蘋果 (AAPL) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Apple, Inc. fourth quarter 2009 fiscal earnings 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. Thank you 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'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, 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 the Apple's Form 10-K for 2008, the Form 10-Q for the first three 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 speak as of their respective date.

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

Thank you, Nancy. Thank you for joining us. We're extremely pleased to report Apple's most profitable quarter ever and sales of more Macs and iPhones than in any previous quarter. We are thrilled with these record-breaking results, particularly given the economic environment around us.

Revenue for the quarter was $9.87 billion, representing 25% growth over the prior September quarter's results. This was Apple's second highest quarterly revenue ever, next to the record results reported for last December quarter. Operating margin was Apple's highest ever at $2.19 billion, representing over 22% of revenue and higher than our guidance, due to better than expected revenue and gross margin. Net income was $1.67 billion, which translated to earnings per share of $1.82.

In terms of non-GAAP measures, adjusted sales totaled $12.25 billion for the September quarter, which was almost $2.4 billion higher than our reported revenue. Adjusted gross margin was $5.21 billion, which was almost $1.6 billion higher than our reported gross margin. And adjusted net income was $2.85 billion, or almost $1.2 billion higher than our reported net income. We believe that these non-GAAP financial measures provided added transparency to our business and hope they are helpful to you in your analysis and understanding of our performance in the September quarter.

Turning to the details of our results, I would like to begin with our Mac products and services. We generated outstanding Mac sales of $3.05 million, meeting our previous record set in the year-ago quarter by over $440,000. The Mac is showing fantastic momentum, growing faster than the market in 19 of the past 20 quarters. We believe this is the result of our unmatched innovation and commitment to providing customers with the best hardware, the best software, and the best user experience in the world. Quarterly Mac sales grew 17% year-over-year and this compares extremely favorably to IDC's latest published estimate of 2% growth for the market overall in the September quarter.

Customers continue to respond very positively to our Mac portable lineup, which we updated in June. Portable sales increased 35% year-over-year and represented 74% of our Mac mix. Our execution in the quarter was outstanding, and we were particularly pleased with the 42% year-over-year growth in our Asia-Pacific segment. We once again had a very successful back-to-school season, and were very pleased with the 12% year-over-year increase in Mac sales to US education institutions, which resulted in the highest quarterly Mac sales ever for our US education business.

The shipments to US education institutions this quarter included 50,000 MacBooks to the state of Maine as part of its ongoing one-to-one initiative. Customer response to the August 28th release of Snow Leopard has been tremendous. Through the end of the September quarter, we generated consumer box upgrade sales at twice the rate we experienced with the leopard release. Snow Leopard delivers hundreds of refinements, is the only operating system to support Exchange out of the box, and is successfully introduced Nucor technologies. Snow Leopard allows developers to take full advantage of hardware features including 64-bit technology, multicore processors, and advanced graphics processing units. We began and ended the quarter with between three and four weeks of Mac channel inventory.

Now I'll turn to our music products. We sold almost 10.2 million iPods, which was down from just over 11 million in the year-ago quarter. Our latest research indicates that 50% of recent iPod buyers were purchasing their first iPod, including those in our high market share countries such as the US, Japan, Australia, Canada, and the UK. Customers love the recently announced iPod Nano's new features including the built-in video camera, FM radio, pedometer and larger display.

Sales of iPod Touch grew strongly during the quarter, up 100% year-over-year, fueled by a very successful back-to-school season and the continued incredible popularity of the App Store, with the new $199 entry price point for the iPod Touch and the updated features for the iPod Shuffle, Nano and Classic, we believe the iPod line up is attractively positioned for the holiday season. Our share of the US market for MP3 players remains at over 70%, based on the latest monthly data published by MPD, 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 four to six weeks of iPod channel inventory.

The iTunes Store delivered another great quarter, with strong sales of music, video and Apps. Customers are loving last month's release of iTunes 9 and its many new features including iTunes LP, sharing and genius mixes, as well as improved syncing and the redesigned iTunes Store. With stores in 23 countries, iTunes is the worlds largest music retailer, now offering over 11 million songs in addition to over 50,000 TV episodes and 7500 films.

I would now like to turn to the iPhone. We are thrilled to have sold almost 7.4 million hand sets in the September quarter. That's a new Company record, and an increase of 7% over the prior September quarter, when we increased channel inventory by two million handsets following the introduction of the iPhone 3G, and the dramatic expansion of geographic distribution. iPhone sell-through in the quarter increased 38% year-over-year.

Response to the new iPhone 3GS has continued to be tremendous, and we were very pleased with JD Power and Associate's announcement earlier this month that iPhone has once again topped the charts for both consumer and business SmartPhone customer satisfaction. iPhone not only maintained its lead since the last JD Power report was issued six months ago, but it widened it over the next closest competitor in both categories. We are looking forward to selling iPhones in China beginning later this month, as this very large market represents a great opportunity to expand iPhone's reach even more broadly. We also plan to expand our carrier relationship in UK and Canada.

The App Sore continues to be an unparalleled success, with over 85,000 Apps available and over two billion customer downloads to date, including over 0.5 billion downloads in the September quarter. In addition to adding more apps at an amazing pace, we've continued to enhance the App Store experience with iPhone OS 3.1, which includes new features such as genius recommendations and a streamlined way to organize Apps within iTunes. Recognized revenue from the iPhone handset sales, accessory sales, and carrier payments with $2.3 billion during the quarter compared to $806 million in the year-ago quarter, an increase of 185%. The sales value of iPhones sold during the quarter was $4.5 billion.

I would now like to turn to the Apple retail stores. The stores had a record quarter, posting the highest revenue, segment margins, and Mac sales ever. Revenue in the quarter was $1.87 billion compared to $1.72 billion in the year-ago quarter. Our store sold 670,000 Macs compared to 596,000 Macs in the year-ago quarter. About half of the Macs sold in our stores during the September quarter were to customers who had never owned a Mac before.

We opened 15 new stores during the quarter, bringing us to a total of 273. With an average of 262 stores open during the quarter, average revenue per store was $7.1 million, compared to $7.6 million in the year-ago quarter. Retail segment margin was $410 million, or 22%, up from $301 million, or 17.5% in the year-ago quarter. We hosted 45.9 million visitors in our stores during the quarter, compared to 42.7 million visitors in the year-ago quarter, an increase of 7%.

We hosted 608,000 personal training sessions and we sold 208,000 memberships to our one-to-one program, an increase of over 120% year-over-year. Fiscal 2009 was a milestone year for our retail stores. In addition to opening 26 new stores, we remodeled 72 stores to our updated design, and for the first time, we opened more stores internationally than in the United States. In November, we plan to open our first two stores in France, including one at the Louvre, as well as our fourth high profile store in Manhattan on the Upper West Side.

Total company gross margin was 36.6%, which was 260 basis points better than our guidance. There were two groups of factors that were the primary causes of this difference. First, we sold more Snow Leopard, had a better product mix, and spent less on the iPod transition than planned. Second, component costs did increase, but not to the level we had expected, and we benefited from leverage on the higher revenue and lower freight and other costs than planned. Operating expenses were $1.42 billion and included $151 million of stock-based compensation expense. OI&E was $45 million and the tax rate for the quarter was 26%.

Turning to cash, our cash, plus short-term and long-term marketable securities totaled $34 billion at the end of the September quarter, compared to $31.1 billion at the end of the June quarter, an increase of $2.9 billion. Cash flow from operations was $3.1 billion, and that was net of our $500 million prepayment to Toshiba early in the September quarter to secure future supply of NAND flash. 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.

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. On September 23, the Financial Accounting Standards Board ratified EITF 09-3, which will change the way we account for iPhone and Apple TV today. Under EITF 09-3, only the estimated sales value of future upgrade rights to iPhone and Apple TV software are required to be deferred at the time of sale, with the balance of the iPhone and Apple TV sales price being recognized immediately as revenue. The deferred amounts will be recognized over the 24-month estimated lives of the product, similar to the way we have applied subscription accounting to these product sales today.

We don't know at this time the specific amount of revenue deferral for each iPhone and Apple TV sold under EITF 09-3, but we do believe a substantial portion of the revenue will be recognized for these products at the time of sale. We are very pleased with the FASB's adoption of this new rule, as we believe it will enable us to more closely align our reported results with the economics of the iPhone and Apple TV sales. We will be required to adopt the new accounting rule no later than the first quarter of our fiscal 2011, a year from now. But we do have the option of adopting earlier than that sometime in our fiscal 2010.

We are currently assessing impact of the new rule on our accounting and reporting systems and processes. Making this change will be complex and as of now, we are uncertain as to the timing of our adoption. Therefore, we don't have anything more specific to discuss with you today about this change. The guidance for the December quarter that we are providing today is based on the subscription accounting treatment that we have applied to date for the iPhone and Apple PV sales. In other words, it is based on the assumption that the full amounts of revenue and product costs for past and future iPhone and Apple TV sales continue to be recognized ratably over the estimated 24-month lives of the products.

Forecasting the current macroeconomic environment remains challenging, so we will continue to provide a range of guidance for the December quarter. For the December quarter, we expect revenues to be between about $11.3 billion and $11.6 billion. We expect gross margin to be about 34%, reflecting approximately $33 million related to stock-based compensation expense. We expect OpEx to be about $1.64 billion, including about $178 million related to stock-based compensation. We expect OI&E to be about $30 million, reflective of the short-term interest rate environment, and we expect a tax rate to be about 30%. We are targeting EPS in the range of about $1.70 to $1.78.

In closing, we are thrilled with our outstanding September quarter results and with our record fiscal 2009. For the year, we generated $36.5 billion in revenue and $5.7 billion in net income. That's 12% annual revenue growth and 18% net income growth in extraordinary challenging economic times. During the year, we continue to introduce incredibly innovative products, including the new aluminum unibody MacBook Pro, the iPhone 3GS and the iPhone OS 3.0, MacOS X Snow Leopard and of course the wildly new popular features and offerings in iTunes and the App Store. As we begin our fiscal 2010, we're looking forward to delivering additional exciting new products and are confident in our new product pipeline. We remain focused on our strategy of bringing the best and most innovative products and solutions to our customers, and we are very enthusiastic about the year ahead.

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

(Operator Instructions) Your first question will come from Richard Gardner with Citigroup.

Okay, thank you. Peter, I was just hoping you could talk a little bit about the factors in forming your guidance for the following quarter, specifically, you know, why the sequential jump in revenue is so far below what you've experienced for the last couple years, and also, why gross margin should be down as much as you've guided sequentially, the main factors there. Thank you.

Let me start with gross margin. I'll come back to revenue. We expect gross margins to decline sequentially about 34%, primarily as a result of four factors. First, for the new products that we have and will announce, we are delivering greater value to our customers, and these products have lower gross margins than their predecessors. Second, and as expected, we will see a seasonally higher mix of iPods and expect Snow Leopard box sales to be less in their second quarter. And third, we'll incur significantly more air freight. And fourth, we expect component costs to be higher than what we saw in the September quarter.

Regarding our revenue, as you know, the education and back-to-school seasons have largely concluded and the December quarter has been typically driven by holiday purchases in the second half of the quarter. Our guidance this quarter includes double-digit revenue growth from last year, which was the best quarter from a revenue perspective in Apple's history. We're also seeing lower ASPs this year, but we remain very confident in our business. We're shipping the best products that we ever have in Apple's history and customers have clearly responded.

Thank you, Rich. Next question, please?

From Barclays Capital, Ben Reitzes.

Yeah, thanks a lot. Could you discuss -- I have two questions, one on iPhone, can you discuss channel inventory, what it was ending the quarter, and what the supply situation is, if there are any supply constraints during the quarter? We noticed lack of availability overseas and then that looked alleviated towards the end of the quarter and it would seem like there's pent-up demand heading into December. So if you could discuss that, that would be great.

Yes, hi, Ben. It's Tim. For much of the quarter, most of the countries where we're selling the iPhone 3G S was very low in inventory, as demand outstripped the supply. We did improve supply markedly in September, and supply and demand converged in the vast majority of countries, either in September or in early October. In terms of your channel inventory question, we now have about 2.4 million units in the channel and that's an additional 585,000 from the previous quarter end.

And are you comfortable with that, given that you have China launching and maybe even a few other GOs?

I would have liked to have had more, honestly, because we were still short in some countries at quarter end. And as indicated, it was early October before we were able to get supply/demand balanced in some countries.

I know you don't want to quantify China maybe, but is there any certain levels of excitement you have and any limitations in terms of Apps and iTunes that may limit the sales out of the gate or anything else you could say qualitatively around that launch that gives us an idea of the velocity of units?

We're thrilled to be launching there on October 30, with China Unicom, and we're going to start with about 1,000 points of sale and expand further over the next several months thereafter. They've announced the plans and prices that they will have both for the device and for the service, and there's a very wide range here from, on the post-paid side from $18 a month all the way up to $8500 a month. And at the higher price points, an individual is able to actually get the device for free, and it goes up as you go down the ARPU as it would in most countries. As you know, as we've shipped the 3G and the 2G phone prior to that, we discovered that there were quite a few phones going into China. So it would seem to us to indicate that there's a good opportunity and we're really excited to get started. We're not making any projections on, on the volume, but it's a huge market, the largest market in the world in terms of total phone, and I think it's very important that we get started to make it as large as possible on SmartPhones.

Do you guys have any updated comments on the economy? And that's my last question. It seemed like the quarter must have closed very strong, especially with those Mac numbers.

We just spend our time projecting our business and leave the economy forecasting and comments to the economists.

Thanks, Ben. Could we have the next question, please?

That question comes from Gene Munster with Piper Jaffray.

Good afternoon, and congratulations. We're looking at the iPhone, it's pretty clear we're still in a green field opportunity here, but as you start to go to multiple carriers, can you talk a little bit about the pricing of the phone when you go from exclusivity to multiple carriers, obviously not specifics, but any sort of color we can have in terms of how the pricing dynamic changes from the phone from you to the carrier? Thanks.

Our pricing is confidential, Gene, so it's not something I can comment on in detail, but generally speaking, from markets where we're already selling, I would not expect to see a wholesale difference as we bring on other carriers. However, the end user price is really set by the carrier themselves, and so you may or may not see a street price difference.

So when you go from exclusive to multiple carriers, you wouldn't necessarily see a change in pricing that you're charging the carrier, is that correct?

That's correct.

Thank you. Could we have the next question, please?

Thank you. Scott Craig from Banc of America.

Hi Tim. I know you don't have a lot of experience with the seasonality of the iPhone business, but how do you think about the seasonality here into the fourth quarter, and a question for Peter on tax, can you walk us through why the tax rate's going to go up here in the near term? Thanks.

Yes. Ted, as you said, when we look at the September to December quarter, we have very few September to Decembers to look at in the iPhone business since we've just been selling for a couple of years. And in fact, in the vast majority of countries, we've only been selling in one, and in some of those, just a partial. And so honestly speaking, we, we're new in the business still and I think for me to make any kind of seasonality forecast would not be a good idea. The, the things that we look at in terms of coming up with our forecast would be the popularity of the iPhone 3GS has been phenomenal. We've -- we were very surprised by the demand.

We were selling in 64 countries by the end of the quarter. We'll roll out others this quarter, notably China, which has already been mentioned in the call. We hope to roll out in Korea as well. And as Gene mentioned previously, we will be adding some carriers in some countries where we only had one carrier before, such as the United Kingdom and Canada as an example. So those are the things that we think about as we think about our December forecast.

Scott, related to your tax question, our tax rate for the quarter was 26%. And it was below our guidance of 30, primarily due to a higher mix of foreign earnings. But for the year, we were about 29%. The past two years, we've been pretty much right on 30. So from what I see at this point for fiscal 2010, we'll see about 30% for our tax rate, really consistent with what we've seen in the last couple years.

Okay, thank you.

Thanks, Scott. Could we have the next question, please?

From RBC Capital Markets, Mike Abramsky.

Thank you very much. Tim, what are your thoughts in the holiday season, given the increased and competitive intensity against iPhone? There's a lot of obviously wannabes that are coming to market in that season, specifically Android and many are now offering touch screens and richer browser and app stores and are being given carrier support. How do you think about maintaining your momentum and differentiation amidst that kind of environment?

Well, Mike, we feel great about how we ended the fiscal year with selling 7.4 million, as Peter talked about in the preamble. And that put us over 20 million, almost 21 million for the fiscal year, which was up 78% from before. And so we have significant momentum. Also, when you look at the ecosystem that we've got with iTunes and the App Store, where the App Store having over 85,000 Apps, which is a country mile more than anyone else, plus the very strong product pipeline that we have, we feel very, very good about suiting up and competing against anyone.

And so--

Go ahead.

No, you go ahead.

Frankly, I think that, that people are really just trying to catch up with the first iPhone that was announced two years ago, and we've long since moved beyond that.

Were you pleasantly surprised at the sort of mix of 3GS versus 99 and did that kind of, you know, what did that tell you perhaps about the value proposition of Apple and how that drives kind of iPhone going forward?

As I indicated before, the 3GS, the demand for the 3GS did exceed our expectation and we quickly changed our orders and for components, et cetera that, are different between the models. I think it shows that there's a, an intense appetite for Apple's latest technology and we were, you know, very pleased with the results.

Thanks. Okay, thanks, Tim.

Thank you, Mike. Could we have the next question, please?

We will hear with Shannon Cross with Cross Research.

Hi, thank you. Could you talk a bit about the Mac business, you know, the channel inventory levels, what the mix has been now that you've had a couple of, you know, a few months since the refresh of your lineup on the portable side?

Sure, Shannon. This is Tim. Last quarter was the quarter of the portable. Up 35% year-over-year compared to IDC at 9%, and so we really had a blow-out quarter for portables, and it's the result of the lineup that we announced in June and as you know, we had backlog entering the quarter on t that line.

Also, the Mac was helped by the back-to-school, which was the strongest back-to-school we had ever had, as Peter talked about, and the launch of Snow Leopard, which occurred later in the quarter, and so there was a group of things that came together to push us to a level above 3 million, which was beyond our own expectations internally, or even some of our stretch targets. From a channel inventory point of view, we started the quarter between three and four weeks. We ended the quarter between three and four weeks. And to be specific on the inventory change, so there's no misunderstanding, the inventory changed less than 15,000 units from beginning to end. And so we had very minor growth, particularly when you compare that to the growth in sales from a sequential point of view.

Great, and then just any idea of the penetration of Snow Leopard right now out in the installed base? I think you mentioned, you expect -- Peter mentioned fewer shipments of box sales in the coming quarter. But any idea where you're at?

The upgrade sales of Snow Leopard, which we include the family in the box set were more than double what we experienced from Leopard over the same five-week initial sales period. And so this doubling was much more than we had planned and was very pleasantly surprised by it.

Great. I guess the price cut worked. So thank you.

Yes, it did. Thank you.

Thanks, Shannon. Could we have the next question, please?

From Credit Suisse, we'll hear from Bill Shope.

Thanks, guys. Last year, you provided some commentary around longer-term gross margin trends. Do you have any thoughts on this for fiscal 2010 or at least how we should think about this longer term?

Sure, Bill. I'll give you some qualitative thoughts. For the December quarter, I guided to about 34%. I don't want to make forecast today for future quarters on a quantitative basis, but I think there's two things that you ought to be aware of. First, for some key components, costs are rising and I think that's visible to, to you. And second, we are continuing to focus on delivering state of the art products at price points that our competitors can't match. And we are going to continue to provide ever-increasing value to our customers.

Okay, great. Thank you.

Thanks, Bill. Could we have the next question, please?

We'll hear from David Bailey with Goldman Sachs.

Great, thank you very much. Just on the iPhone, would the wholesale price for the iPhone the same whether you have an exclusive agreement or whether you have multiple carriers, what are the benefits of having exclusive agreements in some of the bigger countries?

Well, for Apple or for the carrier?

For Apple.

In an exclusive relationship, you can generally have some level of innovation that's very difficult, or would be more difficult to do with several carriers. Visual voicemail was an example of that that we had in the initial iPhone, as you recall. Also, in some cases, an exclusive carrier may be willing to invest more, although there is -- we found no lack of people wanting to sell iPhones, frankly. And so I'm not sure whether that is true on a broad basis or not. But I think that's maybe true in some individual cases. And other than that, I would ask them, because they can probably give you a better view than I could.

Okay, thank you.

Thank you, David. Could we have the next question, please?

We'll hear from Mark Moskowitz with JPMorgan.

Yes, thank you. Good afternoon. Two questions here. Tim, can you give us any sense qualitatively in terms of what Apple has seen with respect to the impact of the remodeled stores, as well as the increasing penetration of the Apple retail stores internationally? I assume you see synergies with your direct and indirect sales levels because of these initiatives, or is it still too early to determine?

it's Peter, I'll take that question. We are seeing strong results from our remodel stores. Ron and his team have remodeled, as I said this year, 72 of the stores to bring them to our most updated design. And those designs are providing the best customer, customer experience in the industry bar none, whether it be up front in the selling part of the store or certainly in the back of the store, with the genius bars or the creative bars. And customers are having a great experience. In terms of international, the growth there was quite strong in the quarter. Our average store revenue was actually up over 20% for our international stores this quarter.

And then Peter, the other question revolves around the OpEx ratio going forward. You've talked in your prepared remarks about 2010, the new product pipeline. Can you give us any sense in terms of how should investors think about the R&D or SG&A moving up? Is it going to kind of hold steady, or will there be any sort of changes regarding that pipeline?

I don't want to give a specific quantitative percent. I think over the last year, we have managed operating expenses well, but we have been investing confidently for our future, especially in engineering and our distribution and our marketing and advertising. We, we saw the benefits in the last downturn, in 2001 and 2002, of coming out of that with just an amazingly strong product pipeline, and we're repeating that very positive lesson this time around. So I think we're being careful with money.

We're making good choices and, but continuing to invest wisely and confidently in our future.

Thank you.

Thank you, Mark. Could we have the next question, please?

Your next question will come from Toni Sacconaghi with Sanford Bernstein.

Yes, thank you. Couple questions, please. You had very strong ASP performance in both Macs and iPhones. On the Mac side, you're typically down because of the back-to-school promotion because of ASPs. You were up even on the notebook side this quarter. Can you comment on that? And on the iPhone side it, does look like your ASP went up $40 or $50 sequentially on a cash basis. You had stated last quarter that 3GS was outstripping the $99 phone, so was it mix alone, or is it something else around currency translation or something else that is affecting that?

Hi, Toni. It's Peter. Let me start with iPhone. The iPhone ASP in the quarter was just over $600, and this reflected both a high mix of the 3GS sell-through, and also the benefit of rebalancing the ending channel inventory more towards the 3GS as a result of the introduction. On a sequential basis, yes, our ASPs were up a bit in the portable space. This was really a function of our seeing a higher mix of our new MacBook Pros.

As Tim commented, very, very strong quarter after the June introduction. We had the best back-to-school season that we have ever had. And on a sequential basis, we also got a little benefit from the dollar as well. On a year-over-year basis, the dollar was a negative. But sequentially, it was a small positive.

And then on the availability issues that you had on the phone, was that a good old fashioned demand exceeds supply issue, or were there any component availability issues that constrained your supply and related to that, you had also mentioned that air freight, you expected to go up next quarter as a reason for gross margins. I'm not sure if that was in relation to phones or anything else, but perhaps you can address that as well.

On the availability portion, Tony, the, the iPhone 3GS demand outstripped the supply of the iPhone 3GS, so you would probably put that in your first category of a good old fashioned -- a demand issue, which is a nice problem to have in the scheme of things. Now, because we, because it was outstripping supply, it creates component shortages as we go out to the market to secure more components, and generally speaking, the ones that are hardest to get is silicon, and so it takes a little longer. However, I was really happy that we were able to solve the bulk of these, the vast majority of them in September or in early October.

So I feel good about how we're positioned now. The air freight is not related to the iPhone. So these are unrelated topics. But generally speaking, the air freight is planned to get enough units into the channel in time for the holidays and is necessary for that reason.

Now, is it, is that air freight non that you had that typically in most Q4s and accordingly, is that larger than usual for this quarter because your demand perception may have changed over the last 30 or 60 days, or is that just a normal sequential seasonal head wind to margins that you always experience?

It's more than normal. And so you're correct that in general, we spend more in freight in Q1. However, this increase is larger than usual. And I'm sorry I can't be specific on the product, but it's, it's, it's an abnormal sequential increase.

Okay. Thank you.

Thanks, Toni. Could we have the next question, please?

From UBS, we'll hear from Maynard Um.

Thanks. Can you talk about how many non-Apple store retail distribution points have you and whether there's more growth there. I'm just trying to think about the mix of your retail stores versus your indirect going forward and then as a follow-up question on CapEx.

Maynard, is that specific to the Mac or--

For the Mac, yes.

For the Mac, we have a little less than 13,000 worldwide and our focus in terms of expansion in the indirect channel is much more so in the international areas, in international market. As you probably could tell from our results, we grew the Mac much stronger outside the US than inside the US, and I'm sure part of that is just the economics difference between the two, but the international business, typically in Europe and in Asia was extremely strong last quarter.

Okay, and just in particular to Europe, just was that broad-based, or western or eastern, any more specific than Europe?

Yes, I can give you some highlights. If you look at the leads, Spain was extremely strong, which I know is going to be a surprise, was over 40%. Germany was 40%. France was 39%, and so you had Western Europe less than UK extremely strong, a tremendous multiple from market growth. And even countries, Switzerland and Italy were in the mid-30s. And so several European countries of sizable countries were incredibly strong.

Great, and then just on the CapEx, about 4.7% of your sales. I'm just trying to understand, I know you have the new stores in there, but aside from that, you talk about normal replacement of existing capital assets, manufacturing-related equipment. Any more details you can provide on that piece of the CapEx that's being spent on the capital assets, and in particular what that is, when that should start to decrease as a percentage of sales?

Not sure I look at that as a percent of sales, but in fiscal 2009, our CapEx was about $1.150 billion, up from about $1.1 billion last year. We spent a little under $400 million in both years on retail stores. As I look forward, we're going to continue to confidently open retail stores and keep them fresh and exciting from a remodel perspective. The other parts of our business, we are spending capital on facilities, infrastructure, and in the manufacturing spaces as well. But at 1.1 billion in the last two years, we've not been terribly capital-intensive. Thank you.

Thanks, Maynard. Could we have the next question, please?

From Deutsche Bank, we hear from Chris Whitmore.

Thanks. Couple questions, first on the Mac business, looking forward to the December quarter, do you expect to hold Mac units roughly flat sequentially?

The things that we're considering, we don't give Mac-specific forecast, as you know, or product-specific forecast, but the things I think you should consider, that we considered anyway in coming up with our numbers, the September quarter was benefited by a 50,000 units order from the state of Maine. This completed the 70,000-unit order, the other 20,000 had shipped in our fiscal Q3. It also benefited from an extremely strong back-to-school season and we had an extremely strong promotion wrapped around that, as you're aware. We also had Snow Leopard, and it's -- with every new OS, you have some pent-up demand that ships with the operating system as people hold to get the latest software. And finally, and I wouldn't underestimate this, the demand for the portables that we announced in June was a key for the quarter at 35% growth, and some of that was demand that was probably, probably existed in June, but we were unable to fill. So it got the quarter off to a very good start. So those are the things that we thought about as we forecasted the Mac business.

Second question on iPhone supply, can you quantify the magnitude of the unit shortfall? In other words, what do you think you could have shipped, had you had adequate supply during the quarter?

It's a very tough question to answer, because unfortunately, we can't run the experiment both ways. What I know is that for the, for almost the entire quarter, until we got into September, the iPhone 3GS was short virtually everywhere. What I don't know is how many people waited until it was available versus bought a competitive phone, and there's just -- there is not a good way to tell that. Are you on track to reach 80 countries by year end for iPhone shipments? iPhone availability?

To be specific, we already shipped the iPhone 3G in over 80 today. We shipped the 3GS in 64 countries as of the end of last quarter and we would forecast that we would be in over 80 by the end of the calendar year, with the 3GS.

Thanks.

Last question relates to guidance. Given the accounting change in my opinion, GAAP accounting loses some meaning. Can you provide a range of pro forma expectations for December? I think that would be more meaningful to the investment community.

I provided you the guidance that, that we provided, is very detailed, and consistent with when we began to ship the iPhone, we provide guidance on GAAP and we will report to you, you know, our numbers in January for the December quarter.

Thank you.

Thanks, Chris. Could we have the next question, please?

We'll hear from Shaw Wu with Kaufman Brothers.

Hi, thanks. I have a question on the, I guess the enterprise business. Two questions. First, on the, on your iPhone business, any color you can share with us, the breakout between consumer and enterprise, at least qualitatively and how that's been trending? And then the second question is what are the key features with Snow Leopard is native support for exchange. Any comment on how that's helping your enterprise effort? Thanks.

Shaw, it's Tim. In terms of the iPhone in the corporate market, what I can tell you is employee demand for iPhone in the corporate environment is very strong. Since the launch of the iPhone 3GS, which coupled with the software made a number of improvements that CIOs were looking for. The iPhone is either being deployed or being piloted in well over 50% of the Fortune 100. And from an international point of view, if you look at Europe, this is true in about 50% of the Financial Times 100. So we feel very good with the progress that we've made since the iPhone 3GS was announced.

Also, another very key market for us that some people call enterprise is that over 350 higher ed institutions have approved iPhones for their faculty, staff and students. And in addition to both of these, we continue to be very, very happy with our sales in the government arena. In terms of Snow Leopard and Exchange, I don't have any statistics to go over with you yet. It's very early. As you know, we just started shipping at the end of August last quarter. And so we'll see how that does, but it clearly makes it very simple for the windows user to, with exchange, working right out of the box.

Thanks for the color.

Thank you, Shaw. Could we have the next question, please?

We'll hear from Brian Marshall with Broadpoint AmTech.

Hi, thanks. Nice quarter. I guess a question with regards to the enterprise as well. I think last quarter you may have commented, you know, there's several government agencies out there that have kind of 30,000-plus iPhone units installed. I was wondering if we could get an update there on maybe some granular specifics of some of this?

No new update on specific numbers, but we continue to be very pleased with the market and the number of agencies that are adopting the iPhone.

Okay, and the same with regards to corporate entities as well?

I just went through that in the previous call, but to repeat it, well over 50% of the Fortune 100 are deploying or piloting the iPhone, and this strength is also happening internationally and if you take Europe over -- about 50% of the Financial Times 100 are deploying or actively evaluating iPhone for broad deployment. And so these numbers for -- are very impressive to us and we feel like we're making great progress in this market.

Definitely. And Tim, I think that you commented in the past that three of that Fortune 100 had 25,000 units or greater. Any update there by chance?

None that we can provide. As you probably guessed, many of these companies would like to keep their specific numbers confidential.

Understood, thanks. And final question, any chance that the international activations grew on a year-over-year basis for the iPhone? Thank you.

Well, iPhone sell-through was up 38% year-over-year. As Peter went through in the preamble, last year and I think it's very important to remember, we expanded channel inventory by about 2 million units because it was the launch of the iPhone 3G during that quarter. We only grew inventory this particular year by less than 600,000. And so that sell-through increase of 38% compares to a projected rate of market growth of 5% from Canalis and so it's a, you know, a significant multiple to market growth based on the market statistics that we have.

And that 5%, just to clarify, is international?

That 5% is a worldwide number, but I'm--

Thank you.

Thanks, Brian. Could we have the next question, please?

From FTN Equity Capital, we'll hear from Bill Fearnley.

Question for you on the Macintosh side, if I could do a deeper dive on the education sector. Question for Tim, you guys have been pretty cautious regarding state spending here given the tax issues that you've quoted for the different states. So what powered the upside in education specifically K-12 and higher ed? And then also, if you could give additional color on what happened in the student buy versus your expectation as well, given the popularity of notebooks for students? Then I had one follow-up, if I could.

Let me start with the last one first. The student buy, you can see those numbers trickling through our retail results and you can't see this, because we don't break it out separately, specifically helped our online results and the institutions buy through book stores. And so the back-to-school season -- attribute a great piece of that to the individual business that you're talking about. In terms of the institutional business, I've been worried about state spending. I'm still worried about state spending. We saw no material stimulus funding flowing last quarter.

We saw a little, but it was a very small number. We may see more this quarter, but it's too early to tell. In terms of the institutional increase, institutions grew about 12%, and that increase was the big thing that pushed us over the zero mark there was the state of Maine order. And so it was extremely key in the education institution achievement.

Okay, thanks. And then on Mac inventory, just doing a deeper dive here on the air freight question, I know you won't talk about the product, but what's driving the increase in air freight? Is the timing of new announcements? Are you having issues with component availability? Are you running into manufacturing yield issues? You know, why the, why the uptick here?

What's driving the air freight is that I haven't been able to figure out a way to move the holiday season, and so we have to get all of these units into the channel for the holiday sales. And I'm sorry, I can't be more specific than that.

Okay. Thanks, guys.

We have to have a little bit of fun on these calls.

Thanks, Bill. And that concludes our Q&A session today. A replay of today's call will be available for two weeks. As a Podcast on the iTunes store. The webcast on Apple.com/investor and via telephone. And the numbers for the telephone replay are 888-203-1112, or 719-457-0820. The confirmation code is 1248587. And these replays will be available beginning at approximately 5:00 p.m. Pacific time today. Members of the press with additional questions can contact Steve Dowling at 408-974-1896 and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, 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.