levels between the Mac desktops and the notebooks, are we to understand then that the divergence was mainly a function of the Pro community not having products there to upgrade into, or was it a function of the education?

And then as we move forward into the September education period, do you expect desktops to regain some strength there?

The main thing affecting desktops frankly are the compelling notebooks that we announced.

So as the market is moving more to notebooks, Apple is leading the way.

With the incredible announcements that we had with the MacBook Pro in Q2 and in the MacBook in Q3, there was just a very compelling reason to buy a laptop.

On the desktop side, the comparison there would be on a Pro business that is clearly slower than a year ago as people await a PowerMac with an Intel chip and/or an application from a third-party developer.

The other thing that was happening was the eMac was really at a close to an end of life last quarter.

So sales on that were not as robust as they were a year ago.

Do you have an idea as to how long a Pro user typically waits before they upgrade?

Are they more of a wait-and-see, or do you believe you have a wait list for Pro users on an Intel refresh?

I believe that Pro users act like other users, and there is a high standard deviation between different types of segments of them.

You would not want to estimate what the average of those would be.

Can we have the next question please?

Chris Whitmore, Deutsche Bank.

Just a follow-up on the last question.

Is there any way you can provide a percentage of desktops to the Pro market, both in the June quarter of '06 and compare that to the June quarter of '05 just so we can get a feel as to the size of that market?

Then secondly, is there any way you can quantify the missed sales due to supply constraints on the MacBook business?

On the size of the market, we do not disclose size of market numbers.

And frankly, it's very hard to conclude exactly what they are because we sell both directly and indirectly.

So that would be very hard to do.

What was your second question?

Hoping to get a quantification of the notebook upside missed due to supply constraints or the size of the backlog.

We did ship a significant amount in June.

We left with some backlog, but we're continuing to ship obviously in this month and view that will not be an issue for this quarter.

To ask that first question a second way, can you provide us a percentage of shipments that were PowerMacs in each of those quarters?

Yes, we release things at desktop and portable level.

Can we have the next question please?

Bill Shope, JPMorgan.

I believe last quarter, you noted that you get more aggressive with marketing efforts overseas for the iPod.

Can you give us some comment on the progress you may have seen in this arena throughout the quarter?

We did get more aggressive.

We had put more energy outside the US as we had the supply capability to do that.

And as a consequence, we saw share gains in several countries in Europe, including the UK and Spain and Italy and France.

And we're very pleased with that.

Also, through the month of May, BCN has reported that we have stayed north of 50% share in Japan as well.

So we appear to be making good progress.

Then one more question, I'm not sure if it's too early to ask this one yet.

But have you been able to gather any data to help you understand if Boot Camp is actually stimulating Mac switchers?

We released the beta in April.

The number of downloads that we've had are significant, and the customer feedback that we have had on Boot Camp is very, very good.

It's clear that for a Windows user that is considering switching to a Mac, that it makes it even more appealing to them to switch.

Can we have the next question please?

Kevin Hunt, Thomas Weisel Partners.

I had a couple of additional follow-ups on the gross margin question.

First of all, in the response to someone asking about why gross margin guidance was down 200 basis points, it sounded to me like you said everything was going to be the same as this quarter.

So I guess I'm still not clear why it would be down 200 basis points.

And then secondly, in terms of the Intel transition on the Mac side, can you talk about how -- what indirect impact that might be having, moving to an Intel chip rather than your historical chips and also whether that Intel -- using the Intel's chipsets essentially lower any other kind of component cost that are used within the PC?

Again, so the reason that we're guiding gross margin down is we will see a full quarter impact of the back-to-school promotion.

It was a very aggressive promotion, where with a purchase of a qualifying Mac and an iPod nano, a customer can get a rebate for the iPod nano.

We lowered our international pricing towards the end of the quarter as a result of the weakening in the dollar.

And we expect a different product mix, including more MacBooks, from having a full quarter of availability.

And I don't think we have really any comments on our Intel-based product gross margins.

Is that a positive factor or a negative factor?

Can you at least say that?

Again, we don't have a comment.

Can we have the next question please?

Charles Wolf, Needham & Company.

I have a question about the music model.

I was wondering if the actions of some European countries, most notably France, pose any threat to Apple's music model.

We believe that the -- any legislation that requires the sharing of DRMs will result in state-sponsored piracy, which will we think cause artists to disallow their works to be sold digitally just as the market is beginning to grow.

And we hope that the countries will let the extremely competitive marketplace driven by consumer choice decide which players and online music stores are offered to customers.

Yes, I have one quick follow-up.

Will there be any surprises at the Developers Conference?

You will have to come and attend.

Can we have the next question please?

Shaw Wu, American Technology Research.

Just some questions on your Japan business.

It was down sequentially double digit for the second quarter in a row but up on a year-over-year basis.

I am just wondering if that is -- is Japan performing up to your expectations?

And then just some comments on the executive departure there.

Thanks.

In the PC market in Japan, sequentially the markets is generally down 15% or so and so the sequential performance isn't surprising.

In addition to that, we took some number of units out of the channel in hi-fi.

On a year-over-year basis if you look at Japan and you combine it with our retail stores that are in Japan, we were up 13%.

That 13% is lower than the Company average of 24, and we're not happy about that.

And so we're continuing to look for and seek improvements in the business in Japan.

Regarding the change, we mutually agreed on [his] resignation, which has already occurred.

Our Japan marketing team will continue to report directly to Phil Schiller in Cupertino.

And Phil will take the interim position to lead our overall marketing in Japan.

Can we have the next question please?

Gene Munster, Piper Jaffray.

A couple of international questions.

First, if you look at the success you had in the US, it really hasn't rolled out internationally.

I think you went over some of the growth rates and it seemed a little bit less in Europe and Asia.

What is the big issue?

Is it just a price point issue or maybe you can address if you think about expanding the Apple brand globally and a follow-up question.

If you look at Europe as an example, Europe revenue was up 21% year over year; that compares to the Company average of 24.

If you combine it with the retail segment or the groups of the stores that we have in Europe, it was up 22 compared to the Company average 24.

And so Europe is very close.

When we deploy a new product -- and in this case, we deployed MacBook as you know -- it takes longer to deploy a new product into Europe than it does the US.

So in the first quarter generally speaking, Europe would be -- would get less advantage of a new product.

And I think that's the primary difference in the growth rate in Europe.

Japan, we just spoke about.

What about even markets like the markets that aren't talked much about, like South America and Central America and things like this?

You just don't seem to really have much of a footprint at all, and these are obviously big markets.

The growth rate that we had in Latin America last quarter was tremendous; it almost doubled.

However, we can always improve in the absolute level of revenue in that area and we're focused on doing that.

Then a specific question just in terms of iPod sales in Europe for the quarter, can you just give us any sort of indication?

Did the growth rate accelerate or was it stable or decline a little bit, just some general themes around iPod growth in Europe?

We don't release iPod shipments on a geographic basis.

Can you address it if some of the legislative issues in France or potentially some of the things going on with Sony Ericsson and some of their new products, is that -- are you seeing an impact from any of those?

I haven't seen an impact from the Sony products that I can comment on.

And as I said -- I answered this for Charlie, but we just think and hope that the governments will let the extremely competitive marketplace driven by customer choice decide which players and which online music stores are offered to consumers.

But it's safe to say that you haven't seen an impact from either of those to the best of your knowledge, Peter?

I have not looked specifically at Sony, so I don't want to comment on that.

I guess just conceptually some of the things that Sony is doing, what are your thoughts on that?

Obviously, it had tremendous growth with the Sony Walkman phone.

When you guys step back and see some of that success, what do you even think about?

Well, we are very confident in our ability to compete in the marketplace.

And we're very excited about what we have in the product pipeline, and you know that I can't comment on that.

As regards cell phones, we don't think that the phones that are available today make the best music players.

We think the iPod is.

But over time, that is likely to change.

And we're not sitting around doing nothing.

Can we have the next question please?

David Bailey, Goldman Sachs.

Similar to what you've done on the Mac side, have you done any studies on what percentage of iPod sales are to existing owners?

And to go along with that, what are you doing to drive sales into your installed base between product cycles?

I'm not aware of studies or data that we have in that regard.

In terms of what are we doing -- great marketing, offering great points of presence around the world both in our retail stores and online and through our channel partners, and offering customers what we think is the absolute best products in the marketplace in not only the iPod but the iTunes Music Store.

I think the market share that we command around the world supports that.

Can we have the next question please?

Steve Lidberg, Pacific Crest Securities.

First with regards to the MacBook, it seemed like you had shipments relatively within equilibrium exiting the June quarter in terms of supply.

And I guess relative to the online store now, you are showing a wait time of five to seven days.

Can you give us some insight into what that is related to?

Then as an additional question, Peter, with regards to I guess the last couple of your quarters, you stated and highlighted the strength in the product pipeline.

Yet really from a product introduction standpoint, what we've seen has been relatively well anticipated, i.e., the Intel transition devices.

Is there some challenges on the execution side of the R&D pipeline, or how should we think about that?

I have high confidence in the team here at Apple.

We remain very confident in and excited about the products in our pipeline and look forward to the future.

On MacBook, we're working very hard to fill our backorders on MacBook.

Thanks to everyone for joining us today.

A recording of today's call will be available for replay via telephone for seven days, beginning at 5 PM Pacific Time today.

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And members of the press with additional questions can contact Steve Dowling at 408-974-1896.

Financial analysts can contact Joan Hoover or me with additional questions.

Joan is at 408-974-4570, and I am at 408-974-5420.

Thanks again for joining us.

Thank you, everyone.

That does conclude today's conference.

You may now disconnect.