蘋果 (AAPL) 2011 Q3 法說會逐字稿

Good day everyone, and welcome to this Apple, Inc.

third-quarter fiscal year 2011 earnings release conference call.

Today's call is being recorded.

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

Nancy Paxton, Senior Director of Investor Relations.

Please go ahead, ma'am.

Thank you.

Good afternoon, and thanks to everyone for joining us.

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

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenues, gross margins, 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 2010, the Form 10-Q for the first two quarters of fiscal 2011, 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 remarks.

Thank you, Nancy.

Thank you for joining us.

We are thrilled to report the highest quarterly revenue and earnings in Apple's history.

We also set a new all-time quarterly record for iPhone and iPad sales and a new June quarter record for Mac sales.

And we are extremely pleased with the momentum of our business.

Revenue for the quarter was $28.6 billion, representing year-over-year growth of 82%.

This record quarterly revenue tops the previous record established in the most recent December quarter by $1.8 billion, and was almost $13 billion over the year-ago quarter's results.

The tremendous year-over-year increase was fueled primarily by dramatic growth in iPhone and iPad sales, in addition to strong growth in Mac sales.

Operating margin was a record high of $9.4 billion, representing 32.8% of revenue.

Net income was $7.3 billion, topping the previous quarterly record set in the December quarter by $1.3 billion.

Net income grew even faster than revenue, increasing 125% year-over-year, and translated to earnings per share of $7.79.

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

We established a new June quarter record with sales of 3.95 million Macs, representing a 14% increase over the year-ago quarter's results.

This growth is more than 4 times IDC's most recently published forecast of 3% growth for the PC market overall.

Mac sales were particularly strong in our Asia-Pacific segment, where we experienced a 57% year-over-year increase in total Macs sold.

We generated healthy Mac growth in both desktop and portable categories.

In May we updated the iMac with a next-generation quad-core processors, powerful new graphics, high-speed Thunderbolt I/O technology and a new FactTime HD camera.

The growth in Mac Portable sales was driven by strong sales at MacBook Pro, as well as MacBook Air.

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

We are very excited to be launching Mac OS X Lion tomorrow.

Lion includes more than 250 new features, such as multi-touch gestures, systemwide support for fullscreen apps, Mission Control, which is an innovative view of everything running on your Mac and much more.

Moving to our music products, we sold 7.5 million iPods compared to 9.4 million in the year-ago quarter.

Total iPod sales were ahead of our expectations, and iPod Touch continues to account for over half of all iPods sold.

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

And iPod continued to be the top-selling MP3 player in most countries we track based on the latest data published by GfK.

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

The iTunes Store generated strong results, with revenue of almost $1.4 billion.

ITunes' revenue was up 36% year-over-year thanks primarily to continued strong sales in music, video and apps.

With more than 225 million accounts, iTunes is the number one music retailer in the world, and customers have downloaded more than 15 billion songs to date.

I would now like to turn to the iPhone.

We were thrilled to sell a record 20.3 million iPhones compared to 8.4 million in the previous June quarter.

This represents 142% year-over-year growth, which is more than double IDC's latest published estimate of 67% growth for the global smartphone market overall in the June quarter.

Recognized revenue from iPhone handset and accessory sales was $13.3 billion during the quarter, compared to $5.3 billion in the year-ago quarter, an increase of 150%.

We continue to experience very strong year-over-year iPhone sales growth in all of our operating segments.

IPhone sales momentum in the Asia-Pacific region was particularly robust, with sales almost quadrupling year-over-year.

We continued to increase our overall iPhone manufacturing capacity in the quarter.

We were pleased to launch a number of new carrier relationships, and by the end of the quarter iPhone was available through 228 carriers in 105 countries compared to 186 carriers in 90 countries as of the end of the March quarter.

We ended the quarter with about 5.9 million iPhones in channel inventory, a sequential increase of about 700,000 to support strong iPhone demand, carrier additions and expanded distribution.

We remain within our target range of 4 to 6 weeks of iPhone channel inventory.

iPhone continues to be adopted as a standard across the enterprise, with 91% of the Fortune 500 deployed or testing the device, up from 88% last quarter.

We are also seeing great growth in scale worldwide.

Today 57% of Global 500 companies are testing or deploying iPhone, fueled by strong employee demand and opportunities for custom app development.

Some examples of Global 500 companies supporting iPhone on their corporate networks include [XA], Credit Agricole, Nestle, Dow Chemical, GlaxoSmithKline, Supervalu and Comcast.

Turning to iPad, we continue to be thrilled with its incredible momentum.

We sold a record 9.2 million iPads during the June quarter compared to 3.3 million in the year-ago quarter, an increase of 183%.

We were able to increase production sequentially by over 4.5 million and we sold every iPad we could make.

We launched iPad 2 in an additional 36 countries, and combining the original iPad and iPad 2 we ended the quarter with distribution in a total of 64 countries.

Recognized revenue from sales of iPad and iPad accessories during the quarter was over $6 billion compared to $2.2 billion in the year-ago quarter, an increase of 179%.

We ended the quarter with about 1.05 million iPads in channel inventory, a sequential increase of about 200,000, which was well below our target range of 4 to 6 weeks.

Today 86% of the Fortune 500 are deploying or testing iPad within their enterprises, up from 75% last quarter.

We are also seeing strong adoption internationally with 47% of Global 500 companies testing or deploying iPad.

In the 15 months since iPad has shipped, we have seen iPad used in the enterprise in ways we could have never imagined.

Companies like Boston Scientific, Xerox and Salesforce.com are deploying thousands of iPad and revolutionizing how their sales teams engage with customers.

IPad is being used inside the country's top hospitals, like HCA and Cedars-Sinai and in retail at Nordstrom and at Estee Lauder's Clinique counters.

General Electric, SAP and Standard Charter have developed internal apps for training, currency tracking and business process management to help make employees even more productive.

Alaska Airlines and American Airlines are using the iPad in cockpits to replace paper-based navigational and reference information pilots carry with them on every flight.

We continue to be delighted by the diverse and sometimes unexpected use cases we see around iPads.

Combining iPhone, iPad and iPod Touch we reached over 222 million cumulative iOS device sales through the end of the June quarter.

Last month we provided a preview of iOS 5 which includes over 200 new features, such as Notification Center for viewing and managing notifications without interruption; iMessage for sending text messages, photos and videos between iOS devices; and Newsstand, a new way to purchase and organize newspaper and magazine subscriptions.

With the new PC free feature, iOS 5 users will be able to activate and set up iOS devices right out of the box with no computer required.

We are looking forward to launching iOS 5 this fall.

In June we also provided a preview of iCloud, our set of three new services that work seamlessly with applications on a customer's iPhone, iPad, iPod Touch, Mac or PC to automatically and wirelessly store content in the cloud, as well as push it to all the user's devices.

We think customers will love using iCloud and we look forward to its release in the fall.

The App Store continues to be incredibly successful with over 425,000 apps available in over 15 billion downloads to date.

As we mentioned last month, we are extremely pleased to have reached over 2.5 billion in cumulative payments to iOS developers, far ahead of any of our competitors.

I would now like to turn to the Apple Retail Stores, which generated record June quarter results.

Revenue grew to $3.5 billion from $2.6 billion in the year-ago quarter, an increase of 36%.

This growth was driven primarily by higher volumes of iPads, iPhones and Macs.

The store sold 768,000 Macs, compared to 677,000 Macs in the year-ago quarter, an increase of 13%.

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

We opened four new stores in the quarter, including two in France, one in the UK and one in Germany, ending with a total of 327.

With an average of 325 stores open, average revenue per store was $10.8 million compared to $9 million in the year-ago quarter, an increase of 20%.

Retail segment margin was $828 million compared to $593 million in the year-ago quarter.

Store traffic continues to be very strong.

We hosted 73.7 million visitors in the June quarter compared to 60.5 million in the year-ago quarter, an increase of 22%.

Our recently launched Personal Setup program is off to a great start.

Customers love this new feature of the retail store experience, as they are up and running with their new products before they leave.

During the June quarter we set-up over 2 million Macs, iPhones, iPads and iPods collectively.

We plan to open 30 new stores in the September quarter, including our first store in Hong Kong.

That will bring us to a total of 40 store openings in fiscal 2011, including 28 new stores outside the United States.

Total Company gross margin was 41.7%, which was 370 basis points higher than our guidance.

This difference was the result of three approximately equal factors -- a stronger mix of iPhones; lower commodity and other costs, which included some one-time items; and leverage on the higher revenue.

Operating expenses were $2.54 billion, and included $232 million in stock-based compensation expense.

OI&E was $172 million, and the tax rate for the quarter was 23.5%.

Turning to cash, our cash, both short-term and long-term marketable securities, totaled $76.2 billion at the end of the June quarter compared to $65.8 billion at the end of the March quarter, a sequential increase of $10.4 billion.

Cash flow from operations was $11.1 billion, an increase of 131% year-over-year.

I would now like to talk about the accounting implications of some of the new aspects of our products and services.

First, when we deliver Mac OS X Lion to customers, we are now including the right to receive future unspecified minor software upgrades and features when and if they become available for both the Mac operating system and our suite of Mac OS iLife applications.

We will continue to charge for standalone sales of our periodic major OS upgrade, such as Lion, as well as major upgrades of iLife.

Revenue from these standalone sales will now be fully deferred at the time of sale and recognized over a period of three years.

In addition to this future software upgrade right, Mac customers will have access to iCloud services when they become available in the fall.

We estimate that the combined value of the software upgrade right and iCloud services for Mac customers is $22.

Therefore, as of June 6, we began deferring $22 of the revenue associated with each new Mac sold, and we will recognize these deferred amounts as revenue over a period of four years.

Purchasers of iOS devices will also have access to iCloud, so beginning on June 6 we began deferring a portion of the revenue from each iOS devices sold to represent the estimated value of the right to receive iCloud services when they become available.

That deferred amount is in addition to the amount that we were already deferring for each iOS devices sold to represent the right to receive future iOS software upgrades.

As a result, beginning on June 6, we are deferring a total of $16 of revenue for each iPhone and iPad sold, and a total of $11 for each iPod Touch sold, and recognizing those amounts over a period of two years.

As we move ahead into September quarter, I would like to review our outlook, which includes the types of forward-looking statements that Nancy referred to at the beginning of the call.

We expect revenue to be about $25 billion compared to $20.3 billion in the September quarter last year.

We expect gross margin to be about 38%, reflecting approximately $55 million related to stock-based compensation expense.

We expect OpEx to be about $2.725 billion, including about $245 million related to stock-based compensation expense.

We expect OI&E to be about $50 million, and we expect the tax rate to be about 24%.

We are targeting EPS of about $5.50.

In closing, we are extremely pleased with our record revenue and earnings and the tremendous customer response to our products.

Through the first three quarters of fiscal 2011 we have generated $35 billion in year-over-year revenue growth, translating to a 78% increase.

At the same time, we have generated over $9.5 billion in year-over-year earnings growth, representing a 99% increase.

We remain very excited about our new product pipeline, and we look forward to releasing Mac OS X Lion tomorrow, and bringing the wonderful new features of iOS 5 and iCloud to customers this fall.

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

Thank you, Peter, and we ask that you limit yourself to one question and one follow-up.

Operator, may we have the first question please.

(Operator Instructions).

Katy Huberty, Morgan Stanley.

The 12% revenue downtick, Peter, in September is much more conservative than your typical September guidance, and what you end up reporting in September, which is usually a 20% plus increase over the last four years.

Can you help us understand why you expect this next quarter to trend softer than seasonal?

And maybe how you handicap the impact from some of the new software, services and products that you expect to launch in the quarter?

Thanks.

Sure.

Let me start with the units, and I will give you some thoughts on revenue.

For the education buying season September has historically been more weighted to higher education, and we would expect this to be the same this year.

We have the best lineup of Macs ever, and would expect to see a year-over-year increase in sales.

We also expect a year-over-year increase in iPhone sales.

And for iPad we are continuing to expand our quarterly production capacity and points-of-sale and would expect a significant year-over-year increase in sales.

For iPod we would expect to see a sequential year-over-year decline.

As we announced at WWDC, we have a lot going on in the fall with the introduction of iOS 5 and iCloud.

We also have a future product transition that we are not good to talk about today, and these things will impact our September quarter.

We remain very confident in our business, our new product pipeline and our momentum.

Peter, as it relates to future product transitions, can you just remind us how you approach working those into your guidance.

Do you tend to be conservative and wait to see what happens with those products?

Well, as I said a moment ago, we are not going to talk about this in any detail today.

We factored our thinking into our guidance.

We are incredibly confident about our business, our new product pipeline and what we are doing.

Thank you very much.

Shannon Cross, Cross Research.

Tim, could you talk a bit about iPad 2 sales and trends?

It is still relatively early, I suppose, but I am curious as to what you're seeing in terms of any potential cannibalization or shift of people away from portables, just any thoughts you have on the iPad 2?

Sure, Shannon.

In terms of cannibalization, we do believe that some customers chose to purchase an iPad instead of a new Mac during the quarter.

But we also believe that even more customers chose to purchase an iPad over a Windows PC.

As I have said before, there is a lot more of the Windows PC business to cannibalize then the Mac.

Also, we believe that the Mac has many other attributes that would make it continue to do well in the market.

We are very happy that we grew 14% versus the market's growth of 2.6%, which is about 5 times, as Peter said earlier.

So that is what we see with iPad.

As Peter said earlier, we were still selling every unit we could make during the quarter, and that was the situation as we ended the quarter.

As we have stepped into July, over the initial weeks to give you a more current update, we have been able to increase the supply further.

And some SKUs in some countries are at a supply/demand balance, but we are still working very hard on the balance of the world.

The sales of iPad 2 have absolutely been a frenzy for people to get one, and we are -- feel very good about the progress that we've made about ramping up and the reception that it has received in the marketplace.

Great.

And then if you could talk just a little bit about China.

Clearly your growth in Asia-Pac was up almost 250% year-over-year.

Just any update on China.

Thank you.

That is a good question.

China was very key to our results.

As a reminder, for Greater -- we define Greater China as Mainland China, Hong Kong and Taiwan.

Year-over-year it was up over 6 times.

And the revenue was approximately $3.8 billion during the quarter, and that makes the year-to-date numbers through the three quarters that we have had thus far around $8.8 billion.

So this has been a substantial opportunity for Apple.

And I firmly believe that we are just scratching the surface right now.

I think there is an incredible opportunity for Apple there.

Thank you.

Benjamin Reitzes, Barclays Capital.

I wanted to talk a little bit more about the outlook for gross margins.

You said 38% from the 41.7%.

Can you talk about what components and/or mix dynamics will impact that, Peter?

Sure, we expect the gross margin, Ben, as you said, to be about 30% and down about 370 basis points sequentially.

We expect about two-thirds of this decline to be driven by different product mix.

And we expect the remainder to be due to the loss of leverage on the lower sequential revenue, the cost of a future product transition, a full quarter of the back-to-school promotion.

Sorry, I guess the components aspect of that?

It is Tim.

Both NAND and DRAM and also LCDs, batteries, optical drives and most of the components are generally in a very positive supply situation currently, and pricing is expected to fall at or above the historical trend.

Hard drive supply is currently constrained, and we project that price declines in this area will be less than the historical rates.

We do expect, therefore, components to be favorable on a sequential comparison.

However, this is largely being offset by one-time benefits that we received that are embedded in the 41.7% gross margin that Peter talked about earlier in the June quarter, and therefore, not a part of the bridge that Peter just talked about.

Bill Shope, Goldman Sachs.

Hopefully I didn't miss this, but can you give us a little more color on that one-time benefit in gross margins, how significant was it, and any color on what drove that?

Sure, Bill, it is Peter.

We saw some benefits in our warranty and our phone support area and some settlements that we had.

They weren't huge in the June quarter, but we did see some benefits there.

As Tim said, we would see that generally offsetting -- the reversal of that generally offsetting the component benefits that he just talked about in the September quarter.

Okay, great.

Then a quick follow-up.

There has been a lot of news around patent disputes as of late.

Some seem to have gone in Apple's favor, while others haven't.

Can you help us understand, Tim, how to put these events in context, how we should think about your IP strategy overall, and perhaps how all this is potentially impacting the competitive landscape in smartphones and tablets?

We have a very simple view here, and that view is we love competition.

We think it is great for us and for everyone.

But we want people to invent their own stuff.

We're going to make sure that we defend our portfolio appropriately.

Okay, thank you very much.

Richard Gardner, Citigroup.

I am surprised nobody has asked it, but I was just hoping that you could provide a little more color on what drove the iPhone strength in the quarter.

Was it new carriers or existing new countries or existing -- I know you specifically referred to China as being a driver, but just a little more color on what you saw with iPhone in the quarter, please?

It is Tim.

It is a great question.

We did add 42 new carriers and 15 new countries during the quarter.

So we continued our expansion efforts to get up beyond the [two a quarter] carrier number and above 100 countries.

However, those occurred throughout the quarter.

And the real sequential improvement, frankly, was due to emerging and developed markets.

It is China was a big part of it.

Latin America, driven by Brazil and Mexico, was a big part of it.

And the Middle East was a big part of it.

So -- which I think is great for Apple, because these are markets that Apple historically has not been as strong in.

And we are really beginning to see the fruits of our labor in these markets.

Thanks.

Then, Tim, would you be willing to give us as a follow-up any sort of milestones that you're hoping to hit for the next quarter or two in terms of new carriers and countries for iPhone?

No, but I think you can see that it is something that is of great focus to us.

We want to do business with great partners, and there are still great partners out there to do business with, and so we are obviously off working new relationships.

Thank you.

Gene Munster, Piper Jaffray.

The iPhone clearly is gaining share, but comments from Google last week suggested Android activations are up 56% quarter-over-quarter.

And by our math it looks like iOS activations were up around 20%.

Tim, you mentioned that China is on fire right now, up 600%.

Obviously, you're doing relatively well in the emerging markets, but any thoughts in terms of -- how do you think, I guess, about that Android activation relative to your business?

I think the Android activation number is a difficult one to get our hands around, because unlike our numbers, which you can go to our datasheet and you can add the iPhones and the iPads and make a reasonable approximation of the iPod Touch, which we have said is over half of our iPod sales, you can quickly see that in the June quarter that we sold over 33 million iOS devices.

And across time, as Peter mentioned in his opening comments, we are now over 222 million cumulative iOS devices.

So we think this is incredible.

So our numbers are very straightforward.

They are transparent and they are reported quarterly.

In terms of iPhone, iPhone is up 142% year-over-year.

This is more than 2 times the rate of growth of the smartphone market.

We think that is incredible.

Also, as Peter said earlier, we sold every iPad 2 in the quarter that we could make.

So there certainly was not a shortage of demand.

We are also gaining traction in enterprise.

From the numbers that Peter spoke of, obviously now our attention is not turning to getting corporations to test and pilot, but it is more we are really converting to more of a penetration focus.

Our App Store is the largest by far.

And if you look at iPad-specific apps we are over 100,000.

And I think you would be hard-pressed to find more than a few hundred on the other platforms.

It also doesn't appear that the other tablets are getting any traction to speak of.

And we have paid over $2.5 billion to developers, and so there is a great business proposition for developers.

And you can tell that customers love it, because we had well over 15 billion apps that have been downloaded.

So we're very, very confident about the product.

We are confident with the App Store.

We are confident with our proposition for developers.

The customers set in every survey I have seen ranked the iPhone number one, and so we're very confident in the customer reception.

We are also very confident in our roadmap, and so we feel very, very good.

You may have seen the data that just came out, I believe was yesterday from ChangeWave, that reaffirmed once again that iPhone is the clear leader in customer satisfaction.

And also was the number one preference for those people planning to buy a smartphone in the next 90 days.

So it seems like there is a lot of great things, and we feel absolutely fantastic about it.

Okay, and just a follow-up question.

Any update on Apple TV, and maybe some thoughts on your strategy in the Connected TV market?

Apple TV continues to do well, but I don't want to mislead.

We still call it a hobby here, and we do that because we don't want anyone to conclude that it is another leg of the stool, because it is not in the size market that iPhone is in or that the iPad is in or that the Mac is in or that the iPod is in.

So we have loved the product.

It is clear that customers love the product.

We really got it right when we went to the new Apple TV just last fall.

But right now it is still a hobby status that we are continuing to invest in it because we think there is something there.

Great, thank you.

Mark Moskowitz, JPMorgan.

I just want to touch base here, Tim, on just the scintillating sales velocity.

Is Apple at a point now where you could kind of diversify your contract manufacturing base, as well even your non-Apple retail channel?

And what are the opportunities and risks there?

In terms of the non-Apple retail channel, if you take the iPhone as an example, which as you know makes up a large percentage of our business, we have about 115,000 points-of-sale.

So I feel that we are incredibly diversified.

We are selling through carriers, through retail.

We are selling through our own stores, through our online store.

We are selling through companies that have direct salesforces.

We are selling to enterprise, including an overlaid salesforce of our own.

So I think the channel is extremely well diversified.

We still -- there are still countries where we are still building the channel.

So I don't want to give you a view that I think the journey is completed.

But in the mature markets I feel that the channels are in good shape.

And in the markets where we are putting more and more energy, obviously, there is still channel development to do there, but I think it is well understood and under control.

So I don't really -- that is not something that I worry about at all, actually.

In terms of suppliers, I don't want to get into this in any detail, because I think this is one of those things for us that is a part of the magic and a part of the things that we feel that we have some secret sauce and I prefer not to share it.

But your general point about are we too centralized in one place, are we too dependent on a place, you can bet that that the people here, they are involved with supply chain.

We have got some outstanding ones.

I always ask that question, and I think we always at the end of the day make the right decision for Apple.

Understood.

I appreciate that.

Maybe as a follow-up, either for you, Tim, or Peter.

You have talked in the past about the iPhone and the iPad 2, just because of the bleeding-edge technology, but sometimes the manufacturing yields are a little lighter than what we all think.

Where are you guys now in terms of manufacturing yields?

Have you walked further up the curve in terms of better utilization?

I don't want to give you specific yield numbers, but as I said earlier, the supply of iPad improved dramatically in the quarter.

That allowed us to do the over 9.2 million.

That is up from the 4.7 million from the prior quarter, so we added almost 100%.

I also said that we had further improved the supply in the initial weeks of July.

And that has allowed us to get into a supply/demand balance on some SKUs in some countries.

So I feel very, very good about our progress in that area.

Thank you.

Mike Abramsky, RBC Capital Markets.

Tim, the trajectory of iPhone growth has been nothing less than astounding, because now you are 142%.

You were 113% last quarter, 86%.

So I am just trying to understand what your thinking is on the keys to sustain that growth.

Particularly, do you see the current pricing, for example, and tariffs perhaps approaching a level maybe in North America some saturation.

Do you need to address that?

Different form factors to expand the distribution or just stay on the same business model, especially in these lower-cost Android competitors potentially coming from Asia?

Can you talk to that?

Well, I think, on the tariff side Apple doesn't set the tariffs.

They are just set by the carriers.

And so I think that is a better question for them.

But at a very macrolevel I think what you would find if you went out and talked to several around the world is that virtually every one of them are desirous of having more and more customers have a smartphone and begin to use data on their networks, because this is a way for them to expand their ARPUs.

I firmly believe there is no better device than the iPhone for someone to move from any phone up to a smartphone.

The ease-of-use is just unparalleled and the ecosystem is unparalleled.

So I think there is a good alignment in that area.

I mentioned a few moments ago that the key driver and sequential results on the iPhone -- or sequential improvement in units were emerging and developing markets.

So you can see that we are putting more and more energy in these markets that have been a bit more difficult to do well in versus some of the markets that are in the established countries and subsidized countries, or they are primarily subsidized.

I think we have a very good focus here, and I think we can compete with anyone.

So those markets would have prepay, for example, lower purchasing power, indirect distribution.

Are those things you're going to need to address through pricing and other means?

Those markets that I mentioned that we were doing well in, there are some percentage of postpaid in some of those markets, but if you looked at the market in the aggregate most of those markets are predominantly prepay.

In some cases we have convinced someone to start a postpaid plan, because in the long term I think that is better for the customer, the carrier and us.

But in general, we are also playing in the prepaid market.

We are not avoiding that market.

We don't want to avoid that market.

We know that we need to play there in order to have the kind of volumes that we would like to have.

And (multiple speakers) your question on expanding channels and developing channels, we are obviously -- that is on our list.

And we are -- with 115,000 down now, we have some experience there.

We know we've got a lot more to do, but we've got some experience under our belt now to play with.

Thanks, Tim.

Keith Bachman, Bank of Montreal.

Tim, this is for you.

Mac growth was about 5% sequential.

In the past two years the sequential growth has looked more like 17% to 18%.

And notebook sequential growth was even below that.

So I wanted to go back to what do you think in this quarter was cannibalization versus perhaps some holdbacks in anticipation of Lion, and how does that show up do you think in terms of catch-up in the September quarter?

I really look more at year-over-year than I do sequential on the Mac.

But I'm going to get at the answer to your question anyway.

I think -- first of all, I am proud of the numbers that we achieved.

To grow at 14% when the market is growing at 2.6%, doing 5 times the rate of growth is certainly something to be proud of.

However, in terms of why isn't the number higher than 14%, obviously, we always focus on that.

No matter if the number were 42%, we would focus on that.

I think there are three things that are the primary factors.

And I don't want to try to quantify these for you, but I do want to list them so that you know how we look at it.

The first is -- as I said before, I think there were some cannibalization of new Macs by iPad.

We shipped a record 9.2 million iPads during the quarter, which is over 2 times the number of Macs that we shipped.

It is clear that some customers chose to purchase an iPad instead of a new Mac.

But the thing that really excites us is that more customers chose to buy an iPad than a Windows PC.

The second one is, I think some customers have delayed purchase until Lion becomes available.

As Peter commented on earlier, we are launching Lion tomorrow.

We are looking forward to getting Lion out.

It is a fantastic product.

The guys have worked very, very hard on it.

It is really revolutionary change.

The third thing that I wouldn't discount is in the year-ago quarter we launched new MacBook Pro.

In this particular quarter we launched new iMac.

Both products were well received.

However, the MacBook Pro makes up over -- makes up the majority of the units that we sell in the Mac area.

So, obviously, if you change the MacBook Pro and it is well received, it is going to make the comp more difficult to compare to.

So those are the three things that I think are primarily why the number isn't more than it is.

But I don't want to lose sight that it already is 5 times the industry, and this is the 21st consecutive quarter that we beat the market.

My follow-up then is if I look at the sequential growth pattern -- sorry, in the September quarter, I would assume given the demand that you said you're catching up here in the month of July that iPads would increase sequentially, including probably some potential channel fill.

But I just wanted to see if you could give us some feedback on what the growth trajectory looks like after this great quarter here in iPads?

Well, we don't predict unit sales.

We aggregate things into a guidance, and Peter went through that earlier.

So I don't want to make a comment about iPad, other than I think Peter said earlier, which I am sure you would have reached the conclusion of anyway, is that we think iPad will grow significantly year-over-year.

We will leave the rest of it to you to conclude.

Okay, thanks very much.

Then we would be very happy to report in October how we view that.

All right, thank you.

Scott Craig, Bank of America.

Tim, can you maybe provide a little bit more color around what exactly the issues are for the iPad ramping up into the sort of levels that you want to get to?

Can you hazard a guess as to when you think you will be at sort of equilibrium on a global basis from a production and supply standpoint?

Thanks.

You know, this is a good sort of problem per se is that the demand is fantastic.

So there is not something that I would point to on the supply side saying this has created a huge issue.

It is the good problem.

As I said before, and I generally don't do that, but in this case I am, is to talk about July and the first weeks of July.

We are now three -- a little over three weeks into the quarter, supply has further improved since we ended our June quarter.

And that further improvement has led some SKUs in some countries to become in supply/demand balance.

Now I'm not going to project what will happen to the other countries, but, obviously, we are working very, very hard to get as many units to customers as we can.

We put -- we placed our latest thinking in the guidance, obviously.

Maybe just a quick follow-up, Tim.

Is there anything you guys are doing differently as far as investing in the enterprise salesforce, so to speak, or doing anything differently as far as going to market on the enterprise side that you can point us to, and then, I guess, we will see the fruits of that labor as we sort of go forward here?

We have a dual-pronged strategy with enterprise on both the iPad and the iPhone.

As we work with the carrier salesforces, and they have very large ones because they are selling their services into enterprise, and many of these enterprises want that -- one of our devices connected to it.

So we train and provide quite a bit of help to the carrier forces.

Plus we do some sales directly ourselves, or act as an overlay salesforce to a channel that sells to enterprise.

I would characterize this as we are still building it out, and we do a bit better each quarter.

We are very, very happy with the numbers that Peter talked about earlier about the level of interest and taking people to the pilot and initial deployment stages.

And now our attention is moving to penetration within those accounts versus sort of getting on the standards list.

I think you would really look at it fairly to be this far into the enterprise with a product that has only been shipping for 15 months, in the case of iPad, is absolutely incredible.

Because the enterprise is typically much more conservative and takes a long time to evaluate products.

In this case people are moving at a speed I haven't seen.

Also, in a group that is not thought up of as enterprise, like K-12, K-12 generally takes a very long time for a new product category, but last quarter we sold more iPads in K-12 than we did Macs.

And to do that after just five quarters is absolutely shocking.

We would have never predicted this.

And so we feel very, very good about the different areas that iPad is being sold into.

It is clear that it has a universal appeal in many different markets from consumer to business to government and on and on.

Brian Blair, Wedge Partners.

Can you just talk a little bit about your views on iCloud?

And how do you feel as a service it is going to drive more volumes of Mac?

And maybe just talk about what your expectations on the halo effect across other iOS devices?

This is Peter.

We cannot wait to get iCloud and iOS 5 into the hands of customers in the fall.

We really think that we have done it right with iCloud.

We are going to deliver customers just a seamless integrated experience that we think they're going to love.

We are going to make it very easy.

It didn't go unnoticed to us yesterday that in the ChangeWave results, that was one of the reasons cited why the iOS devices are number one in terms of intend to buy.

Maybe just briefly if you can comment on it, do you feel like you have much of a lead over competitors in the ability to instantly mirror content across different devices?

It feels like that is a real -- like that is a real competitive edge for you, but I would love to hear your thoughts if you wouldn't mind sharing any.

Well, we are certainly very, very good with the Internet, with telecommunications and delivering content.

I think we have proven that for a decade, first beginning with iTunes and now with the App Store, and our payments to developers exceeding $2.5 billion.

So we probably have some things to learn as we go forward, but have a lot of skills and are very excited to get iCloud in customers' hands.

Thank you.

Toni Sacconaghi, Sanford Bernstein.

Tim, I wanted to revisit China and also prepaid phones.

China Mobile recently said it has 5.6 million phones on its net -- iPhones on its network as of the end of May, and was adding them at an incredible rate.

Now, obviously, China Mobile doesn't sell the phones.

So that would certainly point to a lot of prepaid phones or unlocked phones on their network.

I believe, also, your direct distribution in China for the iPhone, both online and retail stores, is in a prepaid fashion.

So I was wondering if you could tell us how significant prepaid is in China and other emerging markets, how much progress you have made there?

And what lessons you have learned, given that you yourselves are also selling them prepaid?

And I have a follow-up, please.

Prepaid or unlocked phones are -- said more in English, phones sold without a contract, are very key in China, and very key in a number of the emerging markets where the credit systems are not as well established as they are in the US, Japan and Western Europe and Australia, et cetera.

So you can look at our volume, Toni, the iPhone volume for the first three quarters of the fiscal year was up 5 times year-over-year.

And iPhone is a key contributor to Greater China having a cumulative revenue of around $8.8 billion for the first three quarters.

So I am not saying at all that we have figured out precisely how to play perfectly in the environment, we haven't.

I think we have more to do and more to learn, but I feel very, very good about our progress there.

I think if any of us would have been told a year ago that we would do $3.8 billion in Greater China in a quarter, I don't think very many of us would have believed it.

And I don't think any of you would have believed it.

So we feel very, very good about it.

And we are taking those learnings and applying those to other markets as well.

If I could follow up.

Your marketshare data is pretty irrefutable, and it is pretty consistent in terms of you being a share gainer.

There are parts of the world in developed countries like UK, Germany, France and Japan where some of the recent market data suggest that you have actually lost share in iPhones on a year-over-year basis in Q2.

I was wondering if you could tell us whether gaining share in the smartphone category for iPhone is strategically important to Apple longer-term?

And how we get our minds around sustained share gains given that most of the market data says smartphones above $300 are going to grow a lot slower than the overall smartphone market?

So how do we, A., are share gains important to Apple in this marketplace?

And how do we reconcile where you participate in its market growth rate relative to the overall market?

Share gain is important.

Anywhere where we are going the opposite way then we are not happy, and you can bet that we are working hard to change that.

In terms of playing in different price points, we do offer the 3GS as an example today, which in the US is $49 with a contract.

If you step that out into prepaid markets, it really depends upon the VAT and duty and channel kind of uplifts as to what it is.

So it varies greatly market to market.

But it is clearly in a distinctly different price than the iPhone 4 is.

Our philosophy is the same as it has always been, Toni.

We will only make products that we are proud of, that are the best in the world.

If we can do that, and the price is lower, then we are great with that.

An example of that that happened some time ago is the iPod Shuffle was created.

It started at a different price point, but it is now at $49.

That is because that is a product we are very proud of.

It is very innovative, a lot of people love that product.

So that is always the question for us and the litmus test.

We will only make products that we are very proud of that we want -- that are the best in the world, and regardless of what the price band analysis.

Also, as we have seen, and as I am reminded time and time again as I look at some of the China data, is it is up to us to convince people to maybe spend a little more for a materially better experience and product.

We have seen that people will do that if the product is great and if it is messaged properly.

We get a lot of experience in both of those areas.

Thank you.

Brian Marshall, Gleacher & Company.

I was wondering if you could talk a little bit about what you have learned with respect to media consumption on the iPad thus far?

We learned that people love using it for a whole variety of things.

And that is the beauty of the iPad is that if you talk to 10 people they would likely give you 10 different reasons that they love it.

I think that is the reason it is doing so well among a very diverse group of consumers in a diverse group of businesses and markets and geographies.

Then perhaps a quick follow-up.

With respect to content accumulation in regards to video, can you talk a little bit why we don't have more movie titles on iTunes at this point, and if we are going to be rectifying that in the future?

Sure, it is Peter.

We have a very, very broad library of movies and TV shows, particularly here in the United States.

We are adding more content internationally each quarter.

And look for some more content later this quarter across the various stores.

We have some neat stuff coming.

Thank you.

Thanks, Brian.

That concludes our Q&A session.

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