Apple, Inc. AAPL
Q2 2010 Earnings Call Transcript

Operator: Gene Munster, Piper Jaffray.

Gene Munster - Piper Jaffray: It’s clear that the iPad is off to a fast start, based on our work it looks like this is the potential to become the Mac of the masses, if you will. My question is, what insights have you gained in the last three weeks in the U.S. market in terms of gauging what the impact to the iPad has been on the demand for overall Mac; has there basically been any cannibalization? And I would guess there’s some data somewhere that would give us some insight to answering that question. Thanks.

Tim Cook - COO: If you look at last quarter, we made the announcement, as you know, of the iPad in January and in our view for last quarter, there was no obvious impact on either the Mac or the iPod. But you’re going to look at the numbers that we’re reporting and judge that for yourself. Going forward now that we’re selling into April, we really don’t have enough experience to come to a judgment. So we’ll see how it goes. We’re obviously thrilled with the sales of the iPad. They have far exceeded our expectations and we feel we’re off to a great start.

Gene Munster - Piper Jaffray: So let me just – a follow-up question, Tim, is throughout the March quarter, so if you’re going to look on a month-to-month basis, based on some of the third-party data we saw deceleration in the growth rate in Mac in the month of March, do you think any of that could have been attributed to potential people moving off from buying a Mac for an iPad and what would you attribute that maybe that step-down in the March too?

Tim Cook - COO: If you look at the previous March, Gene, the base quarter that you’re comparing to, we announced a new iMac and a new Mac mini, and so our compare point was to a month that we announced two new products versus a month that we didn’t announce any new Macs. So I don’t think you can really judge the Mac business on a month-by-month basis. I think looking at a longer period of time is correct. And certainly if you, our internal expectation was that the comparable would come down through quarter as it began to comp against those product.

Gene Munster - Piper Jaffray: My final question is just on the mix between 3G versus Wi-Fi. Any sort of flavor you can give us on how to model that out?

Tim Cook - COO: Honestly, it’s too early to tell because we’ve only been selling Wi-Fi other than the preorders and so we feel that we really need to be selling both models side-by-side in an unconstrained environment before we’re able really to know what the mix will be.

Operator: Ben Reitzes, Barclays Capital.

Ben Reitzes - Barclays Capital: I wondered if you could talk about your guidance and then a follow-up, you’ve talked about many margin hits sequentially. Can you talk about revenue, for example you have the iPad which you never had before which should help sequentially, usually Mac is up in the June quarter sequentially, and obviously iPods are usually maybe down a little, but can you talk about the puts and takes sequentially? Is there something going on with the iPhone where maybe there’s a transition that hit that sequentially, that’s why you’re guiding down revenues sequentially?

Peter Oppenheimer - SVP and CFO: We’re thrilled with the performance of our business and to be providing guidance year-over-year for growth of 34% to 38% for the June quarter. In coming up with that we factored several points into the guidance, including a sequentially lower ASPs from the beginning of the education buying season, a stronger U.S. dollar and product transitions. We’ve also factored in sequentially lower iTunes, which is typical as holiday gift cards are used in the March quarter and also sequentially lower accessory and software sales. For Mac, we would expect to see a sequential increase in Mac unit sales as a result of the beginning of the education buying season and the recent refresh that we just did in the Mac Pro line. For iPod, our in-stocks in this March quarter were better than last year, which helped us achieve the 10.9 million units. So this year, we would expect to see a bigger sequential decline in the June quarter than the 70% we saw last year. And for iPhone, we don’t have much experience with seasonality with our current country and carrier distribution. So we’re confident and very confident in our product that we’ll see what occurs and we’ll report to you in July. And for iPad, we’re thrilled with customer response to the iPad, and we’ll begin shipping both the Wi-Fi and Wi-Fi and 3G versions in the U.S. by the end of April, and nine additional countries by the end of May. So, we feel very, very good about the start of iPad.

Ben Reitzes - Barclays Capital: And then, Tim, and I guess, Peter, I wanted to hear more about iPhone. Why was it so good? The number was (actually frankly) staggering vis-�-vis expectations in my opinion, and there seems to be good strength overseas. Can you talk about why and what happened there, and it was – how was China and also channel inventory? Thanks.

Tim Cook - COO: Yes, sure. That’s a (little alive). On the channel inventory, our channel inventory was essentially flat from the beginning of the quarter compared to the end of the quarter. If you look in terms of the geographies, we had some staggering growth rates as you mentioned. If you look at Asia-Pacific as an example, the iPhone units in Asia-Pacific grew 474% year-over-year, Japan grew a 183%, Europe grew a 133%, and so these are some fabulous numbers, we’re seeing just incredible demand for iPhone. Some of this was led by adding eight carriers in some key countries, for example Vodafone in the U.K. and Ireland, as well as some other carriers in key countries in Asia. But we also had very strong performance from existing carrier partners, really around the world. And so, it was wide spread and just generally terrific results.

Ben Reitzes - Barclays Capital: And China met your expectations, Tim?

Tim Cook - COO: China has been interesting. If you look at Greater China, which we defined as Mainland China, Hong Kong and Taiwan, the iPhone units were up year-over-year over nine times and we added another 800 points of distribution in China. The revenue also – and we’ve never released this number before but I’ll do this in this particular case, through the first half of the fiscal year that we just completed, so the six months period, our revenue from Greater China was almost $1.3 billion, and this is up over 200% year-over-year. And so, we’re well pleased with how the Company is positioned to take advantage of the growth in Greater China.

Operator: Shannon Cross, Cross Research.

Shannon Cross - Cross Research: I was curious, could you talk a little bit about data points for the success of the App Store and how you are thinking about the App Store with the combination or the addition of the higher ASP apps related to the iPad?

Peter Oppenheimer - SVP and CFO: Shannon, we’re thrilled with the App Store, and I think, customers are loving it. We have seen well over four billion downloads from the App Store, and have over 185,000 apps and now over 3,500 apps for the iPad alone. And we’ve just begun shipping the iPad. Early in the first week we released some data about customer downloads related to the iPad. They are clearly loving it, and I think, it’s a very strong part of the overall product offering to customers.

Shannon Cross - Cross Research: Then Tim, can you talk a little bit about your production capacity on the iPad side, because clearly you pushed out – because of the demand in the U.S. you pushed out your international launch. So how are feeling about your ability to produce there? How quickly can you ramp up production? Are there any gating factors with any access to any commodity components or anything like that? Thanks.

Tim Cook - COO: Shannon, we’ve done very well versus our planned capacity, and so there is not a production problem per se. There is a – this is sort of a good kind of issue to have. The demand in the U.S. was much, much stronger than we predicted. And so regrettably, we had to push out the international launch to be able to launch the 3G unit in the U.S. and to get enough Wi-Fi units into the United States. And so, we are adding capability and we’ll see where this thing goes, but it has shocked us of the level of demand at least initially. We’ll see what happens from here.

Operator: Bill Shope, Credit Suisse.

Bill Shope - Credit Suisse: I may have missed it, but I didn’t hear you comment on component pricing in your gross margin outlook. Can you give us a sense of what you’re seeing in terms of component pricing trends and where are you seeing any signs of pressure or do you think?

Tim Cook - COO: Yes, Bill. Hi, it's Tim. The DRAM market is constrained, and we do expect higher pricing sequentially as a result of that. The bulk of the other commodities including the key commodities of NAND and LCDs and HDDs, we see generally in supply-demand (balance). In other components, we expect a decline consistent with historical trends.

Bill Shope - Credit Suisse: I know it’s early stage here, actually pre-stage, but can you help us understand how we should think about the economics of the iAd business. Is this a potential profit center or are you looking at it as a breakeven-type of business like iTunes and the App Store?

Peter Oppenheimer - SVP and CFO: We’re putting our toes in the water, so don’t expect much from us this calendar year. We think that we will learn a lot and build a foundation for the future.

Bill Shope - Credit Suisse: One final question, can you give us an update on where you think AT&T is with its network improvement plans and are you still comfortable that the performance of the network will be up to par this year?

Tim Cook - COO: I think they continue to work very, very hard and we look forward to continued improvement. They’ve clearly made big strides in some areas as some of the recent surveys have pointed out, and I think it will continue.

Operator: Toni Sacconaghi, Sanford Bernstein.

Toni Sacconaghi - Sanford Bernstein: Tim, you kind of eluded to the growth from new carriers versus existing carriers. I don’t know if it might be possible for you to quantify how much of the year-over-year growth came from new carriers or what percentage of the units were contributed by carriers that you did not have one year ago?

Tim Cook - COO: We don’t break it down at that level of detail, but Toni, I would tell you that both were very important to us, both the addition and the existing carriers. You can look at the number of carriers that we added which was eight, as I’ve mentioned, and out of the 151 carriers at the country level, it’s a good number but not a significant number, and so obviously the existing carriers performed very well in addition to the adds.

Toni Sacconaghi - Sanford Bernstein: Just taking that one step further, can you update us on your thinking about incremental distribution for the iPhone. A couple of calls ago, you talked about not really believing in exclusive distribution and really trying to broaden distribution as quickly as possible. I think on the last earnings call, it almost seemed like you had softened that and said, look, there may be regions where we actually don’t care to offer it beyond one carrier at our choice. Can you update us on your thinking about incremental distribution? How important is it? Is it available to any carrier in any country and how are you thinking about pricing the device for incremental distribution?

Tim Cook - COO: Let me see if I can word it like this, and there are three main countries where Apple’s has a contractual exclusive relationship, and that’s the United States, Germany and Spain. There are a few smaller countries where we have an exclusive or co-exclusive, but those three are the ones that are major markets. Over the past year, we’ve moved a number of markets from exclusive to non-exclusive, and in each case that we’ve done that, we’ve seen our unit growth accelerate and our market share improved, but that doesn’t mean that we view that that the formula works in every single case. And so I would just reiterate what I did last time is that that’s how we’re learning so far. That’s the results that we’ve seen so far. But we think very carefully about each of these at the country level to conclude what’s in our best interest.

Toni Sacconaghi - Sanford Bernstein: Let me just switch to one other topic, if I may, and Peter, I think this is probably for you. Bear with me, I’m going to just plug through some numbers. But you said gross margins are going to decline 600 basis points sequentially, and a quarter of that would be due to the iPad. That’s a 150 basis point negative impact from the iPad. If you assume the iPad has 10 points lower gross margin than the Company average, which is way, way lower than most third-party teardown services which suggest, it basically means that for that contribution to be true for your guidance, iPad would need to be 15% of your revenue or $2 billion. So either iPad is going to be more than $2 billion in terms of revenue per your guidance for next quarter and have a gross margin that is less than 10 points less than the Company average or the gross margins of the iPad are more than 10 points lower than the Company average. The math I think is pretty self-evident. So can you comment on whether we should be thinking about this devices having dramatically lower margins than the Company average or should we be thinking about this as something that has perhaps a bit more volume than many investors are thinking about?

Tim Cook - COO: Let me comment on the iPad margin first. As you know, we don’t give out specific margins for more products, but really refer to the Company’s gross margin. But that said, I would point out that when we priced iPad, we priced it very aggressively. In order to deliver tremendous value to our customers, and we think the market size for the iPad is very large, and we want to capitalize on our first mover advantage. So, as we’ve done in other products, although I’m not forecasting it, you can see that we have a good track record of riding down the cost curves with value engineering and volume manufacturing, or at least that’s certainly been our experience with other products. And so those are the things that I would point out, and Peter, you may want to add something to that or not.

Peter Oppenheimer - SVP and CFO: No, I think, that’s definitely our view.

Toni Sacconaghi - Sanford Bernstein: But the implication of riding down the cost curve would be unless you pass that on in the form of much lower prices, your margins are going to get better, so I gather that statement suggests that to the degree that you want to drive volume, you are going to be open minded about price changes.

Tim Cook - COO: We have nothing to announce relative to those things today. I’m just saying that we have a great product, it’s in great demand, we priced it extremely aggressively, and we did that because we believe that there is a huge market for us, and certainly our – the initial results suggests that that’s the case.

Operator: Richard Gardner, Citigroup.

Richard Gardner - Citigroup: Peter, you talked about the headwinds on gross margin going into the second calendar quarter, just in the spirit of balance I was hoping you might be able to talk about what you would consider to be tailwinds on gross margin going into June, and in particular whether you would consider component pricing overall to be a headwind or a tailwind in the June quarter sequentially?

Peter Oppenheimer - SVP and CFO: Rich, I don’t really consider component pricing to be a headwind or a tailwind, and Tim, I think answered in Bill’s question his view on what we’re going to see in the June quarter. And so, normally costs are by themselves necessarily a big factor. I think, what’s going to – what we think is going to occur in the June quarter is we’ve introduced a new product that we couldn’t be more excited about; we’ve been very aggressive and to take advantage of our first mover opportunity here. And then we’ve got some other transitions, we’ve got a stronger dollar and we’re heading into the (indiscernible) buying season which we anticipate being competitive this year. So, that’s what’s really gone into our thinking on gross margins.

Richard Gardner - Citigroup: Okay. And then I wanted to ask you about the accounting treatments for the iPad; whether you could give us a sense of whether you’re going to be deferring a portion of the revenue associated with iPad software upgrades or whether you’re going to be charging for these upgrades?

Peter Oppenheimer - SVP and CFO: We’ll discuss that with you on our July conference call, when we report the June quarter results which will include our first shipments of iPad.

Richard Gardner - Citigroup: And then the final one from me is could you talk about the performance of your China stores in particular and your plans for additional store openings in China this year?

Peter Oppenheimer - SVP and CFO: Sure. We’re very excited about China, not only for retail but for Apple, and Tim talked about success that we’ve had in Greater China to-date with revenue being up about two times year-over-year. But as regards to retail stores, we will open two stores in Shanghai this summer, and we target having about 25 stores opened in China by the end of calendar 2011.

Operator: Maynard Um, UBS.

Maynard Um - UBS: If I look at your iPhone units across your 151 operators, it’s roughly about 58,000 units per operator, so understanding that some operators are smaller and others larger, can you just talk about the dynamics there, how you drive those units up more materially on a per operator basis?

Tim Cook - COO: Well, the 58,000 to be honest with you is not a very meaningful number because the variances that’s from one particular carrier that does a few million to some that do very, very low numbers, so the average itself isn’t very meaningful. The things that we do to drive overall iPhone demand is focused on product innovation, and that’s software that hopefully you saw with the preview that we gave of the new iPhone release that will be coming this summer. It’s new hardware and new product; it’s new distribution point; it’s additional carriers and geographic expansion which we’ll continue to do and so it’s really all of those things and great marketing.

Maynard Um - UBS: Great. And I have a second question. Apple’s been a little bit more aggressive defending its patent portfolio against infringement. Doesn’t really look like we’re seeing an impact here to OpEx, but I’m just curious how we should think about legal expenses relative to your operating expenses? Thank you.

Peter Oppenheimer - SVP and CFO: It’s Peter. We have certainly factored into the guidance, we’ve given you for the June quarter and results we’ve reported for March are legal and all of our other expense. So, whatever we’re incurring in that area is included.

Operator: Brian Marshall, Broadpoint AmTech.

Brian Marshall - Broadpoint AmTech: I guess some of the iPhone upside I was expecting last quarter actually happened this quarter, and based on my calculations, your international carrier partners probably represented roughly 75% of the mix with the iPhone shipments in the quarter. And taking that one step further, I think you’re roughly a 100 basis points penetrated of that international carrier base, call the postpaid sub-base of those total carriers, roughly 0.5 billion units. So I guess the question is, have you learned any lessons with regard to how the international markets have ramped up relative to what we’ve experienced in the U.S. over the past 2.5 years?

Tim Cook - COO: Brian, I think the key thing is that the smartphone category specifically is a great market to be in. It has a very high growth rates from a market point of view and Apple with the iPhone unit growth of a 131% grew the market by 3X. And so we feel great about that, and those numbers were even better outside the U.S. and inside the U.S. We’ve learned a number of things and we are trying everyday to take everything that we’ve learned and do something better from a product point of view, do something better from distribution and carrier relationships, and so on and so forth. So I wouldn’t want to go into each of those on here because I don’t want anybody to copy those.

Brian Marshall - Broadpoint AmTech: With regard to the Apple TV, clearly it seems as though you guys have been very successful attracting additional media and content on the iTunes and App Store platform. So I guess I was wondering if we can get an update on the ambitions with regard to the Apple TV. Clearly, broadband is still somewhat lagging in terms of quality of service I think and that’s an area that needs to get better, but just want to get your thoughts there?

Tim Cook - COO: The units were up for the quarter 34% year-over-year, but the absolute number of units are still small and we still classify the product as a hobby for the Company. And I would just repeat what I probably said before is that if you look at the other markets that Apple is in, the Macintosh competes in a market of 300 million or so units a year, the iPhone competes in a market, if you look at all phones, maybe 1.2 billion a year, the iPod competes in a market that has 100 million plus or minus units in it per year. And so these are enormous sized markets and clearly the market that Apple TV is in is not in our view nearly that large as yet. And so that’s the reason we classify as a hobby so that no one gets the wrong impression that we have a vision that it's anywhere close to the size of the other businesses. However, a number of us love the product, use the product and we continue to think there’s something interesting there and continue to invest in it.

Brian Marshall - Broadpoint AmTech: I’ll find a question with regards to the iAds. And I guess do you think this could be a significant source of potential incremental earnings down the road as I think what you offer advertisers is a pretty compelling demographic and user base with the information and the emotion that you’re able to convey?

Peter Oppenheimer - SVP and CFO: As I think I commented on a prior question, at this point we’re putting our toes in the water, so we don’t expect much this calendar year. We think we’re going to learn a lot and we’ll look to build the foundation for the future.

Operator: Mike Abramsky, RBC Capital Market.

Mike Abramsky - RBC Capital Market: Just wondering why you didn’t see or whether you expect any Touch cannibalization from the iPad? What’s your stance for it? Do you think iPad is cannibalizing maybe competitive NetBook?

Tim Cook - COO: I can only tell you that in the quarter that we finished, the Q2 that we finished in March, that although we announced the iPad in January, there was nothing obvious in the iPod numbers or the Mac numbers to suggest cannibalization. There’s an obvious difference between announcing and people know it’s coming and it’s starting to sell, and so that part of the equation, we don’t know yet, we will find out. We are thrilled with how the iPad is selling and the enormous response that we’ve received. We also announced new MacBook Pros that you probably saw last week and the whole line change, so we're also happy about how the Mac business is positioned and the level of product innovation. And there’s notebook, it's enormous, taking battery life up to 10 hours. It’s absolutely amazing. In terms of the iPad competing for customers who are considering a NetBook, I am the wrong person to ask that because to me it’s a no-brainer. iPad, NetBook, it’s sort of a 100 to zero. I can’t think of a single thing that NetBook does well. And iPad does so many things very, very well. I am already personally addicted to mine and couldn't live without it. So I’m probably not the right person to ask that just yet.

Mike Abramsky - RBC Capital Market: Well, Tim, you just talked about, you see it as a huge independent category, and given all the public debate over its positioning, which you obviously have some strong views on. Can you elaborate on why you see it as a huge independent category given it’s a new market? You just sort of listed off a bunch of markets that are preexisting, but you’ve stated in this case, you also feel without that preexisting market, it is big. And why do you think Apple’s approach will outpace that of say competitor tablets or vertical devices like e-book?

Tim Cook - COO: I think, Steve did this extremely well as usual in positioning the product in the January announcement when he talked about that if a product category were to exist between the notebook and the smartphone, then it would need to something better than either of those. And I’m just saying from my personal use, there is a variety of things that I would put on that list, and I love notebooks personally, but I would put e-mail on it, I would put browsing on it, listening to music, watching videos, watching TV shows of any type, reading book, and the list goes on. And of course you have the entire App Store and the ecosystem build around that, and so people that like to play games as well, they now have that large canvas to play games on and other apps, from serious apps to less serious apps, the larger canvas provides a artist a lot more room to do things that are very cool. And so, I think that it is a new category, and certainly, it’s early, but we really, really like what we see right now. We had what we thought were high hopes and it has exceeded those. And so, I mean, that’s all I can offer for now. But I’d love to talk to you in July and tell you how the quarter went for the June quarter.

Operator: Katy Huberty, Morgan Stanley.

Kathryn Huberty - Morgan Stanley: Tim, in a previous question you walked through some of the incremental demand drivers for the iPhone. The one you left out was price, because Apple along with the carriers has done a good job lowering the price of the hardware over the last couple of years. But with the low end at $99, it seems that the incremental demand from here would come from more affordable monthly service plans. And so, I guess, my question is whether Apple has any influence via the carriers to get more aggressive on the total cost of ownership for the iPhone? And then just have a quick follow-up on the iPad?

Tim Cook - COO: We do everything that we can Katy to try to get the best deal possible for the consumer. And by the way, I feel like each of the carrier partners we work with want to do the same. And so, I think everybody is focused on that. When we dropped the subsidized price of the phone to $99 last year, we were actually surprised that the (mix) to the 3GI was very, very high. And as you know, that one starts at $199. And so, I think it’s important – I think that the price is important of the device. I think, there are other things that people really want, like an extremely innovative product, and all the apps and the ecosystems, and the great OS and the incredible hardware that we’ve got. And so I just think it’s one of the factors.

Kathryn Huberty - Morgan Stanley: Got it. And then just as a follow-up on the discussion around margins for iPad, Peter, one of the upside drivers of revenue and margins for the iPhone has been the aftermarket sale of things like accessories. What have you considered about attach rates to the iPad relative to what you’ve seen on iPod and iPhone, and could that maybe be an upside driver to gross margins for that portfolio over time?

Tim Cook - COO: Katy, the accessory portfolio is good for us, and the over 5,000 accessories that work for the iPhone and the iPod largely work for the iPad. We have come out with some great accessories for the iPad in the first weeks and the developer community is rallying around it as well. So, let’s give it a little time, and presumably some great things will happen there, just like it has for iPhone and iPod.

Operator: Keith Bachman, Bank of Montreal.

Keith Bachman - Bank of Montreal: I wanted to ask about Retail. Peter, in you same-store sales comment, I think the retail same-store sales were up about 7%, and total retail was up about 22% in terms of revenues, and therefore as investors look out, is the retail number really driven by new store openings or is there something unusual that was going on? But, if you could just give a little bit of color on the drivers of the retail business, that’d be great.

Peter Oppenheimer - SVP and CFO: Sure. Our retail stores had a great March quarter. The average increase of revenue per store was actually up 8%, and this was the best that we had seen in six quarters. The Mac did incredibly well in the stores, up 38% overall, same-store Mac sales were up over 20%. The Phone did well, and I think the stores are going to really be a great place for customers to come and look at and buy iPads. So we’re very confident in our retail stores, the experience that it’s giving customers, and finally after 10 years of retailing, we are just ecstatic about the fact that roughly half of the Mac sales that occur each quarter are to people that have never owned a Mac before.

Keith Bachman - Bank of Montreal: Great, Peter, it would seem that the data has been fairly consistent but the revenue growth in retail, at least that category, is dependent upon new store openings?

Peter Oppenheimer - SVP and CFO: Again, the average store was up 8%, and in the quarter, our average revenue was $5.9 million. So if you annualize it, that’s incredibly high by retail standards, particularly for the size of store that we have. So, Keith, I would see good growth coming not only from new stores that we opened, but the stores that we’ve had open for a number of years are performing very, very well for us, and cash flow from those stores is quite strong.

Keith Bachman - Bank of Montreal: But I want to ask one follow-up if I could. I know Rich had asked about the iPad, but could you at least let us know where that would be categorized as a line item, will be independent or included in something else?

Peter Oppenheimer - SVP and CFO: We’re going to report the iPad very similar as we do iPhone. It will be a line item on our data summary and the revenue that we report will be for the iPad units and the iPad specific accessories. Again, similar to what we do for iPhone.

Operator: Yair Reiner, Oppenheimer & Company.

Yair Reiner - Oppenheimer & Company: I recognize that the iPad is still very much in early days, but have you been able to pick out anything about the app performance? Are consumers buying different kinds of apps than they typically have for the iPhone and is the ASP panning out to be different than the type of apps people have bought for the Phone to this point?

Peter Oppenheimer - SVP and CFO: Again, it’s very early days. We’ve put out some information after the first couple of days. Customers are loving the iPad. They are going to the App Store and getting apps, getting books, so it’s been really just a great thing for customers. But we’ll talk more in the future about how that goes. I would say that we are not focused on trying to make a lot of money on the App Store, just as we haven't on the iTunes Store. We run the store a bit over breakeven and we just want to offer tremendous value to customers.

Yair Reiner - Oppenheimer & Company: Europe appears to be performing exceptionally well. Can we finally say that you are seeing a halo effect from the iPhone there and to what extent has that been playing out at the stores? Are more than 50% of Mac buyers in European stores New to Mac?

Peter Oppenheimer - SVP and CFO: We tend to not break it down by country but I can tell you that we are thrilled with our New to Mac all over the world.

Yair Reiner - Oppenheimer & Company: One final question for me. Peter, you mentioned $600 ASP for the iPhone, does that include the ratable revenue from software or is that purely for hardware?

Peter Oppenheimer - SVP and CFO: It’s based on the sales value of the iPhone. So it doesn’t include anything from carrier payments, any of the deferral or accessories. So it’s the sales value in the quarter of the handset sales.

Operator: Mark Moskowitz, JPMorgan.

Mark Moskowitz - JPMorgan: Tim, earlier you mentioned that the Apple is shocked about the reception in the U.S. for the iPad. Can you talk about how you’re shocked in terms of customer penetration? Are there any customers in the early days that are taking the iPad that are completely new to Apple?

Tim Cook - COO: Of course. The numbers right now are so preliminary and based on such small amount of time that we don’t read a lot into those. And so they are not something we would disclose at this point.

Mark Moskowitz - JPMorgan: Then not pulling too far beyond the iPad, but in the prepared release, you guys stated there are other extraordinary products in the pipeline after this year. Are those incremental categories similar to the iPad or are they just enhancement of existing products?

Peter Oppenheimer - SVP and CFO: We’re just not going to help our competitors, so that’s not a question I can specifically answer for you. But let me reiterate, we are very confident in our new product pipeline and are very excited about the coming months.

Mark Moskowitz - JPMorgan: And then just lastly, Peter, in terms of the education vertical, as far as the commentary around the margin hit for June, how much of that is driven by competitive dynamics versus maybe just your own ability here to try to crop up demand because of the trouble still faced in some of the school districts out there?

Peter Oppenheimer - SVP and CFO: Well, you’d read the same things we do about the state budget situations and the school district is under a lot of pressure in pretty much every state across the country. I’ve seen no evidence that we are losing market share in education, and so I think, it's really just a budget issue. And we’ve now entered in the June quarter, the education buying season. June tends to be more dominated by K-to-12, and then September will be more dominated typically by higher ed. And this year, we expect it to be competitive, but we’re going to put on our uniform, stood up, and we look forward to competing.

Nancy Paxton - IR: Thanks to everyone for joining us. A replay of today’s call will be available for two weeks as a podcast on the iTunes Store, as a webcast on Apple.com/investor, and via telephone. And the numbers for the telephone replay are 888-203-1112 or 719-457-0820, and please enter confirmation code 5473920. And these replays will be available beginning at approximately 5.00 pm Pacific Time today. Members of the press with additional questions can contact Steve Dowling at 408-974-1896, and financial analysts can contact Joan Hoover or me with additional questions. Joan is at 408-974-4570, and I am at 408-974-5420. Thanks.