蘋果 (AAPL) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to this Apple Incorporated fourth quarter fiscal year 2012 earnings release conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to 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 CFO, Peter Oppenheimer, and he'll be joined by Apple CEO, Tim Cook, and Treasurer, Gary Wipfler for the Q&A session with analysts.

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

Actual results or trends could differ materially from our forecast.

For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2011, the Form 10-Q for the first three quarters of fiscal 2012, 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.

And I'd now like to turn the call over to Peter Oppenheimer for introductory remarks.

Thank you, Nancy.

Thank you for joining us.

We're pleased to report the results of our fourth fiscal quarter.

We established new September quarter records for iPhone, iPad and Mac unit sales, leading to our highest September quarter revenue and earnings ever.

Revenue for the quarter was $36 billion, representing year-over-year growth of 27%.

That's a $7.7 billion increase over the prior September quarter's results, and was driven primarily by strong growth in iPhone and iPad sales.

Operating margin was $10.9 billion, representing 30.4% of revenue.

Net income was $8.2 billion, increasing 24% over the prior September quarter's result.

The quarter's net income translated to diluted earnings per share of $8.67.

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

We sold over 4.9 million Macs, establishing a new September quarter record.

This represents 1% growth year-over-year, compared to IDC's latest published estimate of 8% contraction of the global personal computer market in the September quarter.

Portable sales grew 9% year-over-year and represented an all time high of 80% of Mac unit mix, thanks to strong sales of MacBook Pro and MacBook Air.

Earlier this week, we unveiled the stunning new design for iMac that packs high performance technology and a brilliant new display with reduced reflection into an incredibly sleek aluminum and glass enclosure.

We also introduced an even thinner and lighter version of our most popular Mac, the 13-inch MacBook Pro, featuring a Retina display with over 4 million pixels, in all-flash storage.

We began and ended the quarter with between three and four weeks of Mac channel inventory, which is below our target range of four to five weeks.

Moving to our music products, we sold 5.3 million iPods compared to 6.6 million in the year-ago quarter.

iPod touch continued to account for over half of all iPods sold.

iPod's share of the US market for MP3 players was over 70% in the September quarter, based on the latest data published by MPD, and iPod continued to be the top-selling MP3 player in most countries we track, based on the latest data published by GfK.

We're very excited to be shipping our newest iPods as of two weeks ago.

The new iPod touch is the thinnest iPod touch yet, comes in five great colors, and features a 4 inch Retina display, a 5 megapixel iSight camera, our powerful A5 chip and Siri.

The new iPod nano is the thinnest iPod ever, featuring a 2.5-inch Multi-Touch display, convenient navigation buttons, and built-in Bluetooth for wireless listening.

The nano comes in seven great new colors and we think our full range of iPods will make wonderful gifts this holiday season.

The iTunes store generated all-time record results, which revenue of almost $2.1 billion thanks to continued strong sales of music, apps and video.

We look forward to launching the new iTunes, featuring a complete redesigned player, seamless integration with iCloud, and a new look for the iTunes Store.

The new iTunes has a dramatically simpler and clearer interface, so customers' music, movie and TV purchases on any of their iOS devices or computers are conveniently displayed in their iTunes library, and are available whenever they want them.

I'd now like to turn to iPhone.

We're very pleased to have sold 26.9 million iPhones, compared to 17.1 million in the previous September quarter.

That represents 58% year-over-year growth compared to [IBC]'s latest published estimate of 45% growth for the smartphone market overall during the quarter.

We launched iPhone 5 in nine countries on September 21, and 22 more countries on September 28, and demand has been phenomenal.

Customers have responded tremendously to the iPhone 5's all-new thin and light design and beautiful new 4-inch Retina display, the powerful performance of the A6 chip, and the great new ultrafast wireless technology.

Demand for iPhone 5 continues to out-strip supply, and we are working very hard to get more into customer's hands as quickly as possible.

We ended the quarter with about $9.1 million iPhones in channel inventory, a sequential increase of about 800,000 iPhones, and ended the quarter below our target range of four to six weeks of iPhone channel inventory on a look-forward basis.

Recognized revenue from iPhone handset and accessories sales was $17.1 billion during the quarter compared to $11 billion in the year-ago quarter, an increase of 56%.

Businesses around the world continue to make iPhone an essential device for their employees.

Virtually every type of enterprise in small business is using iPhone, along with the business apps from the App Store and custom apps developed in-house to drive efficiencies that were simply not possible before.

Canon has provided its field sales team iPhones with secure access to its customer relationship management system, sales reps can now access customer information and the input meeting notes anywhere, giving them more time with customers.

Amtrak has deployed thousands of iPhones to train conductors, who use an in-house app that changes the entire ticketing and reporting workflow.

The app enables print-at-home ticket validation, delivers a more accurate passenger manifest, and makes accounting date available to Amtrak's revenue systems in near real time, revolutionized in the paper-based process the company used in the past.

And news organizations around the world are using iPhone to transform the way they capture and deliver news.

Reporters for BBC, the Wall Street Journal, Mexican newspaper Milenio, and Canada's CTV News are using their iPhone cameras to capture HD video on location, and send it directly back to headquarters for broadcast on TV or streaming on the web.

Turning to iPad, we were very pleased with sales of 14 million iPads during the September quarter, compared to 11.1 million in the year-ago quarter and the increase of 26%.

iPad sales were ahead of our expectations, and we saw a strong year-over-year growth in iPad sales in every geographic region.

Earlier this week, we introduced the iPad mini, the thinnest, lightest, smallest iPad we've ever built.

it has all the power, performance and capability customers have come to expect from an iPad, and you can hold it in one hand.

We also introduced the fourth-generation iPad with a beautiful 9.7-inch Retina display, an A6 chip with twice the performance of the iPad we announced earlier this year.

Together with the iPad 2, these two new iPads run more than 275,000 apps in the App Store.

Recognized revenue from sales of iPad and iPad accessories during the quarter was $7.5 billion, compared to $6.9 billion in the year-ago quarter, an increase of 9%.

We ended the quarter with about 3.4 million iPads in channel inventory, a sequential increase of about 200,000, which left as just over our four weeks of iPod channel inventory target on a look-back basis.

iPad is fundamentally changing work processes across industries around the world.

With apps developed in-house, iPad is helping companies deliver better service, streamline manufacturing, and empower work forces with critical data and information.

Volkswagen has developed more than 30 in-house apps for vital processes across the company, including monitoring and tracking of vehicles on the production line, scheduling the vehicle transportation at assembly plants, and greeting customers when they pick up new cars.

Ping An Insurance in China has deployed thousands of iPads to their sales agents and service teams.

Apps developed in-house are used by car accident inspectors to carry out onsite inspections and file claims, which significantly shortens processing time, and improves customer satisfaction.

And Brazil's Banco Bradesco is using iPads to redefine the customer experience in their bank branches.

Beyond completing customer transactions, employees use iPad to inform and educate customers about bank services and Bradesco apps in the App Store.

Combining iPhones, iPads and iPod touch, we sold over 44 million iOS devices in the September quarter.

The App Store now offers more than 700,000 apps, including over 275,000 apps specifically for iPad.

We established a new all-time record for quarterly app sales in the September quarter, and we were very pleased to report that we have reached $6.5 billion in cumulative payments to developers.

Customers are embracing iCloud in growing numbers.

With over 190 million account sign-ups in the first year of the service.

With iCloud, customers can access their music, photos, calendars, contacts, documents and more from whatever device they are using, and it is built into every new iOS device and every new Mac.

And we launched iOS6 last month, and it's already on over 200 million devices.

iOS 6 includes over 200 new features, including broader language support for Siri, Facebook integration, shared photo streams and more.

We've made a number of improvements to Maps over the past month, and we will work non-stop until Maps lives up to our incredibly high standards.

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

Revenue was $4.2 billion, which was a new September quarter record, and an increase of 18% over the year-ago quarter, with gross yield primarily by the store's best iPhone launch ever.

The stores also established a new quarterly record for Mac sales, selling just over 1.1 million Macs.

We opened a total of 18 new stores in 10 countries during the quarter, including our first store in Sweden.

We also opened our second store at Hong Kong, at Festival Walk, to overwhelming response, resulting in our biggest store opening of the year.

We exited the quarter with 390 stores, 140 of which are outside the United States.

With an average of 376 stores open, average revenue for store was $11.2 million, compared to $10.7 million in the year-ago quarter.

Segment margin was $848 million, compared to $652 million in the year-ago quarter.

We hosted 94 million visitors to our stores during the quarter, compared to 77.5 million visitors in the year-ago quarter, an increase of 22%.

That translates to an average of 19,000 visitors per store, per week.

Total company gross margin was 40%, which was 150 basis points higher than our guidance.

About half this difference was due to the better-than-expected commodity and other costs.

Another quarterly difference was due to the leverage on higher-than-expected sales and more favorable foreign exchange.

The remainder was due to some items that we do not expect recur in the December quarter.

Operating expenses were $3.5 billion, and included $379 million of stock-based compensation expense.

OI&E was a net expense of $51 million.

Interest income and investment gains were more than offset by higher-than-expected currency hedging expense.

Under the accounting rules, foreign exchange fluctuations late in the quarter required us to accelerate recognition of premium expense related to Q1 and Q2 hedges.

This will result in less premium expense being recognized in Q1 and Q2.

The tax rate for the quarter was 24.5%, bringing us to a tax rate for the full fiscal year of 25.2%.

Turning to cash, our cash for short-term and long-term marketable securities totaled $121.3 billion at the end of September quarter, compared to $117.2 billion at the end of the June quarter, a sequential increase of over $4 billion.

The increase in cash was net of $2.5 billion of dividends paid in August.

About $83 billion of our total cash was offshore at the end of the September quarter.

Cash flow from operations was $9.1 billion.

Our Board of Directors just declared a dividend of $2.65 per common share, payable on November 15, 2012 to shareholders of record as of the close of business on November 12, 2012.

In August, we entered into a Rule 10b5-1 compliant accelerated share repurchase program with a financial institution to purchase up to the $2 billion of Apple stock during fiscal year 2013.

In addition to shares purchased through the accelerated share repurchase program, we may also purchase shares in open market transactions in compliance with all applicable securities laws.

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

As a reminder, year-over-year comparisons will be impacted by the fact that our December quarter of this year will span 13 weeks, whereas the December quarter of last year included a 14th week.

As we indicated previously, revenue in that 14th week last year was approximately 1/14 of the quarter's total revenue.

We expect revenues to be about $52 billion compared to $46.3 billion in the December quarter last year.

We expect gross margin to be about 36%, reflecting approximately $90 million related to stock-based compensation expense.

We expect OpEx to be about $4.05 billion, including about $485 million related to stock-based compensation expense.

We expect OI&E to be about $380 million, and we expect the tax rate to be about 26%.

We are targeting EPS of about $11.75.

In closing, we are extremely proud to conclude an amazing fiscal year 2012.

We generated revenue of over $156 billion, which is up 45% year-over-year, and reflects growth of $48 billion in revenue.

We sold over 200 million iOS devices, including 125 million iPhones, reflecting 73% growth year-over-year, and 58 million iPads, reflecting 80% growth.

We sold a record 18 million Macs and shipped 35 million iPods, and we expanded the reach of iTunes music stores to 63 countries around the world.

We launched stunning new versions of OS 10 and iOS, and tying it all together, we launched iCloud with customer reaching over 190 million and growing.

And finally, we generated net income of $41.7 billion, an increase of 61% year-over-year.

We entered this holiday season with our strongest product line-up ever, and we remain very confident in our new product pipeline.

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)

Your first question will come from Katy Huberty with Morgan Stanley.

If your guidance comes to fruition, December will be the first quarter in a very long time that Apple EPS decline year-on-year, despite what has been the broadest product refresh in the Company's history over the past two months.

The bears will point out that maybe the Company's price premium or supply chain advantage is weakening.

Curious how you would response to that, and then as a follow-up Peter, if you can comment on what's driving the significant gross margin down-tick in December, given you should have decent iPhone mix?

Thank you.

Sure.

Katy let me begin, I will address many of the things you asked, and then Tim can add a few points.

The change year-over-year is being driven by a couple of things.

So first of all last year included a 14th week, this year's Q1 is a normal 13 week quarter.

That, along with a stronger US dollar and that the change in gross margin.

So let me talk to you about what we see for gross margin, but I am going through some detail on a sequential basis, but not year-over-year.

As you pointed out, this is the most prolific product period in Apple's history.

We have an unprecedented number of new product introductions over the last six weeks, and this has led to record levels of demand.

New or re-priced versions of our products announced during this time frame represent over 80% of the total expected December quarter revenue, but there are costs associated with such dramatic change and demand.

The iPhone 5, iPad mini, iMac, MacBook Pro 13-inch, iPod touch and iPod nano have completely new form factors with great new features, and we've never before introduced so many new form factors at once.

All of these products have higher costs than their predecessors, and therefore lower gross margins, as they are at the height of the cost curve.

This has been the case with new products in the past, so nothing new.

The difference this time is the sheer number of new products we are introducing in a very short period of time.

Additionally, we lowered the price of the iPhone 4S and iPhone 4, delivering incredible value to our customers.

We head into this holiday quarter with the strongest iPhone line-up that we have ever had, with the iPhone 4 starting at $300 in the subsidized markets.

We also added the iPad mini to our iPad line-up.

The iPad mini has the full iPad experience and we priced it aggressively at $329, delivering incredible value to our customers.

Its gross margin is significantly below the corporate average.

So in summary, we expect our gross margin to decline by about 400 basis points sequentially.

We expect the benefit from positive leverage on the sequentially higher revenue and a greater mix of iPhones.

But we expect these benefits will be more than offset by a number of factors.

First, margins on new products are lower than their predecessors, including the iPhone 5, and we have been aggressive with the iPad mini.

Second, we've lowered the price of the iPhone 4S and the iPhone 4. Third, we will experience transitionary costs associated with multiple new product ramps.

Fourth, the high anticipated volume of iPhone and other new products will generate significantly greater deferred revenue sequentially.

As you are aware, we defer a portion of our revenue with every device we sell, and amortize it back into revenue over the life of the device.

In periods of exceptionally strong sales like the December quarter, the deferred amounts are significantly higher than the revenue amortized in from past sales.

And fifth, the favorable items that benefited the gross margin in the September quarter are not expected to repeat in the December quarter.

We will work hard to try and get down the cost curves and improve our manufacturing and other efficiencies, as we successfully have done in the past.

We ended this holiday season with our strongest product line-up ever, and we have great choices for customers.

To be in position to anticipate over $50 billion of demand for our products in a single quarter is a reflection of the incredible strength of our products and our business.

And Katy, if I could just add a couple of things to that.

We are dedicated to making the very best products in the world, and we think about the smallest of details and we are unwilling to cut corners in delivering the best customer experience to the world.

If this relentless commitment to innovation and excellence is the reason that our customers to buy our products, and this will always be the driving force behind Apple.

We are advantaging the company for the long run and will continue to make great long-term decisions.

We remained very, very confident in our strategy and will use our world-class skills and hardware, software and services to delight our customers.

Thanks for the detail.

Thanks, Katy.

Could we have the next question, please?

From Goldman Sachs, we'll go to Bill Shope.

Can you walk through how you're thinking about the ramp for the iPhone 5 in the holiday quarter?

And how does some of the challenges you are facing relative to the strong demand compared to the past iOS product launch?

Bill its Tim.

The demand for iPhone is extremely robust.

We are thrilled with what we see.

We are in a significant state of backlog right now.

In terms of the production, our output has improved significantly since earlier this month.

And I'm very, very pleased with the progress that we've made there, I'm pleased with the current level of output, in what is the largest volume ramp in Apples history.

It's difficult to predict when supply and demand will balance, but I'm feeling very confident on our ability to supply quite a few iPhones.

Great.

Thank you.

Thanks, Bill.

Could we have the next question, please?

Next we'll go to Toni Sacconaghi with Sanford Bernstein.

I just wanted to first follow-up on that previous question around the ramp of iPhones.

Do you continue to anticipate rolling out to all 100 countries this quarter, as you had announced at the time of the iPhone 5 announcement?

And related to that, can you comment on whether the supply constraints that you've had, have had a material impact on your cost of goods sold, relative to as your supply improves, do you actually expect your cost of goods sold to decline?

Tony, its Tim.

In regard to your first question, we still continue to anticipate rolling out to the 100 countries, as we announced before.

It is our fastest rollout ever.

There will be some large countries in month of December.

But we anticipate still achieving the 100.

In terms of cost, with each new product, we see learning curves associated with ramping production.

And the new products we have now are no exception to that.

The difference is the number of new products that we having moving at once.

As Peter said, and as you can tell from the announcements we have had in the last couple of months, this is the most prolific period in our history in terms of the new product introduction and innovation.

The past six weeks have been phenomenal in terms of new product introduction.

And so we do see all of these costs associated with each of these.

But I don't see those costs accelerating on a per unit basis.

As we go through the quarter.

I see it very much being a production ramp across many, many new products.

Okay, thank you for that color.

If I could just follow-up, you've talked before about how you believe that the iPad will be, and the tablet market will be an enormous market, bigger than the PC market.

Clearly, you have made a move to expand that market and make it more accessible by introducing the iPad Mini.

I am wondering if over time you could see this market evolving to larger tablets going forward, that would address different needs in the marketplace, take on incremental PC functionality, and I am wondering when you talk about the iPad market being bigger than the PC market going forward, do you see larger form factors in the marketplace evolving, and I guess the question, is why not?

Tony, as you know, we don't comment on our future views on products and roadmaps et cetera, but let me make some comments on your question.

We continue to be very confident that the tablet market will surpass the PC market, there is incredible development in both ecosystems and product going on in the tablet space.

It is already extremely compelling for many, many customers to choose the tablet, in particular an iPad over a PC.

And when you look at the size of the PC market here is an enormous opportunity for Apple there.

Pretty much each quarter you see 80 to 90 million PCs being sold.

And so we do think that the iPad and the iPad mini and the iPad 2 will all be extremely attractive offerings for people in lieu of PCs, and we are going to continue to very much focus on the future of iPad, and we are very, very confident with what we have in the pipeline.

And we are extremely pleased to have launched iPad Mini and can't wait until next Friday, when we begin selling the very first units.

Thanks, Toni.

Could we have the next question, please?

From Cross Research, Shannon Cross.

Tim and Peter could you talk a little bit about China and what you're seeing in China?

Clearly with your revenue guidance, it sounds like it remains strong, but obviously there's been some mixed signals from an economic standpoint.

Shannon, it's Tim.

In terms of what we saw in China for Q4, revenue was $5.7 billion.

That's up 26% year on year.

Mac was up extremely strong, up 44%.

As you recall we launched portables for the first time in July or the portables we had previously announced in the US in June.

We announced it in China in July.

iPad was up 45% in Greater China.

iPhone was up 38%.

And so all in all a fantastic quarter.

That brings us to a full-year fiscal year revenue number of $23.8 billion for China, which is really phenomenal when you think about it.

That's up over $10 billion year on year, up 78% and Greater China now represents about 15% of Apple for the fiscal year.

And so we're extremely happy with how we've done in China.

As Peter alluded to in his opening remarks, we are continuing to invest in our own retail stores there.

We continue to expand distribution with channel partners as well.

And we continue to see it as an extremely exciting market with more and more people wanting Apple products.

Great.

And I just had a follow-up question on the tablet market.

With the launch of Surface today and obviously the Win8 tablets and that, could you talk a little bit about what you're seeing from a competitive standpoint and how you think about it?

Thank you.

Yes.

I haven't personally played with the Surface yet, but what we're reading about it, is that it's a fairly compromised confusing product.

And so I think one of the toughest things you do with deciding which products is to make hard trade-offs and decide what a product should be, and we've really done that with the iPad.

And so the user experience is absolutely incredible.

I suppose you could design a car that flies and floats, but I don't think it would do all of those things very well.

And so I think people, when they look at the iPad versus competitive offerings are going to conclude they really want an iPad.

And I think people have done that to date.

And I think they'll continue to do that.

Thank you.

Ben Reitzes, Barclays.

Can you just go through a little bit more on tablets?

The iPad mini, how do you think that will sell versus the original iPad form factor?

And how do you want to differentiate that?

Is there more of an e-book focus with -- an education focus with the mini?

And do you think it will sell more than the regular or the original iPad?

And how do you want us to think about the cannibalization factor as well of the older product or the older form factor?

We don't really have an old product.

We have only new products.

We just announced the fourth-generation iPad as well.

I knew I'd mess up in my speech there.

Sorry.

So no, the way that we look at this is that we provide a fantastic iPod Touch.

We provide an incredible fourth-generation iPad and iPad mini and an iPad 2. Customers will decide which one or two or three or all four that they would like.

And they will buy those.

So we've learned over the years not to worry about cannibalization of our own products.

It's much better for us to do that than somebody else to do it.

And the far, far bigger opportunity here are the 80 million to 90 million PCs that are being sold per quarter.

There's still over 300 million PCs being bought per year.

And I think a great number of those, those people would be much better off buying an iPad, or a Mac.

And so that's a much bigger opportunity for Apple.

And so instead of being focused on cannibalizing ourselves, I look at it much more that it's an enormous incremental opportunity for us.

And so that's how I look at it.

Okay.

And then just my quick follow-up is on Apple TV we haven't heard about your hobby in a while.

And how many did you sell in the quarter?

And what's the strategy there for the living room to date?

And I'm intrigued to hear the answer or not an answer.

(laughter)

Or not, you might guess.

For Q4, we sold 1.3 million.

That's up over 100% year on year.

That means that we sold more than 5 million Apple TVs during the fiscal year.

Which is almost double the previous year.

We had sold 2.8 million the previous year.

And so the business continues to do very well, but if you look at the size revenue of this business versus our other businesses, it's quite small.

And so it still has a hobby label.

However, it's a beloved hobby.

And we continue to focus on it and continue to believe there's something more there and continued to pull the strings to see where it takes us.

Thanks a lot, Tim.

Gene Munster, Piper Jaffray.

Tim, can you talk a little bit about the iPad?

We saw a deceleration in the September quarter.

Was there anything in particular that might have been as you think about that business, might have been driving that?

The June to September was 17 million to 14 million, Jean.

And the thing -- the first thing to note there is that as we had talked about in the July call, the June quarter contained 1.2 million increase in channel inventory.

And so the actual sell through sequentially comparison looks very different than the reported sell in numbers do.

The second thing is that the 14 million exceeded what we had expected to do in iPad.

And the reason we had expected it to decline is that we believe based on the two or three years of results that we've got is that normally we would see a seasonal reduction in the September quarter versus the June quarter.

Part of this reason is because K-12 heavily buys in the June quarter.

K-12 doesn't buy very much in the September quarter.

It becomes a higher ed kind of move.

And higher ed is still buying notebooks for the most part.

And so there's some kind of normal seasonal -- that's exaggerated further when we announced a new product in March.

And have an enormous full quarter of demand in the June quarter.

And then when you compare that to the September quarter, that would be a natural phase down.

In addition to all of that, it's clear that customers delayed purchases of tablets due to new product rumors.

And these intensified in August and September.

Some of that was anticipated and some of it I wish wouldn't occur.

But it did occur.

That's how I would explain the sequential difference.

On a year-over-year basis, because of the year ago quarter, having also a channel inventory build as we stocked the channel to the proper level, this sell-through year over year actually grew 44%, and so the underlying sell-through was extremely strong.

And so we continue to feel great about how iPad has done with announcing the fourth-generation iPad just this week and adding the iPad mini to the family, we think it's going to be an incredible holiday season.

Okay.

Great.

Thank you.

My follow-up question is given what we're seeing in margins as some of these products get more expensive to produce to be competitive, would you be open to passing some of those costs on to your customers?

Obviously historically you've announced new products and maintained a lot of those price points.

It's a hypothetical question.

And so we think we've made great choices on those products and the prices and as you know, our customary practice -- long-standing customary practice is just to guide for the current quarter.

And so I wouldn't want to talk about what we might do post that.

Great.

Thank you.

Mark Moskowitz, JPMorgan.

Peter or Tim, my first question is around the sequential guidance for revenue of around 44% quarter on quarter for December.

Can you provide us some context about how we should think about the iPad and the iPhone families in particular?

How their revenue growth could dovetail with that 44%?

Hi, Mark.

It's Peter.

You're asking the sequential question but I do want just to remind everybody that if you're looking at this year over year and comparing the sequentials year over year, don't forget about the 14th week last year in Q1.

You need to adjust for that and I think it would give you a different answer if you were comparing anything year over year.

Specific to your question about iPhone and iPad sequentially, we have just announced amazing new products in both lineups, and we expect large sequential increases going from the September to December quarter.

And as a result, we're thrilled to be providing guidance tonight for $52 billion of revenue.

Okay.

And then, Tim, a question on the iPhone 5, as far as just the global rollout, what is the approach?

Is the approach to first touch all 100 countries?

And have supply constraints impacting all 100 countries first?

And then go back and backfill all of those different outlets?

Or will there be certain markets where you decide to reach supply demand equilibrium first and then keep some of those other 100 countries kind of at constrained levels?

Kind of curious about the average there.

Are you going to try to first sprinkle the product everywhere and then backfill later?

Or will it be more targeted?

What we did initially, Mark, was we planned the first 30 to 40 countries prior to introducing the product.

And rolled those out across a September in two different days.

The balance of the quarter, we planned with an eye toward the supply and what we think the demand will be.

But we do plan these in advance.

And so it is not a precise science.

And we obviously have to plan those with several weeks of notice.

And so occasionally, it can be different than what we think.

Okay.

Thank you.

Steve Milunovich, UBS.

Regarding the iPad, you said that you priced it very aggressively.

I think many people on the street seem to have a slightly different view.

Could you maybe talk a little bit about your pricing philosophy and was it driven by cost?

Or is it just more to keep a premium brand given the quality of your products?

Steve, it's Peter.

When we set out to build the iPad mini, we didn't set out to build a small, cheap tablet.

We set out to build a smaller iPad that offered the full iPad experience, as our customers would expect.

As a result, the difference between the iPad mini and the competition is profound.

Our iPad mini begins with a 7.9-inch display, which is 35% larger than the 7-inch tablets, providing a much better experience.

We are shipping two great cameras.

FaceTime HD front and a 5 megapixel 1080p iSight rear camera versus typically one from our competition.

We are shipping our fastest communications with dual band Wi-Fi and included the A5 chip, which has higher performance than our competitors.

And finally, the fit and finish of our precision unibody aluminum closure is breathtaking when held in your hands.

So that's what we've done.

The iPad mini has higher cost.

And the gross margin is significantly below our corporate average.

We're beginning at the height of the cost curve, but in addition to wanting to make a large number, we're going to work to try to get down the cost curves and be more efficient in manufacturing as we have been in the past with our other products.

Steve, it's Tim.

One of the things we try to do is to create a product that people will love for months and years after they purchase it and continue using it in a robust way.

So that's what iPad mini has been designed to do.

And you can really see that more broadly on iPad by looking at the usage statistics.

As I've mentioned earlier this week, over 90% of the web traffic from tablets are from iPads.

And so Apple will not make a product that somebody may feel good about for the moment that they're paying for it and then when they get it home, they rarely ever use it again.

That's not what we're about.

It's not the kind of experience we want our customers to have.

And I think when -- I would encourage you to use an iPad mini and I don't think you'll be using anything other than maybe another iPad or something after you do that.

I look forward to it.

Could you comment on your enterprise opportunity?

Obviously a lot of it is BYOD but you have many retailers who have a corporate directive to use iPads and so forth.

Are you doing anything a little bit more aggressive to support that market particularly with the Windows pads now coming out?

We now have almost all of the Fortune 500 that are testing or deploying iPad.

And I think with the recent announcements, the penetration will only grow.

We've also pushed fairly aggressively in the global 500.

And so those numbers now are above 80% on both iPhone and iPad.

And so I feel like we're doing fairly well there.

There's clearly much more to do, but I'm feeling pretty good about it.

Thank you.

Scott Craig, Bank of America Merrill Lynch.

Tim, can you maybe comment on the component environment a little bit, particularly with related to iPad, iPad mini, and iPhone and just where you see some of the constraints perhaps here as your launching?

And then, Peter, just a quick one for you, the volatility on the OI&E line, is that just a calendar third-quarter and calendar fourth-quarter issue and then it normalizes or is that going to continue?

Thanks.

Scott, it's Tim.

In terms of iPad and iPhone, I don't see a component shortage gating us for the quarter in the numbers that we've given you in the guidance.

I think we've solved some challenges there and feel good about our position.

In terms of general shortages, on the iMac we'll be constrained for the full quarter in a significant way.

Part of that is that we're beginning shipping the 21.5-inch iMac in November and the 27-inch in December.

And so there will be a short amount of time during the quarter to manufacture and ramp those and I expect the demand to be robust.

So we will have a significant shortage there.

The others are more based on how big is big from a demand point of view.

And that is very difficult to predict but you can tell that we are extremely bullish on the demand with the revenue guidance that Peter talked about earlier.

So hopefully that answers your question.

Yes.

Thanks.

This is Gary.

I'll take the OI&E question.

I'll expand on Peter's remarks just a little bit.

While interest income was about what we expected, foreign exchange hedging expense was higher than we expected relative to our guidance.

Without getting overly detailed, dollar weakness late in the quarter and accounting rules required us to accelerate and recognize a large amount of foreign exchange premium expense related to future quarter hedges in the current quarter.

All things being equal, premium expense in Q1 should be lower.

This has been factored into our December OI&E guidance of $380 million.

Brian Marshall, ISI Group.

If you look at the iPhone unit growth versus the revenue growth, that's been a pretty similar dynamic over the past several quarters, but when you look at that same dynamic for the iPad it's actually started to break down slightly over the past couple quarters.

In fact, this most recent quarter it looks like revenues grew three times faster than the unit growth, so I guess the question is, is this just simply the market migrating down to the low end of the SKU stack or is this less accessories from an attach or a dollar spend?

And I have a quick follow-up.

Brian, it's Peter.

I didn't quite follow your three times, but the iPhone ASPs were relatively flat in the September quarter year on year and were up slightly on a sequential basis.

The iPad ASPs were down year over year in a low-double digit way.

But this really was reflective of our price reduction on the iPad 2, the stronger dollar and a little bit of change in mix.

And that's what drove the ASP change year over year.

On a sequential basis, iPad ASPs were actually pretty flat.

Great.

Thanks.

And then the quick follow-up is looks like this is the second quarter in a row that the United States iPhone activations is actually growing faster than the international market, and that seems like a strange dynamic considering the magnitude of the TAM of the international being order of magnitude larger than the US.

I just wonder if you could comment on that.

Thanks.

I think it's important to remember there that we launched iPhone 5 in the US during the quarter and where we launched in some international countries, the bulk of the world, we did not launch yet.

And so I would have expected to have seen a more significant growth in the US versus the rest of the world.

Thank you.

Keith Bachman, Bank of Montreal.

Clarification question.

Will the iPhone 5 launch in mainland China occur in the December quarter?

Keith, it's Tim.

Yes, we project that it will occur in December.

Okay.

Thanks.

And for the clarification on top of that, did you comment that you think you will be able to meet supply of iPhones at the end of the December quarter?

Or do you think you will end the quarter with backlog of iPhone 5 or iPhones, I should just say as a product category?

I'm actually not projecting whether supply and demand will balance for the quarter.

I'm saying that I feel great about where we are on the manufacturing ramp, that we are -- our supply output is significantly higher than it was earlier in October.

And I'm confident that we'll be able to supply quite a few during the quarter, but in terms of when that balance occurs, I can't tell at this point.

Okay.

Demand is very robust.

Okay.

Thanks very much.

Chris Whitmore, Deutsche Bank.

Tim I wanted to go back to the iPad one more time if I could.

Specifically I wanted to ask or try to get a feel for your view around the emerging model in the tablet space where vendors are willing to subsidize their hardware with content or search where many of these vendors are selling hardware at a breakeven or even a loss, and hoping to make it up on the back end.

How is that impacting your iPad business if at all?

And is that something Apple would consider going forward?

We've seen low-cost challengers before.

And iPad continues to beat every other tablet on the market at any price.

And so we think customers are very smart.

We think they have very high expectations.

We think that they want a device that can do more.

And we're confident that our focus on making the best product is what will win at the end of the day.

And so we will stay true to that.

Okay.

And my second question I wanted to ask about supply.

It sounds like you've made a lot of changes to your supplier list as these new products are ramping perhaps due to strategic reasons.

And is that creating an added layer of complexity as you try to ramp these new products?

And to what extent is that contributing perhaps to the higher cost structure of these products?

I'm not sure what you're trying to get at there, but I would not say that there's been a significant change in our supplier partners.

There's always some change obviously, but I wouldn't describe any change as significant.

And there hasn't been a change that would have driven more cost if that's your specific question.

I was specifically asking about LCD and your Samsung relationship.

LCD -- I wouldn't characterize any change there as having driven any cost.

And Samsung we continue to be a customer of Samsung.

And continue to have a commercial relationship.

Thank you.

Kulbinder Garcha, Credit Suisse.

My first question I guess is for Tim.

Just in terms on the iPad mini, there's obviously been a fair amount of debate within Apple over the years whether to even do the smaller screen iPad, and can you speak about what you've learned over the last couple of years as to why the time for that now is right or was the technology is right, just any insight there would be helpful.

And then for Peter, my question is on gross margin.

I just want to revisit it slightly in the sense that you guys have spoken about various higher cost structures before as well in the move from I think the 3GS to the 4 on the iPhone.

Even when the iPad was launched, in the end what we've seen is that the scale that Apple are building, the size of revenues you're getting to, the component reuse is meant that you actually very quickly got through these potential gross margin dips.

Is anything structurally different this time around?

Many thanks.

On your question about iPad mini, the comments that I think you're referencing are comments that Steve had made before about 7-inch tablets.

And let me be clear, we would not make one of the 7-inch tablets.

We don't think they are good products.

And we would never make one.

Not just because it's 7 inches, but for many reasons.

One of the reasons, however is size.

And so I'm not sure if you saw our keynote, but the difference in just the real estate size between the 7.9, almost 8, versus 7 is 35%.

And when you look at the usable area, it's much greater than that.

It's from 50% to 67%.

And also, the iPad mini has the same number of pixels as iPad 2 does.

And so you have access to all 275,000 apps that are in our App Store that have been custom designed to take advantage of the full canvas.

And so iPad mini is a fantastic product.

It's not a compromised product like the 7-inch tablets are.

It's in a whole different league.

Kulbinder, the sequential decline in gross margin that we see in the December quarter is largely being driven by many new form factor changes and some price reductions that we've taken that I went through in great detail.

And we believe that over 80% of the revenue that we will see in the December quarter will come from products that we just introduced in the last six weeks.

And so while having lower gross margins on a new product is not something that's new for us, what is different this time is just the sheer number of new products that we've introduced in the last six weeks.

We just have not had that magnitude in the past.

So I don't see something that's structurally different.

And we have a big focus on wanting to make a lot of these products to get them in customers' hands as quickly as we can, but we're also going to work to try and get down the cost curves and improve manufacturing and other efficiencies as we have successfully done in the past.

So no change in what we're going to try and work on.

And we'll report to you in January how we did.

Thank you very much.

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