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Apple Earnings Report Q3 - 2010 on July 20th, 2010

[10:03 PM] Robert: The call is now over. Stephen, it was good work with you in blogging the call. I'll be back in the AFB later today for more analysis and commentary. Robert
[10:02 PM] Stephen: And that's a wrap for today's conference. You can find the podcast replay as a podcast on Apple's website. Available 5pm PDT.
[10:02 PM] Robert: Apple management can not accurately forecast demand until there's sufficient product supply.
[10:02 PM] Robert: The iPad is being positioned to take PC market share.
[10:01 PM] Stephen: Why are you predicting lower gross margins for iPhone? It has a higher cost structure; don't want to get into specifics.
[10:00 PM] Stephen: Domestic growth potential with iPhone: Need more carriers? Tim: Don't want to get into what we will and won't do. At&t has been great.
[9:59 PM] Robert: My analysis: The company sees huge opportunities due to the Mac's low relative market share and is aggressively taking economic ground.
[9:59 PM] Stephen: How would wage increases in sub contractors effect Apple? Tim: Don't want to get into terms of our supplier agreements.
[9:58 PM] Stephen: If iPad cannibalized PCs, then it's a huge market to cannibalize and grow into.
[9:58 PM] Stephen: Mac has grown in 17 straight quarters, but overall marketshare is relatively low. As more people are introduced to Mac through iPhone, iPad, iPod, it has more chance to grow.
[9:58 PM] Robert: My analysis: Apple management can't accurately forecast iPhone and iPad demand.
[9:57 PM] Stephen: Most people external to Apple focus on cannibalization. We focus on just the opposite: on the synergy between products.
[9:54 PM] Stephen: Macs grew 73% year of year. China grew 140% year over year.
[9:53 PM] Stephen: iPhone growth has come by adding distribution. Is there an opportunity to broaden countries you are already in?
[9:53 PM] Robert: Tim Cook in response to Katy Huberty question: Company growing faster internationally than domestically, but no softening of domestic demand for product.
[9:53 PM] Stephen: Over time phone market will become smartphone market. Lot of opportunity domestically to grow. Our growth as a company is faster internationally. Revenue in Americas is still up over 40%.
[9:52 PM] Stephen: Morgan Stanley: iPhone sales really strong Asia,Europe, and Japan. What about North America?
[9:51 PM] Stephen: Want to get to financial questions, will pass on answering.
[9:51 PM] Stephen: FaceTime: How will you turn that into an industry standard? What about windows, mac?
[9:50 PM] Stephen: Whenever we introduce new portables, we see an increase of portables. It's a move to mobility over desktops over the long run.
[9:50 PM] Stephen: Desktop Mac biz: Normally it's up from March-June. Any reason why it's not?
[9:49 PM] Stephen: Is the concern of developers misplaced? We value input of every dev, and listen and change accordingly. We're open to feedback.
[9:49 PM] Stephen: Most apps are approved in 7 days. Rejected mostly for bugs. Apple doesn't want porn on the store.
[9:48 PM] Stephen: We're always trying to make our customers happy. Just crossed $1 billion threshold of developer payments, and have introduced iAds.
[9:48 PM] Stephen: Charles Wolf: iPhone developers have complained about arbitrary App Store rules. Have Apple done anything to address this issue?
[9:47 PM] Stephen: iPad seems to be unique as it's beyond the early adopter stage. As far as competition, we can't predict what they'll do. We're extremely confident in our business model.
[9:46 PM] Stephen: iPad selling every unit that we can make [I feel like I'm transcribing a broken record]
[9:45 PM] Stephen: Sustainability of iPad demand after new product adopters?
[9:44 PM] Stephen: Tim: Have not seen Android results from June. Iphone sales are up 50%.
[9:44 PM] Stephen: Android based shipments are increasing. Where are you seeing competition from Android to iPhone?
[9:43 PM] Stephen: We will count cost of bumpers when we ship to customer.
[9:43 PM] Stephen: We will need to defer revenue for iPhone 4s that we sell where we've not delivered bumpers and where we have not heard from customers wanting to place an order.
[9:43 PM] Robert: My analysis: Management remains vague on numbers. No direct response on iPad margin question.
[9:42 PM] Stephen: Quantify impact of bumpers in Sept quarter?
[9:42 PM] Stephen: Purposefully agressive when launched iPad, and selling as quickly as we can make them. Always working down the cost curves. No different from other products.
[9:41 PM] Stephen: Bank of Montreal: Deferred iPhone accounting: Margins appeared to go up over time. Can same be said about iPad margins?
[9:41 PM] Robert: Analyst question: Will iPad margins rise over time?
[9:41 PM] Stephen: From last year, iPod touch sales are up.
[9:41 PM] Stephen: iPod ASPs down $7, driven by back to school promotion and stronger US dollar.
[9:40 PM] Stephen: iPod ASP fell from last quarter. Did iPad cannibalize iPod touch sales?
[9:39 PM] Robert: My analysis: Legacy iPhone models in the channel is to be expected. Not a worry.
[9:39 PM] Stephen: Have you been able to increase total inventory? iPhone 4 being sold as quickly as we make them. More work to do there.
[9:39 PM] Robert: Channel inventory on older iPhone models: 1.4 million iPhones at end of quarter. Inventory considerably less on those models now.
[9:37 PM] Robert: Accessories sales contributing to revenue growth and margin growth.
[9:36 PM] Stephen: Sanford Burnstein: 1/4 of Gross margin decline in next quarter is coming from iPads. What impacts on iPads on today's guidance?
[9:35 PM] Stephen: How is the datacenter build coming along? North Carolina is on schedule. We expect to complete by the end of the calendar year.
[9:34 PM] Stephen: How is iAd business coming? Peter: Just launched in early July, and we'll learn a lot to build a foundation for the future.
[9:34 PM] Stephen: Tim: Too early to tell. We've been only selling for 3 months, and still have best Mac quarter.
[9:33 PM] Stephen: Brian Marshall: Upside in Mac? Any thoughts how the iPad will take away sales from other product lines?
[9:33 PM] Stephen: What is the split between 3G and Wifi iPad sales? Peter: We don't disclose the details. All versions are extremely popular. ASP: $640
[9:32 PM] Robert: Again: Descriptive language used to explain demand and supply. No specifics on numbers.
[9:32 PM] Stephen: We think iPad market is really big, and iPad is defining market. We are investing heavily into market.
[9:31 PM] Stephen: Tim: We honestly don't know. Pleasantly surprised how fast it's taken to sell 1 mill iPads. Not following typical early adopter curve.
[9:31 PM] Robert: Question on the iPhone return rate: Returns are less on iPhone 4 than the 3GS. Antenna-related returns very low.
[9:31 PM] Stephen: When do you think the iPad supply and demand will be in balance?
[9:30 PM] Stephen: Rate of return on iPhone 4 is less than return of 3GS
[9:30 PM] Stephen: Tim: My phone is ringing off the hook for more supply. Hard to test if there's an effect until supply > demand.
[9:30 PM] Stephen: You haven't seen any slowdown in order rate online or increase on return because of iPhone 4 antenna?
[9:29 PM] Robert: My view: Management is purposely a bit vague on order rates and production.
[9:29 PM] Stephen: Since issues with antenna, has there been a change in demand? No. Selling every unit.
[9:29 PM] Stephen: Demand for iPhone 4 stunning; still catching up on demand.
[9:28 PM] Stephen: We do not purposely create a shortage to generate buzz.
[9:28 PM] Robert: Tim Cook: Company does not purposely constrain supply to create a "buzz."
[9:28 PM] Stephen: Why do we have shortages right out of the gate?
[9:26 PM] Stephen: Channel adjustment from 3Gs to iPhone 4. Total reduction was 1/4 mill
[9:25 PM] Stephen: Tim: We greatly scaled back 3GS volume; significantly lower sales after June 7 as we waited for official iPhone 4 launch.
[9:24 PM] Stephen: Gene Munster: How did iPhone 4 impact iPhone 3GS numbers?
[9:24 PM] Stephen: Gross margin for Q4, just introduced iPad & iPhone 4. These products have higher cost structures. On a sequential basis, gross margin will decrease.
[9:22 PM] Stephen: iPhone volume started ramping at the end of June. Not one specific thing that is holding back production.
[9:21 PM] Stephen: We thought iPad 1 mill / month capacity was bold. We easily met that capacity; quickly increasing supply to do that. Confident that we will be able to meet demand.
[9:21 PM] Robert: Tim Cook: Production of 1 million iPads a month was considered ambitious. Company is increasing capacity.
[9:21 PM] Stephen: High demand is never a problem -Tim
[9:20 PM] Stephen: Tim: Mac, no supply issues; none currently. Same with iPod. iPad/iPhone: very different. iPhone 4 & iPad backlogged, still selling as fast as we can make them.
[9:20 PM] Robert: Shares up to $259.68 after hours.
[9:19 PM] Stephen: CitiGroup: Supply Demand breakdown for each product category and supply constraints?
[9:19 PM] Robert: Tim Cook: High iPad adoption in large enterprises.
[9:18 PM] Stephen: iPad: 50% fortune 100 deploying/testing iPad. Incredible -Tim
[9:18 PM] Stephen: Focus still consumer/education, but business sales are picking up.
[9:17 PM] Stephen: Tim: iPhone up to 80% fortune 1 use iPhone, 60% fortune 5 piloting iPhone. 400 higher-ed approve iPhone for staff
[9:17 PM] Robert: Tim Cook: iPhone taking off in enterprise and education.
[9:17 PM] Stephen: What are you hearing from corps on iphone/ipad/mac?
[9:16 PM] Stephen: Now call is open to calls
[9:16 PM] Stephen: Very pleased with record June quarter, and iPad sales. Still catching up to customer demand.
[9:16 PM] Robert: From an analysis standpoint, eps of $3.44 is too low relative to revenue. Both revenue and earnings guidance should be easy to beat.
[9:15 PM] Stephen: Expect revenue to 18 bill in Sept quarter. 35% gross margins
[9:14 PM] Robert: $18 billion guidance for the 4th fiscal quarter.
[9:14 PM] Stephen: Free cases to iPhone 4 owners until Sept 30. Deferring revenue until cases shipped.
[9:13 PM] Stephen: 45 billion in cash reserves
[9:13 PM] Robert: $45.8 billion and cash and equivalents at the end of the quarter.
[9:12 PM] Robert: Shares up over $7.00 after hours. Shares now at $258.93.
[9:11 PM] Stephen: 1/2 macs sold were to ppl who never had owned mac before
[9:11 PM] Robert: 677k Macs sold at retail stores, 50% of buyers new to the platform.
[9:10 PM] Stephen: Retail Revenue: 2.85 billion
[9:10 PM] Stephen: iPad comes to 9 new countries on July 23
[9:10 PM] Stephen: Peter is going over the new features of iOS 4. Shipped 3.27 mill iPads
[9:09 PM] Robert: $640 ASP on the iPad in the quarter.
[9:09 PM] Robert: iPhone ASPs of about $595. Asia Europe and Japan for the iPhone.
[9:06 PM] Robert: Strong Mac sales across product lines. Record Mac sales in education.
[9:05 PM] Robert: The call has begun. A record quarter for Mac sales. A record quarter for revenue.
[9:04 PM] Stephen: Peter is now giving introductions.
[9:02 PM] Stephen: iPod Unit Sales
[9:01 PM] Robert: The call is about to begin... Apple waiting on more participants.
[8:59 PM] Robert: Stephen: Thanks for the graph. We'll know more in a few minutes if an uptick in education spending contributed to the superb Mac quarter.
[8:59 PM] Robert: Stephen: Thanks for the graph. We'll know more in a few minutes if an uptick in education spending contributed to the superb Mac quarter.
[8:58 PM] Stephen: Mac Unit Sales in thousands
[8:54 PM] Robert: iPhone unit sales for quarter are respectable, but most likely impacted by channel inventory draw down ahead of the iPhone 4's release. Consumer sales and activations are not the same as units shipped and booked as "sold" by Apple.
[8:51 PM] Robert: Mac unit sales are the pleasant surprise, beating most analyst estimates at 3.47 million units.
[8:51 PM] Stephen: I will be giving a play by play of the call while Robert flushes out the data with his analysis and commentary.
[8:50 PM] Robert: This is Robert Paul Leitao (aka DawnTreader)working with Stephen Swift on today's conference call.
[8:47 PM] Robert: Let's get ready for the conference call.
[8:46 PM] Robert: Earnings of $3.51 per share on revenue of $15.7 billion. An excellent quarter. Guidance of $18 billion for FQ4.
[4:57 PM] Stephen: http://tmo.to/live & @MacObserverLive - Live Coverage of Apple's Q3 Financial Results. July 20 @ 2 PM PDT / Your Time: http://bit.ly/dqVAC2
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