蘋果 (AAPL) 0 Q0 法說會逐字稿

Good day, ladies and gentlemen, and welcome to this Apple Incorporated 2010 earnings release conference call.

Today's call is being recorded.

For opening remarks, I would like to turn the conference over to Nancy Paxton, senior director Investor Relations.

Thank you.

Good afternoon and thanks to everyone for joining us.

Speaking today is Apple's CFO Peter Oppenheimer, and he will be joined by Apple COO, Tim Cook, and Treasurer, Gary Wipfler for a 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 revenues, 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 2009 as amended, the Form 10-Q for the first quarter of fiscal 2010, , and the Form 8-K filed with the SEC today, along with 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 Peter Oppenheimer for introductory

Thank you, Nancy.

Thank you for joining us.

We're thrilled to report outstanding March quarter results that exceeded our expectations.

The strong momentum we experienced in the holiday quarter continued in the March quarter.

As a result, we're reporting our best non holiday quarter revenue and earnings ever, the highest quarterly iPhone sales ever, and a new record for Mac sales in the March quarter.

We're delivering the best products in Apple's history, and our customers are responding enthusiastically.

Revenue was $13.5 billion, a 49% increase over the prior March quarter's results.

This very strong performance was due primarily to the more than doubling in iPhone sales and the strong momentum of our Mac products.

This resulted in a much smaller sequential revenue decline from the December to March quarters than we normally experience.

Operating margin was $4 billion, representing 29.5% of revenue.

Net income was $3.1 billion, up 90% over the year-ago quarter, and earnings per share were $3.33.

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

We generated record March quarter sales of 2.94 million Macs.

This represents 33% year-over-year growth compared to IDC's latest published estimate of 24% growth for the market overall in the March quarter.

We were very pleased with Mac sales growth in each of our geographic segments, and we experienced strong double-digit growth for both desktop and portable categories.

We made our portable lineup even stronger last week, by introducing an updated MacBook Pro line with faster processors, more powerful next-generation Nvidia graphics, and even longer battery life.

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

Moving on to our music products, we sold 10.9 million iPods, about equal to the 11 million we sold in the year-ago quarter.

Sales of iPod touch continued to be very strong, with units growing 63% year-over-year.

The strong mix of iPod Touch resulted in overall iPod revenue growth of 12%, the strongest iPod revenue growth rate in the last two years.

Our share of the US market for MP3 players remains at over 70%, based on the latest monthly data published by NPD.

iPod was also the top selling MP3 player, and continued to gain share internationally year-over-year in nearly to gain share internationally year-over-year in nearly every country we track, including high market share countries such as Australia, the UK, Canada, and Japan, based on the latest data published by GFK.

The iTunes store delivered its best quarter ever, with sales of $1.1 billion due to the continued strong demand for music, video, and apps.

iTunes has the world's largest on-line music catalog with a selection of over 12 million songs, and in February, we crossed the 10 billion mark for songs purchased and downloaded.

The app store continues to be a phenomenal success with more than 185,000 apps and well over 4 billion downloads to date by iPhone and iPod Touch users in 90 countries.

We're very excited to have launched the iBook store, as well as over 3500 new apps designed for iPad.

We ended the quarter within our target range of four to six of iPod channel inventory.

I would now like to turn to the iPhone.

We are thrilled to have sold 8.75 million iPhones during the quarter, an all-time high, seeding the previous record set in the most recent holiday quarter.

This represents 131% year-over-year growth over the previous March quarter's results and is more than three times IDC's published estimate of 41% growth for the smartphone market overall in the March quarter.

Recognized revenue from iPhone handset sales, accessory sales and carrier payments was $5.45 billion during the quarter, compared to $2.43 billion in the year-ago quarter.

The sales value of iPhones alone was about $5.3 billion and dividing this by the 8.75 million units, yields an ASP of about $600.

We've continued to expand iPhone's reach by adding both carriers and countries, and we now have iPhone distribution with 151 carries in 88 countries.

We experienced very strong year-over-year growth in each of our geographic segments and particularly in each of our geographic segments and particularly in Asia, Australia, Japan, and Europe.

We were very pleased with the significant sales growth from both existing and new carrier partners.

We were also very pleased that customers once again ranked the iPhone first in J.D.

Power and Associates 2010 US wireless smartphone customer satisfaction study.

We are also very excited about the release of the iPhone OS 4 this summer.

Developer response to the beta release and new SDK has been very positive, and we believe customers and developers will really enjoy the over 100 new features including multitasking for third-party apps, folders, enhanced enterprise support, the iAd mobile advertising program, and much more.

Turning to the iPad, we're extremely pleased with sales results during the past couple of weeks, and the critical reviews and customer feedback have been outstanding.

Customers are loving the iPad and its revolutionary multitouch user interface that lets them browse the web, read and send e-mail, enjoy and share photos, watch HD videos, listen to music, play games, read e-books, and much more.

We're on track to begin shipping the 3G version of the iPad in the US on April 30th, and to begin shipping both versions of the iPad in nine additional countries at the end of May.

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

Revenue in the quarter was $1.68 billion compared to $1.38 billion in the year-ago quarter, an increase of 22%.

Our stores sold 606,000 Macs compared to 438,000 in the year-ago quarter an increase of 38%.

About half the Macs sold in our stores during the March quarter were to customers what never owned a Mac before.

We opened two new stores in the UK during the quarter, as well as a new store in Germany to end with 286 stores.

With an average of 284 stores open during the March quarter, average revenue per store was $5.9 million compared to $5.5 million in the year-ago quarter.

Retail segment margin was $373 million or 22.2% compared to $317 million or 23% in the year-ago quarter.

We hosted 47 million visitors in our stores during the quarter, compared to 39.1 million visitors in the year-ago quarter, an increase of 20%.

We also conducted over 700,000 personal training sessions, and we ended the quarter with 607,000 members in our one to one program.

We remain on track to open 40 to 50 new stores in total during fiscal 2010, with over half being in international locations including London, Paris, and Shanghai.

Total Company gross margin was 41.7%, which was 270 basis points above our guidance.

This difference was primarily driven by several categories of positive factors compared to our forecast.

In order of relative impact, these were, first, a stronger product mix including more iPhones and accessories.

Second, lower cost, and third, fixed cost leverage from the higher than expected revenue in the March quarter as well as a few other small items.

Operating expenses were $1.65 billion and included $194 million in stock-based compensation expense.

OI&E was $50 million and the tax rate for the quarter was 24%.

We had previously forecasted a 29% tax rate for the full year, but have revised our forecast to about 27% based on a higher mix of foreign earnings.

The 24% tax rate for the March quarter was required to true-up the year to date provision to 27%.

Turning to cash, our cash plus short term and long-term marketable securities totaled $41.7 billion at the end of the March quarter, compared to $39.8 billion at the end of the December quarter, an increase of $1.9 billion.

Cash flow from operations was over 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.

Looking ahead to the June 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 expect revenue to be between about $13 billion and $13.4 billion compared to $9.7 billion in the June quarter last year.

We expect gross margin to be about 36%, down from 41.7% in the March quarter, and reflecting approximately $36 million related to stock-based compensation expense.

We expect about 25% of this sequential gross margin decline to be driven by the first quarter of iPad sales.

As we said in January, when we announced the iPad, we have been very aggressive with pricing and are delivering tremendous value to customers.

We think the market for the iPad will be large, and we want to capitalize on our first mover advantage.

We expect the remaining three quarters of the margin decline to be due to four factors of roughly equal impact including a stronger US dollar, our Mac portable transition, the beginning of the education buying season, and a future product transition.

We expect OpEx to be about $1.83 billion, including $185 million related to stock-based compensation.

We expect OI & E to be about $45 million, reflective of the short-term interest rate environment and we expect tax rate to be about 27%.

We are targeting EPS in the range of $2.28 to $2.39, compared to $2.01 in the year-ago quarter.

expect tax rate to be about 27%.

In closing, we are thrilled with our record March quarter results and the momentum of our business.

We're very pleased with the market share gains for our iPhone, Mac, and iPod products, and with the tremendous customer response to iPad.

We're looking forward to the release of both iPad versions in nine international countries at the end of May, and we're very enthusiastic about iPhone OS4 arriving this summer.

We are very confident in our new product pipeline, and are excited about the months ahead.

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

Could we have the first question, please?

The first question is from Gene Munster.

Good afternoon.

Congratulations.

It's clear that the iPad is off to a fast start.

Based on our work it looks like this is a potential to become the Mac of the masses, if you will.

My question is what insights have you gained in the last three weeks in the US market in terms of gauging what the impact of the iPad has been on the demand for the overall Mac?

Has there been any cannibalization?

I would guess there is data somewhere that would give us some insight into answering that question.

Thanks.

Hi, Gene, it's Tim.

If you look at last quarter, we made the announcement, as you know, of the iPad in January, and in our view for last quarter, there was no obvious impact on either the Mac or the iPod, but you can look at the numbers that we're reporting and judge that for yourself.

Going forward, now that we're selling into April, we really don't have enough experience to come to a judgment yet.

So we'll see how it goes.

We're obviously thrilled with the sales of the iPad.

They have far exceeded our expectations, and we feel we're off to a great start.

Let me just ask a follow-up question, Tim.

Throughout the March quarter, if you are going to look on a month to month basis, based on some of the third-party data we saw, deceleration of the growth rate in Mac in the month of March, do you think any of that could have been attributed to potential people holding off on buying a Mac for an iPad, and what would you attribute that -- maybe that step down in the month of March to?

If you look at that time previous March, Gene, the base quarter that you're comparing to we announced a new iMac and a new Mac Mini, and so our compare point was to a month that we announced two new products versus a month that we didn't announce any new Macs.

So I wouldn't look at -- I don't think you can really judge the Mac business on a month-by-month business.

I think looking on a longer period of time is correct.

Certainly our internal expectation was that the comparable would come down through the quarter as it began to comp against those product.

My final question is just on the mix between 3G versus wi-fi.

Any sort of flavor you can give us on how to model that out?

It's, honestly, too early to tell, because we -- we've only been selling Wi-Fi, other than the pre orders, and so we really -- we feel that we really need to be selling both models side by side in an unconstrained environment before we're able really to know what the mix will be.

Great, thank you.

Thanks, Gene.

Could we have the next question, please?

From Ben Reitzes with Barclays Capital.

Hey, thanks a lot.

Good afternoon.

Wonder if you could talk about your guidance, and then a follow up.

You talked about many margin hits sequentially.

Can you talk about revenue?

For example, you have the iPad, which you never had before, which should help sequentially.

You usually have Macs up in the June quarter sequentially.

Obviously, iPods are usually maybe down a little, but can you talk about the puts and takes sequentially?

Is there something going on with the iPhone where maybe there's a transition that hits that sequentially that that's why you're guiding down revenue sequentially?

Sure, Ben, it's Peter.

We're thrilled with the performance of our business, and to be providing guidance year-over-year for growth of 34% to 38% for the June quarter.

In coming one that we factored several points into the guidance, including sequentially lower ASPs from the beginning of the education buying season, the stronger US dollar, and product transitions.

We've also factored in sequentially lower iTunes, which is typical, as holiday gift cards are used in the March quarter and also sequentially lower accessory and software sales.

For Mac, we would expect to see a sequential increase in Mac unit sales as a result of the beginning of the education buying season and the recent refresh that we just did in the Mac Pro line.

For iPod, our in-stocks in this March quarter were better than last year, which helped us achieve the 10.9 million units.

So this year we would expect to see a bigger sequential So this year we would expect to see a bigger sequential decline in the June quarter than the 7% we saw last year.

For iPhone, we don't have much experience with seasonality with our current country and carrier distribution.

So we're confident, very confident in our products but we'll see what occurs, and we'll report to you in July.

And for iPad, we're thrilled with customer response to the iPad, and we'll begin shipping both the Wi-Fi and 3G versions in the US by the end of April, and nine additional countries by the end of May.

So feel very good about the start of iPad.

Thanks, Peter.

Tim and Peter, I wanted to hear more about iPhone.

Why was it so good?

The number was actually, frankly, staggering, vis-a-vis expectations, in my opinion.

There seems to be good strength overseas.

Can you talk about why and what happened there and how is China and also channel inventory?

Thanks.

Sure, that's -- our channel inventory was essentially flat from the beginning of the quarter compared to the end of the quarter.

If you look in terms of the geographies, we had some staggering growth rates, as you mentioned.

If you look at Asia Pacific as an example, the iPhone units in Asia Pacific grew 474% year-over-year.

Japan grew 183.

Europe grew 133.

So these are some fabulous numbers we're seeing, just incredible demand for iPhone.

Some of this was led by adding eight carriers in some key countries.

For example, Vodafone in the UK and Ireland, as well For example, Vodafone in the UK and Ireland, as well as other carriers in key countries in Asia, but we also had very strong performance from existing carrier partners.

Really around the world.

And so it was widespread, and just generally terrific results.

China met your expectations?

China has been interesting.

If you look at greater China, which we define as mainland China, Hong Kong and Taiwan, the iPhone units were up year over year over nine times.

And we added another 800 points of distribution is in China.

The revenue also -- we've never released this number before, but I will do this in this particular case, is through the first half of the fiscal year that we just completed.

So the six-month period.

Our revenue from greater China was almost $1.3 billion, and this is up over 200% year-over-year.

And so we're well-pleased with how the Company is positioned to take advantage of the growth in greater China.

Thanks, Ben.

Could we have the next question, please?

That will come from Shannon Cross of Cross Research.

Thank you very much.

I was curious, could you talk about data points for the success of the app store and how you are thinking about the apps store with the addition of the higher ASP apps related to the iPad?

Shannon, we're thrilled with the app store.

I think customers are loving it.

We have seen well over 4 billion downloads from the app store and have over 185,000 apps, and now over 3500 for the iPad alone.

We've just begun shipping the iPad.

Early in the first week, we released some data about customer downloads related to the iPad.

They're clearly loving it, and I think it's a very strong part of the overall product offering to customers.

Oh, great.

Tim, can you talk about your production capacity on the iPad side?

Because clearly you pushed out because of the demand in the US you pushed out your international launch.

So how are you feeling about your ability to produce there?

How quickly can you ramp up production?

Are there any gating factors with commodity components, anything like that?

Shannon, we've done very well versus our planned capacity, and so there's not a production problem, per se.

There's sort of a good kind of issue to have.

The demand in the US was much, much stronger than we predicted.

So regrettably we had to push tout international launch to be able to launch the 3G unit in the US and to get enough Wi-Fi units into the United States.

And so we are adding capability, and we'll see where this thing goes, but it has shocked us, the level of demand, at least initially.

We'll see what happens from here.

Thanks, Shannon.

Could we have the next question?

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

I didn't hear you comment on component pricing in your gross margin outlook.

Can you give us a sense of what you're seeing in terms of component pricing trends and where you're seeing any signs of pressure or easing?

This is Tim.

The DRAM market is constrained, and we do expect higher price sequentially as a result of that.

The bulk of the other commodities, including the key commodities of NAND and LCDs and HDDs, we see generally in supply demand balance, and other components we expect a decline consistent with historical trends.

Okay, thank you.

And then I know it's still early stage here.

Actually, pre stage.

But can you help us understand how we should think about the economics of the iAd business.

Is this a potential profit center or are you looking at it as break even like iTunes and the app store?

This is Peter.

We're putting our toes in the water so don't expect much from us this calendar year.

We think that we will learn a lot and build a foundation for the future.

Okay, thank you.

One final question.

Can you give us an update on where you think AT&T is with its network improvement plans, and are you still comfortable that the performance of the network will be up to par this year?

I think they continue to work very, very hard, and we look forward to continued improvement.

They've clearly made big strides in some areas as some of the recent surveys have have pointed out, and I think it will continue.

Great, thank you very much.

Thank you, Bill.

Could we have the next question, please?

We'll hear from Toni Sacconaghi with Sanford Bernstein.

Yes, thank you.

A couple of questions, please.

Tim, you alluded to the growth from new carriers versus existing carriers.

I don't know if it might be possible for you to quantify how much of the year-over-year growth came from new carriers or what percentage of the units were contributed carriers or what percentage of the units were contributed by carriers that you did not have one year ago.

We don't break it out at that level of detail.

Toni, I would tell you that both were very important to us, goth additions and the existing carriers.

You can look at the number of carriers we added, which was eight, as I have mentioned, and out of the 151 carriers at the country level, it's a good number, but not a significant number.

So obviously the existing carriers performed very well in addition to the ads.

Just taking that one step further, can you update us on your thinking about incremental distribution for the iPhone?

A couple calls ago, you talked about not really believing in exclusive distribution, and really trying to broaden distribution as quickly as possible.

I think on the last earnings call you were -- it almost seemed like you had softened that and said, look, there may be regions where we actually don't care to offer beyond one carrier at our choice.

Can you update us on your thinking about incremental distribution, how important is it?

Is it available to any carrier and any country?

And how are you thinking about pricing the device And how are you thinking about pricing the device for incremental distribution?

Let me see if I can word it like this.

There are three main countries where Apple has a contractual exclusive relationship, and that's the United States, Germany, and Spain.

There are a few smaller countries where we have a exclusive or co-exclusive, but those three are the ones that are major markets.

Over the past year, we've moved a number of markets from exclusive to nonexclusive.

In each case that we've done that, we've seen our unit growth accelerate and our market share improved.

But that doesn't mean that we view that the form law works in every single case.

And so I would just sort of reiterate what I did last time, that that's our learning so far, that's the results that we've seen so far.

But we think very carefully about each of these at that time country throstle conclude what's in our best interest.

Okay.

Let me switch to one other topic, if I may.

And, Peter, I think this is probably for you.

Bear with me.

I'm going to just plug through some numbers.

You said gross margin is going to decline 600 basis points sequentially, and a quarter of that would be due to the iPad.

So that's 150 basis point negative impact from the iPad.

If you see the iPad as 10 points lower gross margin than the Company average, which is way, way lower than most third party tear-down services, which suggest, it basically means that for that contribution to be true, per your guidance, iPad would need to be 15% of your revenue or $2 billion.

So either iPad is going to be more than $2 billion in terms of revenue per your guidance for next quarter, and have a gross margin that is less than 10 points less than the Company average, or the gross margins of the iPad are more than 10 points lower than the Company average.

I mean, the math, I think is pretty self-evident.

So can you comment on whether we should be thinking about this device as having dramatically lower margins than the Company average, or should we be thinking about this as something that has perhaps a bit more volume than many investors thinking about?

Toni, it's Tim.

Let me comment on the iPad margin first.

As you know, we don't give out specific margins for products, but really refer to the Company's gross margin.

But that said, I would point out that when we priced iPad, we priced it very aggressively in order to deliver tremendous value to our customers.

And we think the market size for the iPad is very large, and we want to capitalize on our first mover advantage.

So as we've done in other products, although I'm not forecasting it, you can see that we have a good track record of writing down the cost curve with value engineering and volume manufacturing.

At least, that's been our experience with other products.

So those are the things that I would point out.

Peter, you may want to add something to that.

That's definitely our view.

But the implication of riding down the cost curve, unless you pass that on in the form of much lower prices, your margins are going to get better.

So I gather that statement suggests that to the degree that you want to drive volume, you are going to be open minded about price changes.

We have nothing to announce relative to those things today.

I'm just saying that we have a great product, it's in great demand.

We priced it extremely aggressively.

And we did that because we believe that there's a huge market for us, and certainly the initial result suggests that that's the case.

Thank you.

Thanks, Toni.

Could we have the next question, please?

We'll hear from Richard Gardner with Citigroup.

Thank you.

Peter, you talked about the head winds on gross margin going into the second calendar quarter.

Just in the spirit of balance, I was hoping you might be able to talk about what you would consider to be tail winds on gross margin going into June, and in particular, whether would you consider component pricing to -- overall to be ahead wind or a tail wind in the to -- overall to be ahead wind or a tail wind in the June quarter sequentially.

Rich, don't really consider component pricing to be a headwind or a tail wind.

Tim, I think, answered in Bill's question his view on what we were going to see in the June quarter, and so not only costs are by themselves necessarily -- I don't think costs by themselves are necessarily a I don't think costs by themselves are necessarily a big factor.

I think what we think is going to occur in the June quarter is we've introduced a new product that we couldn't be more excited about.

We've been very aggressive.

And to take advantage of our first mover opportunity here.

And then we've got some other transitions.

We've got a stronger dollar, and we're heading into the buying season which we anticipate being competitive this year.

So that's what's really gone into our thinking on gross margins.

Okay.

And then I wanted to ask you about the accounting treatment for the iPad, whether you could give us a sense of whether you are going to be deferring a portion of the revenue associated with iPad software upgrades or whether you are going to be charging for those upgrades.

We'll discuss that with you on our July conference call, when we report the June quarter results which will include our first shipments of iPad.

Okay, great.

And the final one for me is, could you talk about the performance of your China stores in particular and your plans for additional store openings in China this year?

Sure.

We're very excited about China, not only for retail, but for Apple.

And Tim talked about success that we've had in greater China to date with revenue being up about two times year-over-year.

But as regards for retail stores, we will open two stores in Shanghai this summer, and would target having about 25 stores open in China by the end of calendar 2011.

Okay, great.

Thank you.

Thank you, Rich.

Next question, please.

From UBS, we will hear from Maynard Um.

Hi, thanks.

If I look at your iPhone units across your 151 operators, it's roughly about 58,000 units per operator.

I understand that some operators are smaller and others are larger.

Can you talk about the dynamics there, how you drive those units up more materially on a per-operator basis?

Well, the 58,000, to be honest with you, is not a very meaningful number, because the variances from one particular carrier that does a few million to some that do very, very light numbers so the average itself isn't very meaningful.

The things that we do to drive overall iPhone demand is focus on product innovation.

And that's software that hopefully you saw with the preview that we gave of the new iPhone release that will be coming this summer.

It's new hardware and new products.

It's new distribution points.

It's additional carriers and geographic expansion which we will continue to do.

So it's really all of those things.

And great marketing.

Great.

I have a second question.

I have a second question.

Apple has been a little bit more aggressive defending its patent portfolio against infringement.

Doesn't really look like we're seeing an impact here to OpEx, with you I'm just curious how we think think about legal expenses relative to your operating expenses.

Thank you.

It's Peter.

We have certainly factored into the guidance we've given you for the June quarter and results we reported from March, our legal and all of our other expenses.

So whatever we're incurring in that area is included.

Great, thanks, guys.

Could we have the next question, please?

Next question will come from Brian Marshall with Broadpoint AmTech.

Thanks.

I guess some of the iPhone up side I was expecting last quarter actually happened this quarter.

Based on my calculations your international carrier partners probably represented 75% of the mix for the iPhone shipments in the quarter.

Taking that one step further, I think you're roughly 00 basis points penetrated of that international carrier base, call it the post-paid sub base of those total carriers, roughly half a billion units.

So I guess the question is have you learned any lessons with regards to how the international markets have ramped up relative to what we've experienced in the US over the past two-and-a-half years?

Thanks.

Brian, the key thing is that the smartphone category specifically is a great market to be in.

It has very high growth rates from a market point of view, and Apple with the iPhone unit growth of 131% outgrew the market by 3x.

So we feel great about that.

And those numbers were even better outside the US than inside the US.

We've learned a number of things, and we are trying every day to take everything that we've learned and do something better from a product point of view, do something better from distribution, and our carrier relationships and so on and so forth.

So I wouldn't want to go into each of those on here because I don't want anybody to copy those.

Understood.

Thanks, Tim.

And with regards to the Apple TV, clearly it seems as though you guys have been very successful attracting additional media and content on the iTunes and app store platforms.

I was wondering if we could get an update on the ambitions with regard to Apple TV.

Clearly update on the ambitions with regard to Apple TV.

Clearly broadband is still somewhat lagging in terms of quality of service, I think, and so that's an area that needs to get better.

Just want to get your thoughts there.

The units were up for the quarter 34% year-over-year.

But the absolute number of units are still small, and we still classify the product as the hobby for the Company, and I would just repeat what I probably said before, is that if you look at that time other markets that Apple is in, the Macintosh competes in a market of 300 million or so units a year.

The iPhone competes in a market, if you look at all phones, of maybe 1.2 billion a year.

The iPod competes in a market that has 100 million, plus or minus, units in it.

Per year.

And so these are enormous size markets.

Clearly the market that Apple TV is in is not, in our view, nearly that large as yet.

And so that's the reason we classify it as a hobby so that no one gets the wrong impression that we have a vision that it's anywhere close to the size of the other businesses.

However, a number of us love the product, use the product, and we continue to think there's something interesting there and continue to invest in it.

Okay.

Final question with regards to the iAds.

Do you think this could be a significant source of potential incremental earnings down the road as I think potential incremental earnings down the road as I think what you offer is a compelling demographic user base with the emotion that you're able to convey?

Thanks.

Hi, it's Peter.

As I think I commented on a prior question, at this point we're putting our toes in the water so we don't expect much of calendar year.

We think we're going to learn a lot, and we'll look to build a foundation for the future.

Thanks, Brian.

Could we have the next question, please?

From RBC Capital Markets, we'll hear from Mike Abramsky.

Just wondering if you expect any touch cannibalization from tie pad and if you think it is cannibalizing com pet competitive net backs.

Mike this is Tim.

I can only tell you that in the quarter that we finished, Q2, that we finished in March, although we announced the iPad in January, there was nothing obvious in the iPod numbers or the Mac numbers to suggest cannibalization.

Now, there's an obvious difference between announcing, and people know it's coming, and it starting to sell, and so that part of the equation we don't know yet.

We will find out.

We are thrilled with how the iPad is selling and the enormous response that we've received.

We also announced new MacBook Pros that you probably saw last week, and the whole line changed.

So we're also happy about how the Mac business is positioned and the level of product innovation -- it was taking battery life up to 10 hours.

It's absolutely amazing.

In terms of the iPad competing for customers who were considering a netbook, I'm the wrong person to ask that, because to me it's no-brainer.

iPad, netbook, it's sort of 100 to 0.

I can't think of a single thing the net book does well.

And iPad does so many things very, very well that I'm already personally addicted to mine and couldn't live without it.

So I'm probably not the right person to ask that just yet.

Tim, you just talked about you see it as a huge independent category, and given all the public debate over its positioning, which you obviously have some strong views on, can you elaborate on why you see is it as a huge independent category given it's a new market?

You just listed off a bunch of markets that are preexisting.

But you've stated in this case you also feel without that preexisting market it is big, and why do you think Apple's approach will outpace that of, say, competitor tablets or vertical devices like e-books?

Well, I think Steve did this extremely well, as is usual, in positioning the product in the January announcement, when he talked about if a product category were to exist between the notebook and the smartphone, that it would need to do some things better than either of those, and I'm just saying from my personal use, there's a variety of things that I would put on that list.

And I love notebooks personally, but I would put e-mail on it, I would put browsing on it, listening to music, watching videos, watching TV shows of any type, reading books, and the list goes on.

Of course, you have the entire app store and the eco-system built around that, so people that like to play games as well, they now that have large canvas to play games on, and other apps from serious apps to less serious apps, the larger canvas provides an artist a lot more room to do things that are very cool.

So I think that it is a new category, and certainly it's early, but we really, really like what we see right now.

We had what we thought were high hopes, and it has exceeded those.

So that's all I can offer for now, but I would like to talk again in July and tell you thou quarter went, for the June quarter.

Thank you very much.

Thanks, Mike.

Could we have the next question, please?

Katy Huberty with Morgan Stanley.

Tim, in a previous question you walked through some of the incremental demand drivers for the iPhone.

The one you left out was price, because Apple, along with the carriers, has done a good job lowering the price of the hardware over the last couple of years.

But with the low end at $99, it seems that the incremental demand from here would come from more affordable monthly service plans.

And so I guess my question is whether Apple has any influence via the carriers to get more aggressive on the total cost of ownership for the iPhone.

Then just a quick follow-up on the iPad.

We do everything that we can, Katie, to try to get the best deal possible for the consumer.

And, by the way, I feel like each of the carrier partners we work with want to do the same.

And so I think everybody is focused on that.

When we drop the subsidized price of the phone to $99 last year, we were actually surprised that the mix to the 3G app was very, very high.

And as you know that one starts at $199.

And so I think it's important, I think that the price is important of the device, but I think there are other things that people really want, like an extremely innovative product and all the apps and the ecosystem and the great OS and the incredible hardware that we've got.

I just think it's one of the factors.

Got it.

And then just as a follow-up on the discussion around margins for iPad, Peter, one of the up side drivers of revenue and margins for the iPhone has been the aftermarket sale of things like accessories.

What have you considered about attach rates to the iPad relative to what you've seen object iPod and I phone and could that maybe be an upside driver to gross margins for that portfolio over time?

Katy, the accessory portfolio is good for us, and the over 5,000 accessories that work for the iPhone and the iPod largely work for the iPad.

We have come out with some great accessories for the iPad in the first weeks, and the developer community is rallying around it as well.

So let's give it a little time, and presumably some great things will happen there.

Just like it has for iPhone and iPod.

Oh, thanks so much.

Thanks, Katie.

Could we have the next question, please.

That comes from Keith Bachman with Bank of Montreal.

I wanted to ask about retail, Peter.

In your same-store sales comment, I think the retail same-store sales were up about 7%, total retail up about 22% in terms of revenues.

Therefore, as investors look out, is the retail number really driven by new store openings, or is there something unusual that was going on?

But if you could just give a little bit of color on the drivers of the retail business that would be great.

Sure.

Our retail stores had a great March quarter.

The average increase of revenue per store was actually up 8%, and this was the best that we had seen in six quarters.

The Mac did incredibly well in the stores, up 38% overall, same-store Mac sales were up over 20%.

The phone did well.

And I think the stores going to really be a great place for customers to come and look at and buy iPads.

So we're very confident in our retail stores, the experience that it's giving customers and finally, just after 10 years of retailing, we are just he can take it about the fact that roughly half of the Mac sales each quarter are to people that have never owned a Mac before.

Right.

Peter, would it seem that the data has been fairly consistent that the revenue growth in retail, at least that category is dependent upon new store openings.

Again, the average store was up 8%, and in the quarter, our average revenue was $5.9 million.

So if you annualize it, that's incredibly high by retail standards, particularly for the size of store that we have.

So, Keith, I would say good growth coming, not only from new stores that we open, but the stores that we've had open for a number of years are performing very, very well for us, and cash flow from those stores is quite strong.

Great, thank you.

But I wanted to ask one follow-up, if I could.

I know that Rich had asked about the iPad, but could you at least let us know where that would be categorized as a line item, independent or included in something else?

We're going report the iPad very similar as we do iPhone.

It will be a line item on our data summary.

And the revenue that we report will be for the iPad unit and the iPad specific accessories.

Again, similar to what we do for iPhone.

Many thanks.

Thanks, Keith.

Can we have the next question, please?

That will come from Yair Reiner of Oppenheimer.

I recognize the iPad is in early days but have you been able to pick out anything from the app performance?

Are consumers buying different types of apps than than they typically have for the iPhone, and are the ASPs turning out to be different than the type of apps people have bought for the phone, to this point?

It's very early days.

We put out some information after the first couple of days.

Customers are loving the iPad.

They are going to the app store and getting apps, getting books.

So it's been really just a great thing for customers, but we'll talk more in the future about how that goes.

I would say that we're not focused on trying to make a lot of money on the app store, just as we haven't on the iTunes store.

We run the store a bit over break-even, and we just want to offer tremendous value to customers.

want to offer tremendous value to customers.

Very good.

Europe appears to be performing exceptionally well.

Can we finally say that you're seeing a halo effect from the iPhone there and to what extent has that been playing out at the stores?

Are more than 50% of Mac buyers in the European store Are more than 50% of Mac buyers in the European store new to Mac?

We tend to not break it down by country, but I can tell that you we are thrilled with our new to Mac all over the world.

One final question from me.

Peter, you mentioned $600 ASP for the iPhone.

Does that include the ratable revenue from software, or is that purely for the hardware?

It's based on the sales value of the iPhone.

So it doesn't include anything from carrier payments, any of the deferral or accessories.

So it's the sales value in the quarter of the handset sales.

Thank you very much.

Thank you.

Next question, please.

That will come from Mark Moskowitz from JPMorgan.

Tim, earlier you mentioned that Apple was shocked about the reception in the US for the iPad.

Can you talk about how you're shocked in terms of customer penetration?

Are there any customers in the early days that are taking the iPad that are completely new to Apple?

Of course.

The numbers right now are so preliminary, and based on such a small amount of time, we don't read a lot into those.

So they're not something we would disclose at this point.

Not to look too far beyond the iPad, but in the prepared release you do say there are other extraordinary product in the pipeline for this year.

Are those incremental categories similar to the iPad, or are they just enhancements of existing products?

We're just not going to help our competitors, so that's not a question I can specifically answer for you, but let me reiterate, we are very confident in our new product pipeline and are very excited about the coming months.

And then just lastly, Peter, in terms of the education vertical, as far as the commentary around the margin hit for June, how much of that is driven by competitive dynamics versus maybe just your own ability here to try to prop up demand because of the troubles still plagues school districts out there?

You read the same things we do about the state budget situations, and the school districts are under a lot of pressure in pretty much every state across the country.

I have seen no evidence that we are losing market share in education.

And so I think it's really just a budget issue.

And where we've now entered in the June quarter, the education buying season, June tends to be more dominated by K to 12, then September will be more dominated typically by higher ed.

And this year we expect it to be competitive, but we're going to put on our uniforms, suit up, and we look forward to competing.

Thank you.

Thank you, Mark.

And thanks to everyone for joining us.

A replay of today's call will be available for two weeks as a podcast on the iTunes store, as a webcast on Apple.com/investor and via telephone.

The numbers for the telephone replay are 888-203-1112, or 719-457-0820.

And please enter confirmation code 5473920.

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.