蘋果 (AAPL) 2009 Q3 法說會逐字稿

Good day, and welcome to the Apple Incorporated third quarter fiscal year 2009 earnings release conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to Ms.

Nancy Paxton, Senior Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good afternoon, and thanks to everyone for joining us.

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

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

Actual results or trends could differ materially from our forecast.

For more information, please refer to the risk factors discussed in Apple's form 10-K for 2008.

The forms 10-Q for the first two fiscal quarters of 2009, 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 speaks of the respective date.

And with that, I would like to turn the call over to Peter Oppenheimer.

Thank you, Nancy.

Thank you for joining us.

We are very pleased to report record June quarter revenue and earnings and to once again report the highest non-holiday quarter revenue and earnings in Apple's history.

It was an extremely busy quarter for new product introductions and customers have responded enthusiastically.

Revenue for the June quarter was $8.34 billion, representing 12% growth over the prior June quarter's results.

We are very proud of this result, particularly given the economic environment around us.

Operating margin percentage for the quarter was over 20%, higher than our guidance, due to better than expected revenue and gross margin.

Net income was $1.23 billion, which translated to earnings per share of $1.35.

In terms of non-GAAP measures, adjusted sales totaled $9.7 billion for the June quarter, which was $1.4 billion higher than our reported revenue.

Adjusted gross margin was $4 billion, which was $1 billion higher than our reported gross margin.

And adjusted net income was$1.9 billion, $700 million higher that than our reported net income.

We continue to 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.

Turning to the details of our results, I would like to begin with our Mac products and services.

We generated outstanding sales of 2.6 million Macs, setting a new June quarter record, and nearly meeting the Al time quarterly record we set last September.

Mac sales increased by more than 100,000 units over the prior year's June quarter.

This represents 4% year-over-year growth, and compares favorably to IBC's latest published estimate of a 3% contraction for market overall.

We followed up the transition of our entire desk top lineup in March, with significant updates to our entire portable lineup in the June quarter, delivering increased performance and value across the line.

Mac portable shipments increased 13% year-over-year, driven by continued strong growth in sales of MacBooks and our new MacBook pros.

Customer response to the new portables have been very favorable and we saw an acceleration of sales following the launch.

We began and ended the quarter with between 3 and 4 weeks of Mac channel inventory.

Now I'll turn to our music products.

We sold 10.2 million iPods, which was down from 11 million in the year ago quarter.

There were two key reasons for this decline: First, we reduced channel inventory by over 400,000.

Second, sell-through declined by 4% year-over-year.

I would like to discuss how we're looking at this market.

We have three categories of what we call pocket products.

Traditional MP3 players, iPod Touch, and iPhone.

For traditional MP3 players, which include shuffle, nano and classic, we saw a year-over-year decline, which we internally had forecasted to occur.

This is one of the original reasons we developed the iPhone and the iPod Touch.

We expect our traditional MP3 players to decline over time, as we cannibalize ourselves with the iPod Touch and the iPhone.

However, we have a great business that we believe will last for many, many years, and which we will continue to manage well, and offer the world's most innovative products.

Despite the decline in our sales, our research shows that about 50% of our recent traditional iPod purchasers are buying their first iPod, including those in our high market share countries, such as the US, Japan, Australia, Canada, and the UK.

The iPod Touch did extremely well in the quarter, growing more than 130% year-over-year.

Customers continued to embrace this outstanding platform experience, which has been increasingly enhanced by the tremendous offerings of the App Store.

Our share of the US market continues to be over 70%, based on the latest monthly data published by NPD and iPod was the top selling MP3 player and continued to gain share year-over-year in nearly every country we tracked based on the latest data published by GFK.

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

I would now like to turn to the iPhone.

We are thrilled to have sold over 5.2 million handsets in the June quarter, compared to 717,000 handsets sold in the year ago quarter.

Response to the new iPhone 3G-S has been tremendous bus with over 1 million 3G-S handsets sold by the third day after its June 19th launch.

We are currently unable to make enough iPhone 3G-S to meet demand and we're working to address.

There customers and reviewers have been very impressed by its improved speed, 3-megapixel auto focus camera, video recording capability, and hands free voice control.

The iPhone 3G- is available in 18 countries today and we're quickly rolling it out this summer to the rest of the 80-plus countries where iPhones are sold.

Customers are loving the new iPhone OS 3.0 release which includes more than 100 new features including cut, copy and paste, MMF, spotlight search, a landscape keyboard for mail, and expanded parental controls for iTunes and App Store contents.

The App Store now offers over 65,000 applications and the iPhone OS 3.0 software has helped pave the way for developers to create even more innovative applications with many new features, including in-App purchases, a new MAPS API, peer to peer connections around push notifications.

Customer response to the App Store has been phenomenal and we were thrilled to announce the 1.5 billionth download last week.

The App Store is a key strategic differentiator of the iPhone and iPod Touch experience, and we believe that outstanding software is the key ingredient for a great mobile experience.

Recognized revenue from iPhone handset sales, accessory sales, and carrier payments was $1.69 billion during the quarter compared to $419 million in the year ago quarter.

An increase of over 300%.

The sales volume iPhone sold during the quarter was $2.9 billion.

Since we announced specific new features of iPhone OS 3.0 on March 17th, we did not begin to recognize revenue or product cost for any iPhone sold from March 17th until the iPhone OS 3.0 software became available on June 17th.

For those iPhones, revenue and product costs are being recognized ratably, over the remaining terms of their respective 24-month estimated lives from June 17th forward.

The iTunes store delivered another great quarter, fueled by strong sales of music, video and apps.

With the introduction of the iPhone OS 3.0 last month, the iTunes experience keeps getting better.

iPhone OS 3.0 software allows customers to wirelessly download movies, TV, and audio programs directly to an iPhone or an iPod Touch.

And I'm pleased to report that as of last week, customers have purchased and downloaded over 8 billion songs from the iTunes store, yet another remarkable milestone.

I would like to now turn to the Apple retail stores.

The stores recognized $1.5 billion of revenue during the June quarter compared to $1.45 billion in the year ago quarter.

Our stores sold 492,000 Macs compared to 476,000 Macs in the year ago quarter.

And about half the Macs sold in our stores during the June quarter were to customers who never owned a Mac before.

We opened six new stores during the quarter, bringing us to 258 stores, and we also completed 27 store room models.

With an average of 254 stores open during the quarter, average revenue per store was $5.9 million compared to $6.8 million in the year ago quarter.

Retail segment margin was $321 million or 21.5%, up from $297 million or 20.6% in the year ago quarter.

We hosted 38.6 million visitors in our stores during the quarter, compared to 31.7 million visitors in the year-ago quarter.

An increase of 22%.

We successfully launched a new and improved one-to-one program and hosted a record 667,000 personal training sessions during the quarter.

We remain on track to open a total of about 25 stores during fiscal 2009 and to complete the remodel of 100 stores to our new design.

We are also looking forward to opening our first store in France during the holiday quarter.

Total company gross margin was 36.3%, which was 330 basis points better than our guidance.

This difference was primarily driven by three factors: First, component cost did increase, but not to the level we had expected.

Second, we spent less than we had expected in several operating areas, including warranty and manufacturing tools.

And, third, we efficiently ramped our new products in the quarter, spending less than we had planned.

Additionally, and to a lesser extent, we benefited from a weaker US dollar and from leverage on higher revenue than we planned.

Operating expenses were $1.35 billion, consistent with our guidance and included $151 million of stock base compensation expense.

OI&E was $60 million and the tax rate for the quarter was 29%.

Turning to cash, our cash plus short-term to long-term marketable securities totaled $31.1 billion at the end of the June quarter, compared to $28.9 billion at the end of the March quarter, an increase of over $2.2 billion.

Cash flow from operations in the June quarter was $2.3 billion.

Our investment priority for the cash continues to be preservation of capital, which has served us well in the current environment.

We are continuing to focus on short dated high quality investments and remain comfortable with our investment portfolio.

And while it is not reflected in our June quarter results, in the first week of the September quarter, we made a $500 million prepayment to Toshiba for future supply of NAND flash.

Looking ahead to the September quarter, I would like to review our outlook, which includes the types of forward-looking statement that Nancy referred to at the beginning of the call.

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

Forecasting in the current macro environment remains challenging, so we will continue to provide a range of guidance for the September quarter.

We expect revenues to be between $8.7 billion and $8.9 billion.

We expect gross margin to be about 34%.

reflecting approximately $28 million related to stock-base compensation expense.

We expect OpEx to be about $1.445 billion, including $150 million related to stock base compensation.

We expect OI&E to be about $30 million, reflective of the short-term interest rate environment, and we expect the tax rate to be about 30%.

We are targeting EPS in the range of about $1.18 to $1.23.

In closing, we are thrilled to report record June quarter results and with customers reception of our new portables, iPhone OS 3.0, and the iPhone 3G-S.

We are very enthusiastic about the upcoming launch Snow Leopard and the enhanced performance and user experience that we'll offer to our Mac customers.

We remain confident in our strategy, and new product pipeline, and we're working hard to continue to deliver the industry's most exciting and innovative products.

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

(Operator Instructions).

And your first question will come from Gene Munster with Piper Jaffray.

Congratulations.

Two brief questions.

First on the Mac side, judging by the product lead times, the demand for the new lower price MacBook Pro caught you off guard.

How do you see that demand turning to the September quarter?

And second can you talk from a high level of how you see the relationship of the wireless carriers involving.

Hey, Gene.

It's Tim.

In terms of the MacBook Pro, there are a couple of models that I believe we will get beyond in this the next few weeks.

We don't view it as a constraint.

It had a material effect on last quarter, and we factored our view of supply in the guidance that Peter shared with you.

In terms of the relationship with the wireless carriers, I think that most of the carriers that we're doing business with are thrilled over the lower churn that they experience and the higher ARPUs and the customers are demanding the iPhone.

So I feel like we've got a very good set of relationships and are obviously continuing to look to expand those.

Okay.

Maybe to ask it more specifically, do you see an opportunity beyond the iPhone with the carrier, for example, AT&T with data plans and laptops, or AT&T's living room initiative with Uverse offering.

We have nothing to announce today in terms of other things with the carriers.

We're very focused on working with the carriers on iPhone.

Okay.

And then I guess on AT&T, any update on the status of that relationship?

I think it's an excellent relationship and we're very happy with it.

Great.

Thank you.

Thanks, Gene.

Can we have the next question please.

It will come with Bill Fearnley with FTN Equity Capital.

Yes, thanks.

If I could, on the mix here, when you look at consumer spending and you look at K-12 and state and local government in the pro segment in the quarter, is there any detail you can give on the education on the pro segment and then I have a quick follow-up.

Sure, Bill.

It's Tim.

Relative to the market, the consumer market performed relatively better for us.

The US K12 institutional business is weak, as you might expect.

It is getting hit by budget shortfalls.

And last quarter we saw very negligible amounts, if any, of the stimulus funds flow all the way to the state and district levels to get set.

And so that may or may not occur this quarter.

In the pro business, the pro business has also been affected more by the economy than the consumer businesses.

And you can see that some in our ASPs as people that were buying those that were in commercial accounts and small business accounts are delaying purchases.

Tim, you've talked about higher ed growth and K-12 institutional growth before.

Can you give us those numbers for this quarter.

Overall, we were negative 6% in the institutional business.

The K-12 business was more negative than that and the higher ed business was around the 0% level.

Okay.

And then one other, if I could.

In terms of preliminary view after the price changes on mix with the older MacBook, the $999 and then the newer form factor, any additional details you can give us on the first 30 days of what you saw about mix shift with the price changes?

Generally, as you can see from the data sheet that you've got, our units grew faster than our revenue in the portable area.

So ASP did fall some.

And one of the reasons is the price cuts that we took.

Another is the transitional cost of doing that.

What was a major transition of replacing the whole lineup basically in a day.

So we are seeing a mix down versus historic.

And we think part of that is that the commercial customer who is buying up in the line is delaying purchases in this weak economy.

Of course we're thrilled with our overall results.

To grow 4% with IDC full testing at negative three and Gartner forecasting a negative five, that puts us 7-9 points ahead of the market.

And we're thrilled with those performance numbers.

Thank you.

Thanks, Bill.

Can we have the next question please?

From Goldman Sachs we'll hear from David Bailey.

Thanks a lot.

I know you don't break out the SKUs of the iPhone explicitly.

Can you give us some idea of how the $99 iPhone is doing relative to the other price points and have you seen a mix from launch either away from or towards the lower end phone?

There is two pieces of information I can give you, David.

One is that as we made the changes, the two changes, both the launch of the 3G-S and the price reduction of the 3G, we saw significant acceleration in total unit sales.

I don't want to give you the precise mix, because we view that as competitive data and obviously want to hold that tight.

As Peter alluded to in his opening comments, the iPhone 3G-S is constrained in virtually every country we're shipping it in.

So the demand has been very robust.

I think it speaks to the great product that it is and we're working very hard to fill that demand.

Great.

And then just a follow-up on that.

Can you give us an update on the progress you've made in large enterprise accounts with the iPhone and how you look at that opportunity over the next year.

I think it's a great opportunity for us.

And as you might guess, we're seeing growing interest with the release of the 3G-S and iPhone OS 3.0.

Due to the hardware encryption and the improved securities policies.

The phone is particularly doing well with small business and with large organizations that allow people to purchase the phones for individual use.

And this is both in corporate and government settings.

Specifically to give you some numbers, almost 20% of the Fortune 100 have purchased at least 10,000 units or more.

And there is now multiple corporations and government agencies who have purchased an excess of 25,000 each.

We also had the iPhone approved in over 300 higher education institutions.

And so we feel really good about how we're doing.

And you may have noticed, also, that the most recent study by JD Powers has ranked the iPhone the highest in overall satisfaction with business customers.

And so we think that we're just at the tip of the iceberg in terms of what the iPhone can do with business customers.

Great.

Thanks a lot.

Thank you.

Thanks, David.

Thank you, David.

Can we have the next question, please?

And moving on, we'll hear from Richard Gardner with Citigroup.

Hi.

Thanks.

Peter, I was just wondering regarding your revenue guidance, you're guiding up roughly 4 to 7% sequentially.

But you've got a couple hundred million of iPhone deferred revenue coming off the balance sheet, and obviously you're doing very well with the new products.

So I was wondering why you're guiding generally in line with last year's increase and maybe a little bit below what we would consider normal seasonality for the September quarter.

Thanks.

Okay.

Rich, we give you guidance that we have reasonable confidence in achieving.

So no change in our thinking.

Let me talk a little bit about Mac and iPod and iPhone.

For Mac, while we usually see an increase in Mac units from the June to September quarters, and we expect to see one this year, we would expect the sequential increase to be less than previous years since we refreshed every portable last quarter and the desktops in the March quarter making the comparison up sequentially tougher for us.

Additionally, as Tim just commented, the US education institution sales remain under pressure from budget shortfalls.

With regard to iPod similar to June, we would expect the traditional MP3 players to decline year-over-year.

But iPod Touch to grow significantly.

And for phone, last year we sold very few phones in the June quarter after the results of the July transition and 7 million in September, which included 2 million units of channel fill.

This year, we introduced iPhone 3 GS in June selling 5.2 million in the quarter.

And in terms of assessing how we'll do, going from June to September, we're very optimistic about the product.

It's off to a great start.

But we just don't have any experience in this seasonality with distribution as wide as we've got it.

So we'll report to you in October how we did.

Thanks, Peter.

Thanks, Rich.

Can we have the next question please?

From Barclays, we'll hear from Ben Reitzes.

Peter, can you talk about gross margins.

You've obviously the last two quarters handily exceeded any of your expectations in guiding above.

At one point you said 30% for September and now we're at 34.

And does that mean that the long-term estimate of 30% no longer holds, and that we should probably model something at least higher than 30 due to maybe better execution or something in your business model that's changed?

The teams are executing phenomenally well.

So that's something that we're very proud of.

And I think the results have benefited from that.

Regarding gross margins for the September quarter, we've had a chance to go through our complete process and I'm guiding to 34% for the September quarter, which is down from the 36% that we just reported.

We expect the margins to decline sequentially as a result of a full quarter of back to school promotion.

And full quarter of our new portables and also higher component cost.

I don't want to make comments today about future quarters, but I'll give you a couple things that are on our mind.

First, for many key components, costs are rising and you're seeing that in the market as well.

And, secondly, we will continue to focus on delivering state of the art products at price points that our competitors can't match, and we are going to provide customers ever increasing volume.

And so as you think about quarters beyond September, I would urge you to consider those factors.

Okay.

Thanks.

And with regard to the surge at the end of the quarter of Iphones, 5.2 million and you're constrained on the 3G-S, what is the inventory situation like?

I mean, you were running at over a million, I believe, Tim.

And how did you end the quarter on inventory and how does the demand look heading into the next one?

The iPhone channel inventory was flat sequentially, so it was approximately the same number from the beginning of the quarter and at the end of the quarter.

And what that means, obviously, is since we were selling a lot more units at the end that we do not have a channel loaded with the numbered units that we would like at this time.

And can you see that in terms of stock out on the 3G-S.

What is that unit number, and then I'll cede the floor here.

The unit number.

Of inventory?

Consistent with what I said before.

You can do the math.

But it's about 1.83 million .

Just

Thanks a lot, Tim.

That includes in transit that we invoiced and demos we've counted in a conservative manner.

Thank you, Ben.

Can we have the next question, please?

It will come from Bill Shope with Credit Suisse.

Okay, great thanks, guys.

Looking at the response you've seen on the $999 MacBook and the more recent MacBook Pro price cuts, can you comment on whether the Mac business is more or less elastic than you previously anticipated, and perhaps give us an idea of how you're thinking about elasticity in this business over the longer term?

We're obviously thrilled with the results that we've had since we've done the portable announcement.

Mac sales did accelerate after the announcement, WWDC and shipment of the portables, and we feel great about how they're selling.

As we expected, there's some number of people that are buying up, because they can now get a MacBook Pro for $1199, whereas, it wasn't too many months ago that to buy a MacBook Pro it would cost $1999, so we've made a significant change there.

So we're not thinking fundamentally different about the Mac business than we were before.

Our goal has been and continues to be to build the best computers in the world.

And when we can do that at lower prices, we do that.

When we can't, we won't put the Apple brand on a product that doesn't stand for innovation and doesn't have the legendary ease of use that we're known for.

Any chance you can give us some quantitative color on the gross margin EPS impact from the delayed iPhone recognition in the June quarter?

Sorry.

I can't do anything specifically.

You can make an estimate of what the revenues might have been now that you know the June quarter sales.

And you can take a shot at the related gross margin.

Okay.

Great.

We'll do that.

Thanks .

Thanks, Bill.

Could we have the next question, please?

From Cross Research, we'll hear from Shannon Cross.

Thank you.

Good afternoon.

Could you give us an update on Snow Leopard and how we should think about the $29 price point.

I'm kind of curious as to what throws the decision to go so low and how are you thinking about potential adoption rates.

Yes.

It's Tim.

Snow Leopard is an even better Leopard.

It redefines about 90% of the projects that make up OS X and it includes a lot of powerful new core technologies and builds Microsoft Exchange support right into the OS which is something that even Windows PC does not do.

We priced it very aggressively so that all of our users can upgrade to it.

And we're hoping that they do that.

As we announced at WWDC, we continue to expect to ship it later this quarter.

Okay.

Great.

And then just a follow-up on the commodities.

I'm just curious as to which ones you expect to be sort of challenging going forward and how should we think about the prebuy with Toshiba and should we continue to expect additional prebuys depending on what you think in terms of what you think of inventory and demand and pricing.

In terms of going forward, the market for DRAM and the market for large-size LCDs has shifted to a constrained environment.

And the pricing has moved accordingly.

The NAN/market has now begun to stabilize and we expect it to move towards a supply/demand balance.

Hard drives and optical drives and pricing is declining at less than historical rates as a result of in terms of the Toshiba pre buy, we did a long-term agreement with Toshiba.

As part of the terms and conditions, we paid them $500 million as a prepay earlier in the quarter as Peter had said.

We view flash as a very key component for us, because as you know, we use it in so many of our products.

And also, we're a reasonable percentage of the user of flash on a worldwide basis.

In terms of doing additional deals, we are always open to doing additional deals with the right terms and conditions.

And as you know, we've done two in this fiscal year.

We announced one with LG earlier on LCD.

And we may do others but there's not one that we're currently working on.

But I don't close that door because we are always looking at different things.

Great.

Thank you very much.

Thanks, Shannon.

Thank you, Shannon.

Could we have the next question, please?

We'll hear from Toni Sacconaghi with Sanford Bernstein.

Thank you.

I think last quarter you had commented that the percentage of $999 Macs had increased sequentially.

Can you comment on this quarter?

It sounds like there was a mix shift to the low end because of continued economic uncertainty, yet you lowered Mac prices which was -- excuse me, MacBook Pro prices which was stimulative on the Pro.

So to give us a sense on how consumers netted out, was your $999 offering a bigger percentage of total Mac notebooks this quarter than it was last quarter and can you give us a little more color on the dynamics?

Toni, I don't want to give you exact mix numbers for competitive reasons, but let me share with you at a macro point what we saw happening last quarter.

After the transition, not our non-education business, we saw people upselling from the $999 to the $1199 MacBook pro.

Obviously for $200, it's a significant amount of features and so we saw that occurring last quarter.

Before the transition, we saw a mix that was larger than after it to the $999.

But we did see that change at the developers conference.

Education itself, when you carve education itself out, the bulk of what K-12 would be would be the lower price unit.

And we sell it for even lower prices than the consumer price obviously.

And then can you comment on the dynamics on the iPhone side.

It sounds like the lower price point of the $99 3-G phone actually served perhaps more as a traffic driver for the 3G-S phone than would anticipated.

Was that the role or the product itself a meaningful contributor to the iPhone story?

We're happy -- we're focused on total iPhone units, Toni.

And so we're very happy when the total comes out to the 52 number and we're thrilled over it.

I think it's too early to tell what the ultimate mix of those products will be.

Because as you know, the iPhone 3G-S is constrained and also it's only shipping in 18 countries of the 80 plus that we're in.

And so I think it will take some amount of time.

Also there's a phenomenon at the beginning of purchasing where you have people upgrading.

And those people that upgrade are obviously more likely to select the new phone.

And so it's only been a few weeks, and I wouldn't want to make any grand statements about what things will happen in the longer term.

And then one for Peter.

Peter, I think your sequential gross margin guidance in terms of the sequential decline is actually more benign than you have guided for in each of the last two years, which is surprising to me because the component environment, I think, is tougher than it's been in either the last two years.

Your back-to-school promotions in terms of geographic breadth are considerably larger and you have notebook price cuts which you didn't have in any of the previous fiscal Q4.

So is the offset in terms of guiding to a lower gross margin sequential decline, is that all iPhone related, or are there other considerations relative to previous years that we ought to be thinking about?

Toni, it's always hard to talk about gross margin year-over-year, because you're typically in different product cycles and you have different component environments and currencies can be different and mixes and a variety of things.

So it's hard.

We are benefiting from a higher mix of iPhone revenues.

And that is beneficial to our gross margin.

So as I think about this year versus last, sure, that is a factor.

But as we put our guidance together for the September quarter, we've gone through our normal process and we thought about supply.

We thought about demand.

And it resulted in the 34% that we've provided you.

And then final question, you mentioned you lowered channel inventory on iPods about 400,000 units.

Should we be thinking about the reduction in channel inventory being somewhat consistent as a percentage of what you anticipate for reduced iPhone sales in the following quarter or otherwise, why would you have taken it down by that amount?

Toni, if you look at the over 400K that we reduced it by, there were two primary reasons.

The first reason was that as you may remember in March we announced and launched a new Shuffle very close to the end of the quarter.

And also the Easter holiday was at the beginning of the June quarter.

And so to support both of these, we ended March with a bit more inventory.

Although still within the target range of 4 to 6 weeks.

With these events behind us, we were able to reduce channel inventory.

And this accounted for about half of the over 400,000 unit reduction.

The second reason is the overall demand was lower.

And we believe that this is due to the weak economy.

Cannibalization from iPhone.

And a reduction in the market size for traditional MP3 players.

As you heard Peter's definition for this, we call traditional MP3 players, the Shuffle, the Nano and the Classic.

And as a result of this, we adjusted channel inventories to correspond with the lower demand.

And this accounted for the balance of the over 400,000 unit reduction.

But as a reminder, I don't want to overstate this, but we began and ended the quarter within our target range of 4 to 6 weeks.

And so we're staying within the realm that we have forever set as a target.

Thank you.

Thanks.

Thank you, Toni.

Can we have the next question, please.

We'll hear from Mike Abramsky with RBC Capital Markets.

Thanks very much.

Tim, there are competitors that are unveiling application stores now and media and touch features via software.

Can you just talk about maybe the dimensions along which you see continuing to out innovate competitor user experiences and maintain iPhone momentum and share leadership?

Sure, Mike.

I don't want to talk very much about what we have planned in the future.

But if I just sort of summarize just what's happened in the last 90 days, we've just shipped the next major version of the world's most advanced mobile software platform with iPhone 3.0.

And the App Store is now available in 77 countries.

And reaches and installed base that is now more than 45 million.

That's the sum of iPhone plus iPod Touch.

The App Store, I think, by any measure has been an unprecedented success with over 65,000 apps now in the store.

And over 1.5 billion Apps downloaded.

As you may remember, as you look at the App number, over 65,000 from the store, that compares to the latest numbers we have for RiM and Nokia that puts them at 1 and 2,000 each.

And the latest published number we've seen on android puts it less than 5,000.

And so we feel like we have a substantial lead on apps for the phone, on software for the phone and we think we have brought a great deal of hardware innovation for the phone as well.

And so we feel extremely good about our competitive position and continue to believe that we're years ahead of other people.

Okay.

Thanks.

And do you see additional distribution and pricing models important to sustain either your growth in market share gains in iPhone and do you think you can sustain growth based on the current strategies?

Well, I think we just took a major change with the introduction of a $99 product.

And so the reason we did that was obviously because we knew there was elasticity there.

In regards to your other question, we are working very hard to continue expanding distribution both within countries that we're in where it makes sense to do so and to add new countries because the world has more than 80 countries in it.

And so we're looking at both of those and we recognize there are some large markets left uncovered currently.

Okay.

Thanks.

And then now, just lastly , does the positive response to the Mac price cuts provide you some pause regarding the opportunity that you might have for similar momentum for lower priced entry level PCs?

In other words, do you still feel that the lower price PC category is perhaps not attractive versus your business model?

I may not be exactly paraphrasing what you said the last time but

Mike, I would say it differently really.

And maybe I haven't expressed it well.

Our goal is not the build the computers, it's to build the best.

And whatever price point we can build the best at, we will play there.

At this point, we don't see a way to build a great product for this $399, $499, this kind of price-point unit.

And as I've said before, and I think this is playing out in several areas, I think some customers, maybe many customers, buying these become disappointed and disenchanted after they buy one of these.

So we're going to continue to focus on what we've always done is making the best, the most innovative and giving people tremendous value.

And I feel like the moves that we've made across this quarter really puts an exploration point on those when you look at being now able to buy a MacBook Pro for $800 less than someone could have done in October of last year.

It's just jaw dropping.

And so we feel very good about our strategy and our pricing.

And I think, frankly, the results bear it out.

If you look at it now, now the Mac has outrun the market a staggering 18 of the last 19 quarters.

And I think that really says that we do have the right approach.

Thank you very much, Tim.

Thank you, Mike.

Can we have the next question, please?

We'll hear from Andy Hargreaves with Pacific Crest.

I'm just wondering on the iPhone.

Do you feel like the services and apps are obviously growing really fast.

Is that putting -- is it the growth there constrained, do you think, by the network capacity of your carrier partners?

I think, Andy, it's Tim, I think that's a better question for them.

But what I see without talking about specific ones, I see them making more investment in order to have faster networks and see them being very happy about driving higher ARPUs and lower churn.

This changes their cost to customer acquisition if they're not outchurning people left and right.

So I think they will continue to make investments to deliver services that people really enjoy, which is faster networks.

Do you think you guys will end up making investments on the side, whether it's a NOC or a data center or something to help take some of the pressure off them or off load some of that capacity?

We have no plan to do so.

When we entered this business, we looked at it and came to a conclusion that what we could do really well was deliver a world-class handset because of our hardware and software skills and that we could uniquely play in that world and deliver something that was revolutionary.

I think there are other people that have much more skills than networks, and I think we're dealing with a lot of those as partners.

And I think that's their business and they're quite good at it.

Okay.

Thank you.

Thank you, Andy.

Can we have the next question, please.

We'll hear from Katy Huberty with Morgan Stanley.

A couple of follow-ups, Tim, on the conversation around $399, $499 net book or whatever you want to call it.

I understand that the ability of Apple to make something that is high quality at that price point is limited.

But do you think that there is, perhaps, an emerging market for a truly mobile device that would have perhaps a larger screen where you can do more with it than on the iPhone that is big enough that you may want to participate at regardless of price?

I never want to discount anything in the future and never want to specifically answer a question on new products.

As you probably know, Katy, the point I'm making right now is that I think most customers that are buying a portable want a full-featured notebook.

And we deliver those and deliver some incredible values in those, and we feel like -- and we know from our research the customers are very happy with those.

I think some of the net books that are being delivered or many of those are very slow.

They have software technology that is old.

They don't have a robust computing experience.

They lack horse power.

They have small displays and cramped keyboards.

I could go on and on but I won't.

And so that kind of thing, I think, many people will not be happy with.

And we're only going to plan things where we can deliver something that is very innovative that we're very proud of.

Thank you, Katy.

Could we have the next question, please?

We'll hear from Brian Marshall with Broadpoint AmTech.

Hi.

Thanks.

A question with regards to iPhone activations.

Based on my calculations, it seems as though the US has represented about 40% or so of the total activations over the last couple quarters.

Shouldn't we be entering a point here where the international side should start to pick up here and start growing materially faster, and I just wondered if you could help us think about this.

This is Tim again.

We don't release the percentage of iPhone sales by geography.

And so I wouldn't want to get into that.

We view it as competitive information.

Generally speaking, you would find that smart phones in general are being sold in larger numbers in environments where post pay is the primary payment mechanism.

Not that phones are being sold and prepaid.

There are some, but it's much lower.

And so you can look at and do an analysis of where those post pay countries are and find that there is a disproportionate number of phones relative to the total phone market being sold there.

But that's not unique to Apple.

I think that's the reality of the smart phone market currently.

And, Tim, having said that, some of your competitors are sort of tinkering around with some of the prepaid models out there.

Is that something that you might be interested in down the road?

We're doing that as well.

And we sell by prepay in markets that are predominantly prepay.

And I think we have more to learn in that environment.

I think this is an environment where we're still a beginner in some ways.

And I think we can make drastic improvements.

I think our business model works quite well in the post pay category.

But prepay is an opportunity for us.

We are trying it in both markets where post pay is dominant of the two and we're trying it where prepay is the dominant.

So we have multiple things going on right now and hopefully we'll learn from that and improve as we move forward.

Okay.

Final question, any help you can give with regards to the percent of the iPod Touch user base which we calculated north of $20 million at this point, that actually upgraded to the new iPhone 3.0 software?

I would call it a good number.

And I don't want to be more specific.

But obviously we priced that extremely aggressively and we are very much wanting to get the platform out there.

It's great for our ecosystem and the developers will sell more apps as a part of that.

So we tried very hard to get people to upgrade.

Thank you, Brian.

The next question, please.

We'll hear from Chris Whitmore at Deutsche Bank.

Thanks very much.

Do the supply constraints on the iPhone 3G-S affect the rollout for remaining countries or put it another way when do you expect it to reach equilibrium for the iPhone.

Let me answer both questions.

One, I don't want to predict today when supply and demand will balance.

I know that it will not balance in the short-term.

And I don't want to give a prediction because as you can guess, it's very difficult to gauge the demand without having the supply there to find out what it is.

And so I don't want to do that.

In terms of affecting the country roll out, I believe the vast majority of the countries that we were selling -- that we are selling the 3 G in will be selling a 3 GS by the end of the fiscal quarter.

So it may move the date by a few weeks here or there, but I think the vast majority will be shipping in by the end of the fiscal quarter.

Tim, any update on the iPhone in China?

Nothing to work -- nothing to add to date specifically other than it continues to be a priority project and we hope to be there within a year.

Thank you, Chris.

Could we have the next question, please.

We'll hear from Charles Wolf with Needham and Company.

Hi, guys.

I have a couple of questions.

On sales of the iPhone , could you share with us any information you have regarding the division between new

Charlie, it's Tim.

I can't share that information.

Some of that information is confidential to the carriers themselves because the customer signs up with the carrier.

Okay.

Well, let me ask a question about the App Store then.

In terms of application prices , there appears to be a race to the bottom.

I've noticed that there is an increasing number of $0.99 offerings.

Do you regard this as a concern, and, if so, are you taking any steps to enable consumers to separate quality apps

Charlie, we're always looking for ways to categorize apps differently.

And we do have some ideas in this area.

As you know today, we do it by type of app and also show popular apps and top selling apps, et cetera.

We realize there is opportunity he there for further improvement and are working on that.

In terms of the price, the developer sets the price.

And so it's up to the developer what to charge.

And I think what they're doing is they're doing what any good business person would do is doing the elasticity analysis and deciding where to best set their price.

I would expect -- I would think as the install base grows more and more and more, it makes more and more sense to have a bit lower prices.

And -- but that's totally up to the developers.

And I'm sure each of them may view that in a little different manner.

Thank you.

Thanks, Charlie.

And thanks to everyone.

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