蘋果 (AAPL) 2008 Q4 法說會逐字稿

Good day, and welcome to this Apple Incorporated, Apple fourth quarter fiscal 2008 conference call.

Today's call is being recorded.

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

Please go ahead.

Thank you.

Good afternoon, and thank you, to everyone, for joining us.

Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, stock based compensation expense, taxes and earnings per share.

Actual results or trends could differ materially from our forecast.

For more information, please refer to the the risk factors discussed in Apple's form 10-K for 2007, the form's 10-Q for the first three quarters of 2008, and the form 8-K filed with the SEC today and the attached press release.

Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

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

Thank you Nancy.

Thank you for joining us.

We're pleased to report our September quarter results, which were record breaking on a number of fronts.

First, we sold more Macs than we have in any other quarter in Apple's history.

Second, we sold more iPhones in the September quarter than in all previous quarters combined.

Third, we sold more iPods than in any prior non-holiday quarter.

Finally, we generated more revenue and earnings than in any previous September quarter in Apple's history.

Revenue for the quarter was $7.9 billion, representing 27% growth, and an increase of $1.68 billion over the previous September quarter's revenue of $6.22 billion.

Operating margin for the quarter was better than expected at 18.3%, due to higher than anticipated gross margin.

Net income was $1.14 billion, which was up 26% over prior September quarters' results, and translated to earnings per share of $1.26.

As we have discussed in the past, because we may provide new features and software applications to iPhone and Apple TV customers, in the future, free of charge, in accordance with GAAP, we use subscription accounting to recognize revenue and cost of sales for these products on a straight-line basis over their two-year estimated economic lives.

This results in a deferral of almost all revenue and cost of sales relate to iPhones and Apple TV during the quarter in which these products are sold to customers.

In contrast, we generally recognize revenue and cost of sales for our other hardware products such as Macs and iPods at the time of sale as we do not provide new features or software applications for those products free of charge.

As we reported in our press release, iPhone unit sales grew significantly in the September quarter, resulting in a material increase in the amount of iPhone revenue and product costs that have been deferred for recognition in future periods.

Specifically, deferred revenue from iPhone and Apple TV sales grew to $5.8 billion at the end of the September quarter, an increase of nearly $3.8 billion from the end of the June quarter.

If iPhone revenue was not deferred, iPhone would have represented 39% of Apple's revenue in the September quarter.

While our GAAP results provide significant insight into our performance, we are supplementing our analysis of the business internally by using non-GAAP financial measures that correspond to the total sales and product costs of iPhones and Apple TVs sold during the quarter.

We believe these non-GAAP measures provide us with meaningful additional insight into the performance of our business, as well as provide information about iPhone and Apple TV that is similar to the information we use to analyze the performance of Macs and iPods.

Beginning with this quarter's earnings release, we plan to provide you quarterly, with non-GAAP financial measures we use in internally to help us evaluate our performance and make operating decisions.

I encourage you to read the earnings press release as it provides a full description of these non-GAAP measures including how we use them, how they are derived, and their limitations.

I would now like to go through several of the non-GAAP measures.

First, we use a non-GAAP measure that we call adjusted sales to provide more information regarding our underlying sales trends and to evaluate the sales dollars of products sold in the period.

We calculated adjusted sales by backing out the September quarter's amortization of deferred revenue from iPhone and Apple TV sales, and adding back all amounts generally due at the time of sales for iPhones and Apple TV shipped in the September quarter.

Adjusted sales totaled $11.7 billion, which was about $3.8 billion higher than our reported revenue of $7.9 billion.

Second, we use a non-GAAP measure we call adjusted cost of sales that corresponds to adjusted sales.

We calculated adjusted cost of sales by backing out the September quarter's amortization of deferred cost related to iPhone and Apple TV and adding back the total cost of the iPhones and Apple TVs shipped in the September quarter.

We also used an estimate of the total future warranty expense related to the iPhones and Apple TVs sold in the September quarter, rather than reflecting the actual iPhone and Apple TV warranty expenses incurred during the September quarter.

We then calculated the non-GAAP measure of adjusted gross margin by subtracted adjusting cost of sales from adjusted sales.

For the September quarter, adjusted gross margin was $4.6 billion, which was $1.8 billion higher than reported gross margin.

Third, we used a non-GAAP measure of adjusted net income to evaluate our performance based on the current period iPhone and Apple TV sales, and to facilitate ongoing operating decision.

For the September quarter, adjusted net income was $2.4 billion, which was $1.3 billion higher than reported net income.

We believe that these non-GAAP financial measures provide added transparency to our business and hope they are helpful to you in your analysis and understanding of our performance during the second quarter.

Now turning to details of our results, I would like to begin with the iPhone, which had a breakout quarter thanks to the July 11th launch of the iPhone 3G.

We sold nearly 6.9 million iPhones during the September quarter, exceeding the 6.1 million units shipped over the entire lifetime of the first generation iPhone.

And with more than two months to go in the calendar year, we have already surpassed our goal of 10 million iPhone sales in calendar 2008.

Recognized return from iPhone handset sales, iPhone accessories and carrier payments totaled $806 million during the quarter.

We dramatically expanded iPhone distribution in the last quarter.

We increased the number of countries where we're selling iPhones from 6 to 51, and we expect to be in more than 70 countries by the end of the December quarter.

With the addition of Best Buy, we have over 3100 points of iPhone distribution in the U.S.

and with our international expansion we currently have over 30,000 points of distribution around the world.

I would like to now talk about our Mac products and services.

We're pleased to have shipped over 2.6 million Macs which was a new company record for any quarter.

This represents 21% year-over-year growth and is higher than the overall PC market rate of growth for the September quarter, based on the latest estimate published by IDC.

Although Mac sales grew faster than the market, we believe Mac growth was impacted by purchase delays based on speculation about the new launch of our portables, and budgetary constraints affecting education institution purchases.

We are unsure how the economy may have affected Mac sales in the quarter.

And of course we are very enthusiastic about the new notebooks introduced last week.

The new MacBook and MacBook Pro redefine notebook design while lowering the entry price for advanced notebook features, including all metal enclosures, pro performance notebook graphics, brilliant instant on LED backlit displays, and new large glass and multitouch trackpads.

We began and ended the quarter with between three and four weeks of Mac channel inventory.

Now I would like to discuss our music products and services.

We sold over 11 million iPods, a new record for a nonholiday quarter, and an increase of 8% over the year-ago quarter.

Last month, we introduced our new lineup of iPods including the fourth generation iPod nano featuring a sleek new curved aluminum and glass design in nine great colors.

We also introduced the second generation iPod touch, building on its groundbreaking original features, while redefining the entry price of $229.

Both iPods incorporate the new iTunes 8 Genius Technology which automatically creates play lists from songs in users libraries that go great together with just one click.

We remain very pleased with iPod market share.

Our share of the US market for MP3 players was over 70% in the month of September, based on the latest data published by NPD, and we continue to gain share year-over-year in most international markets, including the UK, France, Germany, Japan, Canada, and Australia, based on the latest data published by GFK and BCN.

We began and ended the quarter within our target range of 4 to 6 weeks of iPod channel inventory.

The iTunes store had a very good quarter thanks to strong music and video sales and the tremendous success of the App Store.

We now have over 65 million iTunes customer accounts and a music catalog of over 8.5 million titles.

We are very pleased with our fall 2008 TV line-up, which now includes prime time programming from all four major networks in stunning high-definition.

I would like to now turn to the Apple retail stores, which delivered strong results with revenue growing 37% year-over-year to 1.72 billion.

The stores sold 596,000 Macs during the quarter, an all time quarterly record, and an an increase of 26% year-over-year.

Over half of the Macs sold through the retail stores during the quarter were to customers who had never owned a Mac before.

We opened 31 new stores during the quarter, including 13 stores outside the US to end the quarter with 247 stores.

With an average of 226 stores open during the quarter, average revenue per store was $7.6 million, compared to $6.6 million in the year-ago quarter, an increase of 15%.

Retail segment margin was $301 million, compared to $268 million in the year-ago quarter.

Our stores hosted a new all-time high of 42.7 million visitors during the September quarter, or 14,500 customers per store per week.

We have continued to invest in our stores to accommodate this record-breaking traffic and to offer customers a great experience.

We recently launched the fastest way to buy an iPhone, which customers are loving.

After starting the process by answering a few questions online, customers can complete their iPhone purchase and activations in our stores in just about a minute longer than it takes to purchase an iPod.

Total company gross margin was 34.7%, which was better than we anticipated at the beginning of the quarter, due primarily to a better component pricing environment.

To a lesser degree, we also benefited from higher software sales and payments from carriers related to first generation iPhone, and lower costs associated with the iPod product transition.

Operating expenses were $1.3 billion, including $120 million in stock-based compensation expense.

The OpEx total was about $30 million higher than our guidance, largely as a result of additional advertising and the operating costs of selling 6.9 million iPhones.

OI&E was $140 million.

The tax rate for the quarter was 28.2%, below our guidance of 30.5%, due largely to a higher than anticipated mix of foreign earnings.

We are very pleased to have generated $3.7 billion in cash during the quarter, ending with $24.5 billion.

Cash flow from operations was $4.3 billion.

Our investment priority has been preservation of capital, which has served us well in these difficult credit markets.

At the end of the September quarter, our unrealized mark to market loss was $117 million on the total portfolio of $24.5 billion, which was only an $80 million sequential increase from the end of the June quarter.

We plan to hold these investments and do not expect to realize any material losses on them.

Looking ahead to the December 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.

We will continue our practice of providing guidance based on GAAP and will report our December non-GAAP measures to you in January when we release our results.

We enter this holiday quarter with the best products we've ever shipped, including the iPhone 3G and new notebooks and iPods and we remain very confident in our business.

Our visibility is low and our forecasting is challenging, and as a result, we are going to be prudent in producing the December quarter.

We are providing a wide range for our guidance for the quarter and are targeting revenue between 9 and 10 billion.

We expect gross margin to be between 30 and 31%, reflecting approximately $25 million related to stock-based compensation expense, down from 34.7% gross margin in the September quarter.

The sequential decline in our gross margin reflects the recent introductions of the new iPods and notebooks.

We expect OpEx to be between 1.45 and $1.47 billion, including about $150 million related to stock-based compensation.

We expect OI&E to be about $140 million, and we expect the tax rate to be about 30.5%.

We are targeting EPS between $1.06 and $1.35.

In closing, we're extremely pleased with the performance of our business during fiscal 2008.

We generated nearly $32.5 billion in revenue, a 35% increase from 2007, and we gained market share globally in Macs, iPods and iPhones.

We are also pleased to have generated $9.1 billion in cash during the fiscal year.

We're headed into the holiday season with our best product line-up ever and are excited about our expanding geographic reach with iPhone 3G.

We remain very focused on developing the industry's most innovative products, managing our business, and gaining share in each of our markets.

Before we open the call to questions, we have a special guest here today who would like to say a few words and answer some of your questions.

Our CEO, Steve Jobs.

Hi, everyone.

Some remarkable things are happening at Apple, but everything is now set against the back drop of this global economic slowdown.

So it seemed like a good time for me to make a few remarks and help answer some of your questions.

I would like to go back and talk about the non-GAAP financial results, because I think this is a pretty big deal.

In addition to reporting an outstanding quarter, today we are also introducing non-GAAP financial results which eliminate the impact of subscription accounting.

As you know, subscription accounting is the solution we adopted to let us provide free software updates to iPhone users under GAAP accounting rules.

In accordance with the subscription accounting treatment required by GAAP, Apple recognizes the revenue and the cost of goods sold for the iPhone over its economic life of two years rather than upon sale as we do for Macs and iPods.

Because by its nature subscription accounting spreads the impact of iPhone's contribution to Apple's overall sales, gross margin and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company's overall performance.

As long as our iPhone business was small relative to our Mac and music businesses, this didn't really matter much, but the past quarter, as you heard, our iPhone business has grown to about $4.6 billion, or 39% of Apple's total business, clearly too big for Apple management or investors to ignore.

Hence our introduction today of non-GAAP financial results alongside our reported GAAP results.

As you can see, the non-GAAP financial results are truly stunning.

By eliminating subscription accounting, adjusted sales for the quarter were $11.68 billion, 48% higher than the reported revenue of $7.9 billion.

While adjusted income was $2.44 billion, 115% higher than the reported net income of 1.14 billion.

Adjusted net income that is more than double our reported income.

If this isn't stunning, I don't know what is.

All due to the incredible success of the iPhone 3G.

I would like to now highlight two remarkable milestones resulting from iPhone's outstanding performance last quarter.

The first is that Apple beat RIM!

In our most recent quarter, Research In Motion, or RIM reported selling 6.1 million BlackBerry devices, compared to our most recent quarter sales of 6.9 million iPhones.

Apple outsold RIM last quarter, and this is a big milestone for us.

RIM is a good company that makes good products, and so it is surprising that after only 15 months in the market, we could outsell them in any quarter.

But even more remarkable is this: Measured by revenues, Apple has become the world's third largest mobile phone supplier.

I know this sounds crazy, but it's true.

As measured in revs, not units, Apple has become the third largest mobile phone supplier.

Let's look at the ranking.

Nokia is clearly number one at $12.7 billion.

Samsung number two at $5.9 billion.

Apple is number three at $4.6 billion.

Sony Ericsson, number 4, at 4.2.

LG number 5 at $3.4 billion.

Motorola number 6 at 3.2, and RIM number 7 at 2.1.

Pretty amazing.

Now, both of these things, beating RIM in units and becoming the third largest mobile supplier in revenues are amazing feats, but part of this was the result of expanding into over 50 countries, and there's no guarantee that sustained sales will equal initial sales, and who knows what the future will be given the worldwide economic slowdown, but we actually outsold RIM last quarter and ranked as the third largest mobile phone supplier in revenues.

Not bad for being in the market for only 15 months.

I would now like to talk about the App store for a few minutes.

One area we, completely changed the value proposition from mobile devices is the App store.

Customers will down load the 200 millionth application from the App store tomorrow.

Only 102 days since its launch on July 11th.

The 200 millionth App.

We've never seen anything like this in our careers.

There are now over 5,500 applications offered on the App store in 62 countries around the world, and the rate of new applications being submitted is increasing every week.

Competitors are scrambling to keep our App store, but it's not as easy as it looks, and we are far along in creating the virtuous cycle of cool applications begetting more iPhone sales, thereby creating an even larger market, which will attract even more iPhone software development.

It is clear that customers are now attracted to iPhone if only for its amazing functionality and revolutionary multi-touch user interface, but also for its unique ability to let users easily purchase, download, and use thousands of different applications, raining from free games to financial planning and health management.

All of this in only 102 days.

And now I would like to touch on the notebooks that we just introduced.

Last week we introduced our new MacBook and MacBook pro line.

These products are very important since notebooks comprise two-thirds or more of the Macs we sell.

These new MacBooks are some of the best products we've ever created, and it's already clear our customers love them.

We had a very, very strong launch and are anxiously waiting to see the demand trajectory that will unfold during the quarter.

The level of quality these products deliver to customers is mind-blowing for their price points.

The unibody precision aluminum enclosures would normally cost hundreds of dollars by themselves.

The electronics, especially the graphics, are state of the art in mobile computing, and features like the glass track pad are unique in the industry.

With the introduction of LED backlit displays on these mainstream notebooks, over 90% of the notebook's Apple cells now use LED backlit displays.

Another thing worth noting is that these new notebooks are the greenest products Apple has ever offered.

You'll hear more and more about that from us in the future.

So now let's turn to the economy.

To the broader market conditions resulting from the global economic slowdown and credit crisis.

First let me say that we are not economists.

Your next door neighbor can likely predict what is going to happen as accurately as we can, but we do know a few things.

First, we have the best customers in the world.

I wouldn't trade our customers for any other company's customers in the entire world.

They are some of the smartest, most product-aware customers in the market, and they have chosen Apple's quality hardware and software products.

While they may postpone purchases in tough times, they are unlikely to abandon the quality and seamless integration which they have personally experienced and become accustomed to with apples products.

So if the economic down turn does affect them, they are more likely to delay than switch.

Two.

We still have a minority market share of the PC market, and a miniscule market share of the mobile phone market.

While we may not appeal to every prospective customer, the percentage of prospective customers we need to attract in order to significantly increase our market share isn't that many, and we have 250 Apple retail stores that already sell half their Macs to new to Mac customers.

Three.

We have the best product line-up in Apple's history.

The new MacBooks in particular should trigger a serious upgrade cycle our install base.

We'll see.

I feel very good about our product line-up as we head into the holidays and beyond.

Four, we have the most talented and creative employees in the world.

Just look at their results.

The new MacBooks, the iMac, the iPhone, the iPod Nano and Touch, Leopard, iLife and on and on.

None of our competitors can deliver products in this class.

And five: we have almost $25 billion safely in the bank and zero debt.

This provides us tremendous stability and the ability to invest our way through this down turn.

This is what we did during the last down turn.

We increased R&D investments and created some of our best new products and businesses, like the Apple retail stores for one.

This down turn may also present some extraordinary opportunities for companies that have the cash to take advantage of them, like Apple does.

In summary, we have the strongest product line-up in Apple's history, the most talented employees, and the best customers, and $25 billion in the bank.

We may get buffeted around by the waves a bit, but we'll be fine, and stronger than ever when the waters calm in the future.

With that, I'd like to open it up for questions for Peter, Jim, or myself.

(OPERATOR INSTRUCTIONS).

And your first question will come from [Bill Schultz] with Credit Suisse.

Okay.

Great, thank you.

Steve, clearly your results and the guidance today paint two very different pictures of the world, and I'm wondering, have you seen any trends in recent business that would suggest such a disparity, or is this just prudence give all the macro headlines we're seeing right now?

Well, there's a lot of prudence in there, but it's also October, and October has always been a little bit of a foggy month for us.

We're always biting our nails, wondering whether we ordered too many iPods or this or that for the holiday quarter, because sales obviously don't take off until November sometime, so the months of October and April are our slowest during the year, and, we think we're doing the right things, we think we know what the results may be, but October and April are foggy months for us in terms of predicting the whole quarter, but there's a lot of prudence built in.

We're not economists and we read the same newspapers you do.

Thanks, Bill.

Could we have the next question, please?

Next question will come from Richard Gardner with Citi.

Thank you, Steve.

Steve, thanks for being on the call.

I would like to start off with a question regarding share repurchase and just ask your and the board's late effort thoughts on share repurchase now.

I understand that cash is a good thing to have in the current environment, but you're using relatively little of that cash for things like retail store openings and for investments in the business.

What are your thoughts to returning some to shareholders?

I think this economic downturn may present some extraordinary opportunities to companies that have cash.

I think cash is already king, and it may get more so that way.

So we're very comfortable with our cash position in the bank, and it's not burning a hole in our pocket.

Okay.

Thank you.

And if I could follow-up, Peter, and maybe ask if you could give us a sense of how much of the gross margin outlook for the fourth quarter is related to the higher costs associated with the aluminum unibody enclosures, and maybe some sense of how much more expensive that is than the way you were doing things previously.

Well, the guidance that I provided, Rich, the sequential decline, really is driven from the introductions of the notebooks and iPods, which we couldn't be more excited about, and there's many, many new technologies, new features in those besides the unibody, but that contributed.

As I said on the last call, we were going to introduce these products.

They were initially going to have higher costs, and through volume manufacturing and cost engineering, we're going to work to get down the cost curve over time.

But we've made a big investment in these products, and these are some of the of the best we've ever shipped.

Okay.

Peter could I ask one more?

And that is we've seen a 35% decline in aluminum pricing so far, well, since you gave the guidance for fiscal '09 gross margin, aluminum is down 35%.

How quickly can we expect that to start flowing through the P&L?

thank you.

We certainly sell our new Mac books cheap per we just delivered them with a block of aluminum, but we have to machine that aluminum, and it's a fairly precision operation, so the cost of the aluminum matters some, but is not a dominant cost.

Thanks, Rich.

Could we have the next question, please?

That will come from Ben Reitzes with Barclays Capital.

Thanks a lot.

Steve, can you talk about the pricing of your Mac line right now and how you feel that is positioned going into this economy, and, in particular, as well, maybe, your thoughts?

There's this new net book category that's getting a lot of hype, and just where do you see that playing out in the market place and your position in the market there?

Well, again, this particular down turn is not creating a market of cheaper computers.

That market has existed for some time.

And there are parts of that market that we choose not to play in.

I think when people want a product of the class that we make, over and over again people have done the price comparisons, and we're actually quite competitive.

So we choose to be in certain segments of the market, and we choose not to be in certain segments of the market.

And the question is, is the downturn going to drive some of our customers to those lower segments of the marketplace and get to buy lesser products.

And I will be surprised if that happens in large numbers, and I actually think that there are still a tremendous number of customers that we don't have in the Windows world or in the other 99% of the phone market we don't have, who would like to and can afford to buy Apple products.

So, we'll see what the ratio of those two things are, but we're not tremendously worried.

As we look at the netbook category, that's a nascent category, as best as we can tell, not a lot of them getting sold.

One of our entrants into that category, if you will, is the iPhone, for browsing the Internet and doing e-mail and all of the other things that a net book lets you do, and being connected via the cellular net wherever you are, an iPhone is a pretty good solution for that, and it fits in your pocket.

But we'll wait and see how that nascent category evolves, and have some pretty interesting ideas if it does evolve.

Okay.

Great, thanks.

And just a quick follow-up on the iPhone, given it's so new for you, Steve, do you have any view on how it will do in this economy?

And in particular, you know, you still have some international expansion going on, so just given the iPhone is new, we've been through down turns with Macs, although a long time ago, and maybe even consumer devices, this iPhone is so new, how do you see it doing in this economy?

We'll be glad to tell you how it does.

Okay.

Thanks a lot.

Thanks, Ben.

Could we have the next question, please?

That will come from Shannon Cross.

Cross Research.

Yes.

A question with regard to channel inventory and what you're seeing in terms of iPhone, iPod, Macs.

Comments from the retailers?

I know it's October, and as you said, it's a bit foggy, but any sort of thoughts on how things are positioned that you can give us in more detail than how you provided earlier?

Shannon, it's Tim.

In the Mac area, as Peter said in his opening comments, we began and ended the quarter between three and four weeks of inventory, and that's below our target, as you know, of four to five weeks.

In the iPod, we began and ended between four and six weeks, which is right in our target range, and on the iPhone, we were shipping to carriers in 51 countries by the end of the quarter, and we had over 30,000 points of distribution.

With the 44 countries that we had launched prior to the end of August, the weeks of inventory that we had at the end of the quarter for those countries was less than six weeks.

For the remaining seven countries where launches occurred in late September or early October, we don't have enough data yet to quantify the weeks of inventory.

However, to be precise, at the end of the quarter, I can tell you that we had about 2 million iPhones in total channel inventory across all all of the 51 countries, and we feel that this inventory is about right.

Okay.

And curious, any idea on how much the Mac refresh would have impacted, sales last quarter as you sort of cleared the channel?

I think if you look at the Mac, there are two things that I believe impacted the Mac sales last quarter, and possibly a third.

The first is that US K to 12 institutional sales were down 7% year on year to about 200,000 units, and this is due to state and local budget constraints.

California in particular was down 28% year on year.

That 7% contraction was a significant change from what we had seen in the first three quarters of the fiscal year, which were up 29%.

In particular, purchases of a thousand units or more were down significantly, both sequentially and year-over-year.

In the unit sales had grown last quarter in K to 12 at 29%, which is what we had seen going into the quarter, instead of contracting by 7%, the Mac unit sales would have been 75,000 units higher, and so this was a -- a big issue for the quarter from a Mac perspective.

The second thing that we -- that we believe was that customers were delaying purchases because of the portable transition.

As you know, there were rampant rumors and lots of press reports about a potential portable transition, and we saw some slowing toward particularly the final weeks of September and the initial weeks of October.

However, once announcing last week, we saw a considerable rebound in sales, and we're very, very optimistic about those results.

Okay.

And then just a final question for Steve.

Any chance we can get you to make this a recurring event?

Not likely.

I'm sorry.

Okay.

Thanks.

Peter and Tim do such a good job that I don't think I could add much.

Thank you.

Thanks, Shannon.

Could we have the next question, please?

That will come from Gene Munster with Piper Jaffray.

Thanks for providing the non-GAAP results.

That's just helpful and really points to the power that the iPhone is having on you and clearly you're off to a phenomenal start there.

Steve, can you talk about the bigger picture for the iPhone in 2009 when the field is starting to get more cluttered with iPhone wannabes an and how do you just, big picture, think about your road map for '09 and the phone?

Well, I think we have to be the best, and I think we have to not leave a price umbrella underneath us.

And we're working very hard to fulfill both of these goals.

And I think we're way out ahead of anybody else right now, and we're investing a lot with the most talented people in the world, to stay that way.

We have a great partner in AT&T, and together I think we're both very committed to making the iPhone a great value for customers.

So we'll be focused on all of those things next year and beyond.

Okay.

Can you give any sort of split in terms of phones sold in U.S.

versus international?

Not specifically, but I would tell you that there was a significant percentage internationally.

And just a final question, Peter, last quarter you talked about the margin impact and the potential for these new products, and seems like margins, once again, were phenomenal.

Can you just help us understand, should we still be waiting for something, or have we seen what happened in just the price environment was much more favorable than you had expected?

How do we reconcile your comments last quarter versus what we're seeing right now?

Gene, really the latter.

We have introduced stunning new iPods and notebooks.

They cost more, and that's why our margin declined sequentially.

As I told you 90 days ago, we don't talk about new products, so it was hard to make the comments that I did, and be clear, but you've now seen what we've done, and I've provided guidance for 30 to 31% this quarter, and we're going to continue to work to get down the cost curves over time on these great products.

Okay.

I guess one final question, did you actually see a deceleration in your business?

did you see any sort of deceleration towards the end of September, or is the guidance just purely trying to be as conservative as possible?

On the iPod side, iPod was up 8% for the full quarter as Peter mentioned earlier.

In the final weeks of September and the early weeks of October, we were running flat year-over-year on a worldwide perspective, and now as we -- as we look forward, it's very difficult to predict whether the usual seasonal holiday lift will exist in the same pattern as it has before.

As we said, forecasting is very difficult.

On the Mac, I commented that we did see what we believe were purchasing delays, due to last week's portable transition, and, also, the K-12 institutional business was down year-over-year last quarter.

Would it be safe to summarize your comments as that you have seen some sort of an impact, it looks like it's more slowdown ahead of the Mac cycle, and so it's less economy related and more just your general conservatism

It's difficult to separate how much was the purchase delay versus economy.

It could have all been delay.

Could be some part due to the economy.

We just don't know.

What we are very excited about is the rebound last week was great.

However, forecasting that going forward with the visibility that we have is just very difficult.

Thank you.

Thanks, Gene.

Could we have the next question, please?

That will come from Charles Wolf with Needham.

Yes, I have a question for Steve, and well, for anybody, the performance of the I was absolutely astonishing, but it was probably more so in this respect, that most of the phones sold in the quarter were probably net activations as oppose to reupgrades from the first gen.

I was wonder, do you have any percentages on how maybe of the iPhones went to new users, and what percentage went to the first gen people?

Charlie, it's Tim.

That's confidential information to our carrier partners, but I would point of that we expanded the number of countries we sold in from 6 to 51, and so there was an extraordinary amount of iPhones being sold to people for the first time.

Yes.

Well, my point is simply that over half of RIM's sales, BlackBerry sales are upgrades, not new users, so I would argue that Apple did better than it would appear given the numbers.

We're happy just to -- we're just happy to beat them on a number to number comparison.

Well, keep it up, Steve.

We'll try.

Okay.

Thanks.

Thank you, Charlie.

Could we have the next question, please?

And we'll hear from Toni Sacconaghi with Sanford Bernstein.

Yes, thank you.

I have a question or two for Peter and Tim, and clarifications for Steve.

For Peter and Tim, can you talk about the forces at work in terms of iPhone volumes for Q4?

Typically, last year we saw iPhone volumes double in the calendar fourth quarter.

You're also expanding distribution, both of those are obviously forces that would suggest that the iPhone number could be considerably higher.

Obviously, on the flip side of that, you did have a stocking of your channel which won't be as significant in Q4, and we have economic uncertainty.

Should investors be thinking about strong seasonal growth in the iPhone for calendar Q4, and, if not, why?

Tony, it's Tim.

We don't predict unit sales as a product level, but what I would point out is that we did begin shipping in many more countries last quarter, from 6 to 51, as I had said, and I, we just launched the phone on July 11th, so we did have a channel build.

That channel build was about 2 million units, as I had mentioned previously, and so that's something you would have to take into account in predicting our fiscal Q1 sales.

We will expand into more countries.

We're on target to be in over 70 by the end of the year.

However, the countries that we are expanding in are clearly have -- there's less opportunity in those than the 50 that we have rolled out so far, and so you would have to take that into consideration.

We are confident that year-over-year, that sales will be up significantly.

What they do sequentially, our crystal ball is not working at the moment, and so we would leave that for you to -- you to predict.

And then on the gross margin side, you're guiding for 30 to 31% for Q1, and you said that you expect to be able to ride down the cost curve as volumes ramp going forward.

How does that -- how should we think about your previously stated guidance of 30% gross margin for fiscal year 2009 in light of those two statements?

Okay.

In last quarter's call, I said that we anticipated gross margin being about 30%, in fiscal 2009, and our guidance for the December quarter is consistent with that, at 30 to 31%.

As we look forward, we continue to anticipate gross margins of about 30% in 2009.

We're delivering state of the art products that price points that our competitors can't match, and that's resulting in market share gains in each of our product areas.

We're going to continue with this strategy of delivering great products and making a reasonable margin, but as Steve said, we're not going to leave an umbrella for competitors.

Toni, I would point out, just to show the breadth of what we done, when we took touch price down, we took it down from $299 to $229 for the entry price, and the units above it were moved $399 to $299, and $499 to $399, so significant price cuts on Touch.

We also doubled the memory at the same price on Nano, while providing an incredibly new design.

Also, on the notebooks, as you know from last week, the entry price went from $10.99 to $9.99 -- from $1099 to $999, and brought to the Mac pro range, which is essentially at $700 less than what we were offering before.

And so we've made an enormous round of cuts to provide more value to our customers.

That's a good segue for the to things I wanted to just clarify with Steve.

Steve, you mentioned a couple of times that you thought there were extraordinary opportunities for companies with cash.

Think you could hire almost every engineer in Silicon Valley on a life time employment contract and not really dent that significant cash hoard that you have.

When you made that statement, are you suggesting that there are significant opportunities for Apple outside of Apple, specifically in terms of acquiring companies?

I just meant exactly what I said, which is I think there's going to be some significant opportunities.

I think the hiring every engineer in Silicon Valley is a good to idea, though, thank you.

And you had also mentioned the price umbrella statement, and you said, look, you know, certainly to be successful on iPhone, we don't want to create a price umbrella.

I think in response to another question, you also talked about extraordinary feature functionality in terms of -- in terms of the -- your Mac products.

Are you -- do you have the same philosophy around Mac as you do with iPhone, that you have to be careful not to create an umbrella in each?

and so I guess the simple question is, should we continue to see more affordable price points across the Mac product family, and across iPhone going forward?

Well, I think what we want to do is deliver a lot -- an increasing level of value to these customers.

There are some customers which we choose not to serve.

We don't know how to make a $500 computer that's not a piece of junk.

And our DNA will not let us ship that, but we can continue to deliver greater and better value to those customers that we serve, and there's a lot of them.

And we've seen great success by focusing on certain segments of the market and not trying to be everything to everybody.

So I think you can expect us to stick with that winning strategy, and continuing to try to add more and more value to those products in those customer bases we choose to serve.

Does that make sense to you?

Yes, it does.

I guess the -- if I could follow up.

The -- you did in this cased a more value in terms of feature functionality with your notebook by actually lowering the price, so you retained the features, but lowered the price.

Certainly in terms of the new notebooks, you lowered the price and added more features.

Correct.

Can we expect you to continue to attract more customers by doing both.

Adding features at the same price, and lowering price and retaining the same features?

Well, we like to attract new customers, but you'll just have to wait and see.

Thank you.

Thank you Tony.

Could I have the next question, please

And that will come from Bill Fearnley with FTN Midwest.

Yes, thanks.

If I could have ask a question for Steve and a quick followup to Peter and Tim.

Steve, how are you thinking about Apple TV now.

You've had a heck of a year.

For fiscal year you've upgraded in the iPhones, iPods, and certainly the Macintoshes as well.

If you look at the digital living room category and you look at the upcoming year for 2009, how do you have look at the digital living room opportunity and how it relates to Apple TV?

Well, again, I think the whole category is still a hobby right now.

I don't think anybody has succeeded at it.

And actually the experimentation has slowed down.

A lot of the early companies that were trying things have faded away.

So I would have to say that given the economic conditions, given the venture capital outlooks and stuff, I continue to believe it will be a hobby in 2009.

And if I could switch quickly to tablet computing and touch-screens.

You've made comments about those in the past.

when you look at tablet computing and you look at the new norm fact for the Macs and those type of things, does that get to be a more attractive opportunity for you going forward here, now that the new Macs are out?

I think we have such creative people that are looking at a lot of of things, but I really can't talk about any of the future products we're working on, I'm sorry.

Thanks for that.

And Peter, when you talk about your expectations here for the upcoming quarter, what's your expectation for meeting or getting close to equilibrium from demand and supply perspective here in the first quarter in '09, and are there any credit issues in the channel affecting your revenue projections for the upcoming quarter, either in the U.S.

or other GOs, so it's a new product and a credit issue question for the guidance in the first quarter?

Bill, I'll make a comment or two on the credit, and Tim can speak about your -- but I think the first part of your question.

This is definitely a concerning environment from a credit perspective.

Our Treasury team has done just an amazing job with our cash.

I was so proud to tell you in my opening comments that our mark to market unrealized mark to market on a portfolio only increased $80 million sequentially on over $24 billion of cash.

So they've done a -- they've done a great job.

On the receivables side, we have historically been very good in that area.

And we have good people.

We stay on top of collections and we monitor accounts, I think as any company does, but it's a tough environment out there.

And we're being as careful as we can, and hopefully, you know, we won't have issues in the future.

Bill, let me take the three product areas and briefly comment on your question.

In the iPod space at the end of the quarter, we were still filling the channel to get the new products at the right level in the channel.

We are now completed that, but we're not at the end of last quarter.

In the iPhone, as I had alluded to before, we thought we ended with the right level of channel inventory, and it's -- it's difficult to predict demand for the quarter, but today I know of no issues in providing the right lovely of supply.

On the Mac side, we have significant backlogs on the new products, and we are working very, very hard around the clock to fill those just as fast as we can, and we'll see what the trajectory of demand is, but I'm confident that we can produce a lot.

Whether it's enough, I don't know, because it's hard to forecast the demand.

Well, if the fog lifts in October, and your demand visibility gets better at the beginning of November, do you still have time to ramp your builds to affect the first quarter number then, from a supply chain perspective?

We're obviously making bets on the demand already, and so we are predicting, it's just hard for us to forecast for external consumption.

Thanks for the details, folks.

Yes.

Thank you, Bill.

Could we have the next question please?

That will come from Mike Abramsky with RBC Capital Markets.

Thanks very much.

Steve, you only have really one SKU in the phone biz, and the phone market is 10 times the size of PC market.

You say you continually strive to be the best.

At the same time, what might be the opportunities for further innovation or market opportunities within that market?

Well, I wasn't alive then, but I -- from everything I've heard, Babe Ruth had only one home run, he just kept hitting it over and over again.

So I don't think that -- I think the traditional -- the traditional game in the phone market has been to produce a voice phone in a hundred different varieties, but as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing.

And most of the competitors in our -- in this phone business do not really have much experience in a software platform business.

So we're extremely comfortable with our strategy, our product strategy going forward, and we purchase it as a software platform company which is pretty different than most of our competitors.

Okay.

And I think earlier there's been lots of discussion about limited visibility on whether there's delays to purchases, or the economy.

When do you think you get better visibility to things like Mac upgrade or uptake cycles, versus economy-related headwinds or changes in buyer patterns here given so much uncertainty.

Is that first quarter next year?

And is your price point comment about we're going to restrict ourselves to certain markets we're going to play in.

Is that firm, or are there alternative strategies you might employ if you don't get the upgrade cycles or response to the price point stance that you're looking for?

Mike, I think the answer to your question is different by product.

On iPod, historically, about half of our sell-through occurs in December, and so the question of iPod visibility, we'll get a lot better visibility as we head into December on this quarter.

Before then, the visibility will be limited.

In the Mac area, the question is the -- how much was purchasing delay versus economy, if at all, and we'll gain knowledge on that each week, but it will take some number of weeks before we're able to meet the demand in that space, and so I think it will take a little while longer.

Okay.

Thank you very much.

Yes.

Thank you, Mike.

A replay of today's call will be available for two weeks as a podcast on the iTunes store.

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Members of the press with additional questions can contact Steve Dowling at 408-974-1896, and financial analysts can contact either Joan Hoover or me with additional questions.

Joan is at 408-947-4570, and I'm at 408-974-5420.

Thanks again for joining us.

Ladies and gentlemen, that does conclude today's presentation.

We do thank everyone for your participation.

Have a wonderful day.