Operator: Good day, ladies and gentlemen, and welcome to today’s Apple Inc. Third Quarter Fiscal Year 2010 Earnings Release Conference Call. Today’s call is being recorded.
At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma’am.
Nancy Paxton - IR: Thank you. Good afternoon and thanks to everyone for joining us. Speaking today is Apple's CFO, Peter Oppenheimer. He will be joined by Apple's COO, Tim Cook and Treasurer, (Gary Wipfler), for the Q&A session with analysts.
Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenues, gross margins, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings per share and future products. Actual results or trends could differ materially from our forecasts.
For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2009 as amended, the Form 10-Q for the first two quarters of fiscal 2010 and the Form 8-K filed with the SEC today, along with the attached press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of the respective dates.
With that, I’d like to turn the call over to Peter Oppenheimer for introductory remarks.
Peter Oppenheimer - SVP and CFO: Thank you, Nancy. Thank you for joining us. We are extremely pleased to report outstanding results for the June quarter. During the quarter, we began shipping iPad to millions of delighted customers in 10 countries. We launched the very popular iPhone 4. We shipped iOS 4 with many great new features and we set a new all time record for quarterly Mac sales. We're shipping the best products in Apple's history and the response from our customers has been terrific and as a result, we're thrilled to announce today our highest quarterly revenue ever surpassing the previous record set in the most recent holiday quarter.
Revenue was $15.7 billion, an increase of $6 billion or 61% over the prior June quarter's result. The tremendous revenue growth was driven primarily by the very successful launch of iPad in addition to strong sales of iPhone and Mac. Operating margin was $4.23 billion, representing 27% of revenue. Net income was $3.25 billion, up 78% over the year ago quarter, and earnings per share were $3.51.
Turning to the details of our results, I'd like to begin with our Mac products and services. We generated record quarterly sales of 3.47 million Macs exceeding the previous record established in the most recent December quarter by over 100,000. This represents 33% year-over-year growth compared to IDC's latest published estimate of 22% growth for the market overall in the June quarter.
We are pleased to have outgrown the global market in both the desktop and portable categories. We experienced strong double digit Mac growth in each of our geographies led by both the continued momentum of iMac in the very popular MacBook Pro family which was updated in April with faster processors, more powerful graphics, and even longer battery life.
We are also pleased to report record Mac sales in our U.S. education institution business despite state budget constraints. We began and ended the quarter with between three and four weeks of Mac channel inventory.
Moving on to our music products, we sold 9.4 million iPods compared to 10.2 million in the year ago quarter. Sales of iPod touch continue to be very strong with sales growing 48% year-over-year. The continued mix shift toward iPod touch resulted in an overall iPod ASP increase of 12%, generating total iPod revenue growth of 4%.
iPod share of the U.S. market for MP3 players remains at over 70% based on the latest monthly data published by NPD. iPod also continues to be the top selling MP3 player and to gain share internationally year-over-year in nearly every country we track based on the latest data published by GfK.
The iTunes Store had another great quarter with revenue exceeding $1 billion and growing 25% year-over-year. The App Store continues to be an unparallel success with more than 225,000 apps available, including more than 11,000 apps specifically for iPad. iPhone, iPod touch, and iPad users have downloaded over 5 billion apps from the App Store.
We ended the quarter within our target range of four to six weeks on iPod channel inventory.
I'd now like to turn to iPhone. We were very pleased with iPhone sales of 8.4 million, including over 1.7 million iPhone 4s in the initial five countries where it was launched. This represents 61% year-over-year growth and is considerably higher than IDC's latest published estimate of 38% growth for the global smartphone market overall in the June quarter.
Customers are loving the great new features of iPhone 4, including FaceTime for video calling, the high-resolution retina display, HD video recording, and the beautiful new glass and stainless steel design. Recognized revenue from the iPhone handset sales, accessories sales and carrier payments was $5.33 billion during the quarter compared to $3.06 billion in the year ago quarter, an increase of 74%. The sales value of iPhones alone was about $5 billion, which yields an ASP of about (indiscernible) to an amazing start, and we're extremely pleased with customer response to sales to-date.
Through the end of the June quarter, we shipped 3.27 million iPads to customers in 10 countries. Recognized revenue from sales of iPad and iPad accessories during the quarter was $2.17 billion. The sales value of iPads alone was almost $2.1 billion, which yields an ASP of about $640.
Feedback from customers continues to be outstanding as more and more of them experience iPad and take advantage of its multi-touch user interface, large screen, and high quality graphics to browse the web, read and send email, read e-books and much more. We look forward to bring in iPad to customers in non-additional countries on July 23.
I’d now like to turn the Apple Retail Stores, which had an outstanding quarter generating record revenue and customer traffic. Retail revenue was $2.58 billion compared to $1.49 billion in the year ago quarter, an increase of 73%.
Our stores sold 677,000 Macs compared to 492,000 Macs in the year ago quarter, an increase of 38%. About half the Macs sold in our stores during the June quarter were to customers who had never owned a Mac before. We opened seven new stores during the quarter, including four in U.S., two in Australia and one in Canada, ending with 293 stores. With an average of 287 stores opened during the June quarter, average revenue per store was $9 million compared to $5.9 million in the year ago quarter.
Retail segment margin was $593 million compared to $387 million in the year ago quarter. We hosted a record 60.5 million visitors in our stores during the quarter compared to 38.6 million visitors in the year ago quarter, an increase of 57%.
We expect to open 24 stores this quarter, including our fabulous new stores in Paris and Shanghai which opened earlier this month, our Covent Garden Store in London and our first two stores in Spain to be opened in Barcelona and Madrid.
Total Company gross margin was 39.1%, which was 310 basis points above our guidance. This difference was driven by two categories of factors. The first category accounted for a little over half the difference. When we provided our guidance for the June quarter, we identified five things that we expected to drive a sequential decline in gross margin from the March to June quarters.
These were the first quarter of iPad sales, a stronger U.S. dollar, our portable Mac transition, the beginning of the education buying season and the iPhone 4 transition. Collectively, these things did have an impact sequentially but to a lesser extent than we had anticipated in our guidance.
The second category of factors which accounted for the remainder of the difference consisted of unanticipated favorable adjustments as well as leverage on the higher than expected revenue.
Operating expenses were $1.9 billion and included $181 million in stock-based compensation expense. OI&E for the quarter was $58 million. Our tax rate for the quarter was 24.2%, about 3 points below our guidance as a result of two factors. First, we had a better mix to foreign earnings and this accounted for about two-thirds of the difference. Second, we finalized favorably some prior year U.S. tax audits accounting for the remainder of the difference. As a result of the better mix of foreign earnings we have lowered our expected fourth quarter tax rate from 27% to about 26.5%.
Turning to cash, our cash plus short-term and long-term marketable securities totaled $45.8 billion at the end of the June quarter compared to $41.7 billion at the end of the March quarter, an increase of $4.1 billion. Cash flow from operations was $4.8 billion. Our investment priority for cash continues to be preservation of capital, and we are continuing to focus on relatively short-dated, high quality investments, and remain comfortable with our investment portfolio.
Looking ahead to the September 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 we announced on Friday, we will be offering free cases to all customers who have purchased an iPhone 4 through September 30. As a result, we will be deferring revenue corresponding to the value of the cases that has yet to be ordered by or delivered to eligible customers under this offer as of the end of the September quarter. We estimate this deferral to be about $175 million, and we expect this September quarter deferral to be recognized as revenue in the December quarter. We will recognize the cost of the cases upon delivery to our customers.
We expect revenue to be about $18 billion compared to $12.2 billion in the September quarter last year. We expect gross margins to be about 35% reflecting approximately $14 million related to stock-based compensation expense. We expect most of the sequential decline to be due to a higher mix of the iPhone 4 and iPad sales, which have higher cost structures and provide great value to customers as well as the revenue deferral impact of the iPhone 4 case offer.
To a lesser extent, we expect the sequential decline to be driven by back-to-school promotion and the absence of the favorable adjustment that benefited gross margin in the June quarter.
We expect OpEx to be about $2 billion including about a $195 million related stock-based compensation expense. We expect OI&E to be about $50 million reflective of the short-term interest rate environment, and we expect the tax rate to be about 26.5%. We are targeting EPS of about $3.44.
In closing, we're thrilled with our record June quarter revenue and strong financial performance. We're very pleased with sales of iPad and iPhone 4. We’re working hard on catching up with customer demand for these great products and we look forward to rolling them out to even more customers and more countries this quarter.
We are very pleased with the market share gains for our iPhone, Macs, and iPod, and remain very confident in our new product pipeline.
With that, I'd like to open the call to questions.
Operator: Shannon Cross, Cross Research.
Shannon Cross - Cross Research: Could you talk a bit about what you're hearing from corporations on their thoughts on the iPhone, the iPad and Mac, just what you're seeing in terms of corporate adoption?
Tim Cook - COO: If you look at the iPhone, we are now up to more than 80% of the Fortune 100 that are deploying or piloting the iPhone, and we also see very good momentum in the Fortune 500. In fact, over 60% of the Fortune 500 are deploying or piloting iPhone. This is also transcending into education institution, and we see around 400 higher education institutions which have approved the iPhone for faculty, staff, and students, and so iPhone is really taking off, and iOS 4 was another help in doing that. In terms of the Macintosh, you can see that Mac had an incredible quarter. We're still selling principally to consumer and education, but we are seeing businesses with increasing interest in the Mac, it's more difficult to measure because many of those sales are still through the channel. But, we're obviously thrilled with growing 33% year-on-year.
Shannon Cross - Cross Research: And then the iPad?
Tim Cook - COO: The iPad, very surprisingly in the first quarter. So in the first 90 days we already have 50% of the Fortune 500 that are deploying or testing the iPad, it’s incredible. That’s the Fortune 100 – excuse me.
Shannon Cross - Cross Research: That’s great. Then I had a follow-up for Peter. When you talked about the gross margin upside this quarter you mentioned about half of that came from those five areas performing better than you’d expected. Can you give us anymore specifics on why exactly those areas were better than you’d anticipated?
Peter Oppenheimer - SVP and CFO: Sure. Shannon, the largest contributors were higher iPhone sales than we had included in our guidance and also higher accessories sales as well.
Operator: Richard Gardner, Citigroup.
Richard Gardner - Citigroup: Tim, I wanted to start just by asking you to give us a supply/demand breakdown for each of the product categories if you would and talk about any notable supply constraints within each product line and how severe they are and when you expect it to be alleviated?
Tim Cook - COO: Rich, starting with the Mac, there were no significant supply/demand issues during the quarter, and there are none currently. On the iPod, it’s the same, none significant last quarter and none currently. The iPad and the iPhone are significantly different. Both of these products, the iPad and specifically the iPhone 4, we had backlog at the end of last quarter that we were not able to fill. And currently, we are still selling both of those products as fast as we can make them. So we still are quoting longer lead times than we like and we’re looking around the clock to try to get supply and demand at balance. In the schema things, it's a good problem to have.
Richard Gardner - Citigroup: And Tim, are you willing provide any additional color on what's causing – what the sources of constraint are and when you expect this to be alleviated or is it just simply a demand problem and not so much a supply problem?
Tim Cook - COO: I don't think – high demand is never a problem. On the iPad, as I've mentioned in last quarter that we went into the iPad thinking that planning a 1 million per month capacity was a very bold move. In fact, if you look at a lot of the industry analysts who are predicting that we would only sell somewhere around that number for the whole calendar year. As you know, we did 1 million in the first month and then the second million in the second month and third million in the third month. So basically, what we're doing is, we're increasing capacity as quickly as we can and there is a number of things that we have to increase in order to do that. But I am fairly confident that we will be able to increase the capacity. It's not a situation where there is something profound that we can't – that we can't eventually increase. The iPhone, we just started ramping at it in June. We had very limited days last quarter. As you know, we launched on the 24th, and quarter ended on the 26th, and we are still ramping and increasing volume. But again, there is not a specific thing that is a overwhelming (gauge). It's just a matter of getting up the round.
Richard Gardner - Citigroup: Then if could, Peter, you mentioned actually the mix of iPhone 4 and iPad sale as a negative for gross margin this coming quarter, and iPhone 4, well iPhone in general, I guess, has typically had margins that are well above the corporate average. I'm just wondering why you would put that on the negative side of the ledger for gross margins for September, and was hoping you could tell us – give us a little more detail on the adjustments that positively affected the gross margin in June?
Peter Oppenheimer - SVP and CFO: Sure. Let me start with your second question. I don’t want to go into a lot of specificity there, but we did have some adjustments that occurred in our supply chain and some other product cost that benefited us in June. They were the larger contributor of the second set of factors that I outlined for you. As regards to our gross margin for the September quarter, look we've just introduced the iPad and the iPhone 4. We are delivering great value to customers and these products have higher cost structures and in the case of the iPhone 4, it has a higher cost structure than the predecessor product that we were shipping, so while the margin there is attractive on a sequential basis. We have been pretty aggressive here with pricing and it's going to play through a bit on the margin line.
Operator: Gene Munster, Piper Jaffray.
Gene Munster - Piper Jaffray: The iPhone number was strong despite a lot of moving parts in the channel in terms of inventory this quarter versus a year ago, when you launched the 3GS. Can you talk a little bit about what those dynamics were and how they impacted the $8.4 million unit number you've put there?
Tim Cook - COO: We greatly reduced shipments of the previous generation iPhone beginning around June, the 7, which was the – our Worldwide Developers Conference and coincided with the announcement of the iPhone 4. But as you probably know, we did not launch the iPhone 4 and the new 8-gigabyte 3GS until June 24, which was only three days before the end of the quarter. The result of that was that we had significantly lower sales after June the 7 for that period of time, as we waited on the official launch. In fact, if you looked at our year-over-year growth rate prior to June 7, it was around 90%. As you know, we exited the quarter, you can see this from the data sheets, we exited the quarter with total iPhone sales, up 61%. So basically we did a channel adjustment. We pulled the previous generation of iPhones down significantly in channel inventory. We increased from zero the iPhone 4 inventory, and the inventory of the 8-gigabyte 3GS, and the net reduction in the channel was about a quarter of a million units from the beginning of the quarter. In that we'd remind you that as you probably guessed the run rate associated with the sales of the new product are larger than the run rate associated with the sales of the old product. So in terms of any kind of weeks of inventory, it would be much less than what we were running before.
Gene Munster - Piper Jaffray: So last quarter, I think your comment was you had about 2.7 million units in the channel, is that correct?
Tim Cook - COO: Yeah, that's right. So we ended with about 2.45, and if you look at the ins and outs in that just to give you the numbers. The previous generation drawdown by the end of the quarter was slightly less than 1.3 million. And the combination of iPhone 4 and iPhone 3GS was up about 1 million. And the vast majority of that million was in transit at the end of the quarter not available for sale.
Gene Munster - Piper Jaffray: So is it safe to say that you would have printed around 8.7 million iPhones if assuming more of a normalized inventory levels throughout the quarter?
Tim Cook - COO: If we would have held inventory flat from the beginning of the quarter, we would have done a little over 250,000 more units. However, what we really wanted to do is the – if the opportunity quite frankly is to take inventory up quarter-over-quarter, beginning of the quarter, to end of the quarter because the sales run rate was larger at the end of the quarter with the new product.
Gene Munster - Piper Jaffray: And then just quickly I have a philosophical question that I can understand why you guys run out of products and then iPad comes out, it’s the first time you are doing it, but these shortages that we have right out of the gates, can you just give us any insight? There is obviously a lot of talk do you guys purposely do this to just to create buzz. I suspect that that’s not the case. But can you give us any insight into a Company that understands how to build products as well as you do that we still have these problems going into these product lines.
Tim Cook - COO: Well, on the – let me answer that in two different ways, if you look at the previous generation product, we called the number of units that we’re going to sell many weeks beforehand, and when we run out we’ve run out and quite frankly, we tend to manage that aggressively on purpose because we would (– rather) the market move very quickly the new product. And that’s what happened here, and frankly speaking, I’m glad that it happened and it’s exactly the way that we want to manage it. In terms of the new product, we do not purposely create a shortage or buzz. I am not sure where that comes from but that's certainly not our objective. We would like to fill every customers’ order as quickly as we can. The demand for iPhone 4 is absolutely stunning, and we're working very hard to catch up with demand and I can't predict when that will occur, but I can tell you that we're – everyone's working very hard to do it.
Gene Munster - Piper Jaffray: Just last question, and I'll turn it over is that since the issues with the antenna, have you seen any changes in demand for – or what changes have you seen in demand for iPhone 4?
Tim Cook - COO: Gene, let me be very clear on this. We are selling every unit we could make currently.
Operator: Ben Reitzes, Barclays Capital.
Ben Reitzes - Barclays Capital: I guess I just want to elaborate on that last question a little more, Tim. So you haven't seen any slowdown in order rates online or your lead times remain the same. Is that what you mean you haven't seen any slowdown in order rates or any increase in returns that are noticeable in the marketplace?
Tim Cook - COO: Ben, my phone is ringing of the people that want more supply. So, right now it's hard to test the real question that you are asking about is there an effect or not, because we're selling everyone that we can make and so you can't run the experiment both ways.
Ben Reitzes - Barclays Capital: And on the return issue, is there anything noticeable maybe a easy answer to it, we're not seeing a huge blip up, but are you?
Tim Cook - COO: The returns that we've seen on the iPhone 4 are less than the iPhone 3GS, as Steve shared in the presentation of products, and the ones for this specific issues are extremely small.
Ben Reitzes - Barclays Capital: Moving on with regard to the iPad, when do you think supply and demand will be in balance? Is it – and maybe if you can refer back to your experience with other products that have falling demand, and when you got the equilibrium or is there any other experience that's comparable to that, that you can give us any indication of when you feel like, there could be an equilibrium (indiscernible)?
Peter Oppenheimer - SVP and CFO: We honestly don't know is the answer. We have been pleasantly surprised at how fast this product has gotten out of the shoot. If you look at how long it took us to sell the first million iPods, the 20 plus months versus the one month of iPad, it’s a phenomenal difference. It is not following a typical early adopter curve, and then it's taking a long time to cross into the mainstream, and so I don’t know how high is high. Our guts tell us that this market is very big and we believe that iPad is really defining the market, and we want to take full advantage of it, and so we are investing enormous time and resource in increasing our capability in getting iPad out to as many people as we can.
Ben Reitzes - Barclays Capital: Okay. Then just finally, maybe, Peter, for you, are you surprised on how many people want the 3G product for the iPad and since you launched that product, what is the split between 3G and Wi-Fi?
Peter Oppenheimer - SVP and CFO: Ben, We don't – we're not going to disclose the splits between that, but all of the models have been very popular. As I commented in my prepared remarks, and Tim just did that, the demand has just been amazing, and this is off to an incredible start, and overall ASP in the June quarter for iPad was about $640.
Ben Reitzes - Barclays Capital: Well, it just would seem like that's the base ASP, because now you have a better mix of 3G, so that might be the low point, but – okay, I'll leave the floor.
Operator: Brian Marshall, Gleacher & Company.
Brian Marshall - Gleacher & Company: Question with regards to the upside that you saw in the Mac as well as the iPhone units, I mean that's pretty impressive considering iPad came in very strongly this quarter as well. So, do you have an updated thoughts kind of longer term philosophical perspective about how the iPad will potentially cannibalize or take away some dollars in some of your other product lines going forward?
Peter Oppenheimer - SVP and CFO: It's a very good question and it's one that we do talk about internally. We've only been selling for three months, and so I think the real answer is that it's too early to tell. If you do look at the quarter that we just finished, we are thrilled that we recorded our best Mac quarter ever in the same quarter that iPad sold almost 3.3 million units. So, for us it's a jaw-dropper.
Brian Marshall - Gleacher & Company: I was wondering if you can give us any updates on how the iAd business is coming to fruition here.
Tim Cook - COO: Yeah, we have just launched the iAd in the early part of July. We're going to learn a lot this calendar year and build a foundation for the future, and beyond that I don’t have any further specifics to share with you today.
Brian Marshall - Gleacher & Company: And final question is, I was wondering if you could give us an update how the data center built is coming along in North Carolina, and that’s it.
Peter Oppenheimer - SVP and CFO: North Carolina is on schedule. Everything’s going fine.
Brian Marshall - Gleacher & Company: Can you share what the schedule is there?
Peter Oppenheimer - SVP and CFO: We expect to complete it by the end of the calendar year and begin to use it.
Operator: Toni Sacconaghi, Sanford Bernstein.
Toni Sacconaghi - Sanford Bernstein: I wanted to revisit the gross margin question please. Peter on your guidance last quarter you basically said about a quarter of the expected sequential decline and gross margins was expected to come from iPad, about 150 basis points. Relative to your expectation on that what kind of impact did iPad have on gross margins versus your guidance and why may it have has been different?
Peter Oppenheimer - SVP and CFO: Toni, the factors that we cited last quarter, largely on a collective basis were as we saw it. And we did about 310 basis points better than we had guided to and a little more than half of that was those five factors not been quite as deep as we thought. And the biggest piece of that difference really came from selling more iPhones and selling accessories. So, the other factors were generally about what we thought they would be.
Toni Sacconaghi - Sanford Bernstein: So, if we think about it, you're expecting to be down 570 basis points. You were down about 260 basis points but you had mentioned you had a favorable benefit as well as some operating leverage. What was the collective impact of those two positive forces of operating leverage in favorable, so were you down – you thought you would be down 570 from those factors and you are down 400 or 450 and then you had favorable impact of 150 from the other two factors or how do we think about that in basis points?
Peter Oppenheimer - SVP and CFO: So, we were ahead of what we thought by about 310 basis points. Little more than half of that came from the five factors not being quite as deep as we thought and it was mostly selling more iPhones and more accessories that drove that. A little less than half the 310 basis points occurred from the unanticipated favorable adjustments and the leverage on the higher revenue, and the favorable adjustments were the bigger piece of that second group.
Toni Sacconaghi - Sanford Bernstein: On the favorable adjustments can you comment on whether they were one-time and where they were discretionary, any more color you can provide on that?
Peter Oppenheimer - SVP and CFO: I don't expect them to – the ones that we benefited from to reoccur, and again I don't want to specific but these were things that really just occurred in our supply chain and with the other product costs.
Toni Sacconaghi - Sanford Bernstein: Tim, you had talked a little bit about channel inventory, it sounds like and correct me if I am wrong that you might have 1.4 million in existing channel inventory of the older 3GS the 16 and 32 gig, is that correct and where and how are those being sold currently?
Tim Cook - COO: Tony, we had about 1.4 on June 26, which was the end of the fiscal quarter. Currently, we have materially less than that, and those are being sold at basically most, not all, but most of the – in most of the countries that we sell the 3GS in.
Toni Sacconaghi - Sanford Bernstein: Have you been able to take up that? So since the end of the quarter, the June 26, have you had any progress in increasing your total channel inventory or you feel like you're fighting a losing battle?
Tim Cook - COO: I never feel like I'm fighting a losing battle, but on iPhone 4, we are selling things as quickly as we make them, and so we have more work to do there.
Toni Sacconaghi - Sanford Bernstein: But I guess that implication would be as, if you've taken down inventory of the non-iPhone 4 product, and you're selling them as quickly as you can, that would actually suggest your total inventory would be even lower now than it was on June 26.
Tim Cook - COO: Well, keep in mind that we also sell the iPhone 3GS 8 Gig, that’s a new model in the line, and so the 1.4 million that I was referring to, that I assume that you're also referring to are the iPhone 3GS units that were in the previous generation.
Toni Sacconaghi - Sanford Bernstein: Correct.
Tim Cook - COO: Yeah.
Peter Oppenheimer - SVP and CFO: So you really would have to look at the whole line.
Toni Sacconaghi - Sanford Bernstein: And final question, you talked a little bit about cannibalization of iPad on Macs, and I know, you talked about the iPod and iPod touch on a year-over-year basis, but sequentially, your ASP is though quite a bit on the iPod business, do you think there may be any cannibalization of iPad on iPod touch; and specifically, can you comment on whether iPod touch was a higher percentage of units sold or actually if you sold higher percentage of units sold in Q3 versus Q2?
Tim Cook - COO: Tony, our iPod ASPs were down about $7 sequentially, and that really was driven by the start of the back-to-school promotion, which we began in the month of June and a stronger U.S. dollar. We did mix on a year-over-year basis up in the iPod touch, and I'm sorry, I don't have on a sequential basis the touch mix in front of me.
Operator: Keith Bachman, Bank of Montreal.
Keith Bachman - Bank of Montreal: I had a couple as well. Peter, when the iPhone – when you're using the accrual accounting or the deferred accounting rather on the iPhone, the deferred balances indicated that margins went up over time. Would you anticipate that the iPad margins would increase as we move forward?
Peter Oppenheimer - SVP and CFO: Look, we were purposely aggressive when we launched the iPad, because we absolutely believe we had a great product and we had a great first mover advantage, so we were aggressive coming out of the shoots, and as both Tim and I've commented, we are selling them as quickly as we can make them. I think, it was a very, very, very good way to launch the product for us. We are always working to become more efficient and to write down the cost curves, and I don't see that motivation being any different on the iPad than it is on our other products.
Keith Bachman - Bank of Montreal: A few to follow up. Peter, is there any comments that you could make on the impact of the Bumpers? I know you said you're incurring the cost in the September quarter, is there any way to quantify in terms of the basis points or any other metric that you can give us for the impact in the September quarter?
Peter Oppenheimer - SVP and CFO: Well, there are two impacts of this. The first is we will need to defer revenue for the iPhone 4s that we sell, where we’ve not delivered the Bumpers and where we have not heard from the customers wanting to place an order. And I expect the accrual that we'll need to make which is a revenue accrual with no cost to be about $175 million in the September quarter and I would expect to have that be recorded as revenue in the December quarter. We will expense the cost of the Bumpers when we ship them to customers and our most important objective there is to take care of every customer and (delight them).
Keith Bachman - Bank of Montreal: I guess the last question for me then is directed to Tim if I could. Android-based shipments are certainly increasing and gaining a lot of press. I wondered if you guys could give any color about where you might be seeing Android as competition to the iPhone family in terms of geo or customer sets or any other color there, and that’s my last question.
Tim Cook - COO: I haven’t seen the Android results for June since the sum of several companies’ shipments, but iPhone sales were up 61% in the June quarter despite the inventory drawdown and the transition that we spoke about, and that's against the IDC estimate of smartphone market growth at 38% and so we're growing substantially faster than the market.
Operator: Mike Abramsky, RBC Capital Markets.
Mike Abramsky - RBC Capital Market: Tim, do you think that there has been some sort of I think still some questions around sustainability of iPad demand after early adopters international channels, so even with new product cycle given that – it's still a relatively new category, and I am wondering what your thoughts are there? And also given that there may be some competitive subsidized 3G tablet coming in the fall, how do you see that potentially impacting or not the iPad pricing strategy or demand? Thanks.
Peter Oppenheimer - SVP and CFO: Mike, the only thing I can share right now is that on iPad we are absolutely selling every unit that we can make. And it looks good in every country that we have launched in so far and we’re excited about launching it in additional countries this coming weekend. Anecdotally, it does seem to me that it is beyond an early adopter stage already as I indicated earlier, just based on watching the people that are using it and so – and it's the fastest that that has happened in any product I know off or I have ever been involved with. So I think it's extremely unique and extremely special. In terms of what the competition does, I don't know what they will do and what they will try, no secrets that everybody is trying to work on something to come out with it, but we're extremely happy with our competitive position, and the business model that we have if you look at the U.S. as an example since everybody can look at that model where you have a very affordable rate structure that starts at $15 with no (indiscernible) at all, and a very aggressive device price that seems to be what the end-user really desires. So, yes, somebody could come in and jack the rate plans way up and subsidize the -- I'm not so sure that people are really going to want another contract. We'll see if somebody tries that (indiscernible). Right now, we're thrilled with our position.
Operator: Charles Wolf, Needham & Company.
Charles Wolf - Needham & Company: In the past, iPhone software developers have complained not about the App Store rules, but the fact that they were arbitrary. Has Apple done anything to address this issue?
Peter Oppenheimer - SVP and CFO: Charlie, I think that we are always looking to make our developers happy. We have over 225,000 apps on the store with over 5 billion downloads. We were thrilled to have very recently crossed $1 billion in payments to our developers and we just launched iAd with the primary objective of developing another revenue stream for them. So, we care deeply about our developers and want to have many, many great apps for our iOS products, and the success that we've had on the store today is unparallel.
Tim Cook - COO: Really I would just add that the vast majority of apps are approved within seven days of their submission, and that many of the apps that aren't approved have bugs in them, and are eventually resubmitted and approved. We obviously, I think all of us want to ensure that pornography and graphic scenes don’t make their way to the platform, and so – I think, these are things that I realize not a 100% of everybody is going to agree, but I think many of us would want those to occur.
Charles Wolf - Needham & Company: Well, just asking the question slightly differently. Do you think the concern of developers is really misplaced?
Tim Cook - COO: We value the input of every developer and very much listen to them and modify our programs accordingly when it's appropriate to do that. So, I am not going to say every concern out there is misplaced. We're very open to any kind of feedback.
Operator: Shaw Wu, Kaufman Brothers.
Shaw Wu - Kaufman Brothers: I have two questions. First, just on your desktop Mac business, normally it's up sequentially from March to June, and I understand there is a secular trend towards portables. Is there anything else – any color you could share over there that's occurring?
Tim Cook - COO: You have a little bit of yin and yang when we announce new portables, you'll see a substantial move to portables, and when there is not a desktop announced at the same time, and so I think that's more of what we saw than anything else. But yes, there's clearly a mood to mobility and in the long, long, long run, I think you’ll see portables grow as a percentage of mix continually.
Shaw Wu - Kaufman Brothers: Then just second question is, just on stage time. You talked about how you wanted to turn that into an industry standard. Just wondering how you plan to roll that out. I mean, will it available on Windows, will be available – imagine today it’s on the iPhone, what about on the Mac, any color you can share there?
Peter Oppenheimer - SVP and CFO: Shaw, I want to make sure that we get to all of the financial related questions today. So I’m going to answer that one for another day.
Operator: Katie Huberty, Morgan Stanley.
Kathryn Huberty - Morgan Stanley: Tim, when Peter was walking through the iPhone business he said, the iPhone revenues and units were particularly strong in Asia, Europe and Japan; would love your true sense as to why North America isn’t on that list? Are we hitting lot of large numbers or is there anything you can do to really reaccelerate the growth in the domestic market?
Tim Cook - COO: I don’t think we’re hitting large numbers. I think that the market over time will increasingly – the phone market will increasingly become a smartphone market and Steve said that long ago and we’d seem that that forecast has come true as the smartphone market continues to grow with multiples of the basic handset market that is shrinking. I think we have a lot of opportunity domestically and in the other parts of the Americas. And I think Peter’s comment was more that our growth as a Company whether you look at Mac, iPhone or iPod is, we're growing faster internationally than we are domestically, and you can see that in the revenues as well. However, I think you have to put that in perspective that the Company's revenues in Americas are growing over 40%. And so, this is a huge number. We're not talking about a low number; it's just that the international numbers are absolutely (killers).
Kathryn Huberty - Morgan Stanley: And then just on a more global basis a lot of the iPhone growth has come from broadening distribution among carriers and in new countries. Can you just cover the opportunity that you see or don't see to broaden within countries you're already in to go after emerging markets like China and India and then just quickly thoughts on prepaid markets and whether that's an opportunity for you?
Tim Cook - COO: Yeah, I think both on the Mac and the iPhone and later the iPad as we roll it out to more places, I think there is still extraordinary opportunity left. I mean if you look at the Mac as an example, in Asia Pacific, the Mac's grew 73% year-over-year. This is phenomenal that we could grow by this much, and in China we grew 144%, in Korea we grew about 184%, in Hong Kong we almost doubled, and even in a country like Spain, where the economy has clearly been very difficult, the Mac grew 59%. And so, there is some very, very extraordinary numbers in that. In the iPhone space, we are doing well in basically all of the key markets, and so in terms of expanding that learning what we've learned with the exclusive deals and continuing to look market-by-market as I've indicated in the past, we've elected to open Spain, and at the end of this month, we will go from an exclusive carrier market to having three carriers. So that's one example. There are also more countries remaining, and frankly, there's still increased distribution and increased market penetration like enterprise and consumer, and a general move in the marketplace from the basic voice and text phones to the smartphone, all of which are in the iPhone favor. So, honestly, I just see an enormous amount of opportunity out there, and our biggest challenge is to decide, which of these to deploy resources against not to have good ideas about which ones, are about making the list of ideas.
Operator: Mark Moskowitz, JPMorgan.
Mark Moskowitz - JPMorgan: Two quick questions, Tim, just coming back to the iPad for a second. I know, there is a lot of speculation about potential cannibalization down the road, while it's still premature to speculate. I'm just trying to get a sense, could there actually be a reverse effect, where Apple maybe benefits from a halo effect forced by the iPad, but then they also decide maybe to buy some either Apple devices to keep at home when they're using the iPad on the road. In the early stages, has your data shown that where you're seeing someone buying iPad and then there is a subsequent purchase of a MacBook or a iMac or an iPhone?
Tim Cook - COO: We – that's a very good question, Mark, and I do agree that I think most people external to Apple focus on cannibalization, it's been negative, and internally, we focused on exactly the opposite. It's the synergy between both technically and from a demand point of view. If you look at the iPod historically, all of the people here felt that the iPod created a halo for the Mac, and in fact as the iPod volumes took off, you will see a dramatic change in the Mac sales back in time that we experienced. So, could that happen on iPhone and iPad? We'll see. I don't want to predict it. But I do think that with our Mac share, the Mac has outgrown the market 17 straight quarters. However, the Mac share is still low, and so there is still an enormous opportunity for the Mac to grow. Certainly the more customers we can introduce to Apple through iPad, and through iPhone and through iPod, you would think that there might be some synergy with the Mac there, and there may be synergy between the iPad and the iPhone as well, and so on and so forth. So, that's the way that we look at it internally instead of the negative. Although I know everybody is more focused on the negative piece of it. This is where it's great to be – to have a lower share, because if it turns out that the iPad cannibalizes PCs then I think it's fantastic for us, because there is a lot PCs to cannibalize. It's still a big market.
Mark Moskowitz - JPMorgan: Thanks, Tim, and maybe, I could shift gears to Peter real quickly, Peter have you had a chance to kind of formulate what could be the scenario whereby some of the subcontractors that you work with, that they do have to put significant wage hikes over the next course of contract renewals over the next year or so. How would that impact Apple? Will you have to absorb any of those pass through on the wage hikes or whether those subcontractors have to absorb 100% of the wage hikes.
Peter Oppenheimer - SVP and CFO: We don’t want to get into the terms of our commercial agreements. We hold these to be competitive advantages and do not want to release those.
Operator: Chris Whitmore, Deutsche Bank.
Chris Whitmore - Deutsche Bank: Thanks very much. Tim, earlier you mentioned there is a lot of opportunity domestically for the iPhone, do you need to extend your carrier relationships to tab that, or do you think there is plenty of headroom with AT&T.
Tim Cook - COO: I don’t want to get into what we will or will not do. I would say that we are very happy to be a partner with AT&T. And they’ve been a first class partner and have really pioneered the smartphone growth from a network point of view in the U.S. and that’s all I have to say about that.
Chris Whitmore - Deutsche Bank: Secondly, on the gross margin guidance, just back of the envelope it seems to suggest iPhone margins will be down, maybe 10 or 15 points quarter-on-quarter. Is that in the right neighborhood? And if so, can you provide a little more color on which components are driving that, it seems they contradict third party data around the bill and material cost for that product.
Peter Oppenheimer - SVP and CFO: Sure. Chris it’s Peter. Let me begin by suggesting that you don’t put a lot of (credence) in these third party reports that you see. It’s always amazing to me the cost categories and the components that never seem to make it into the reports. And as I, I think, answered in Toni’s questions, look, with the iPhone 4, we have been very aggressive here. This is the best iPhone that have ever shipped. We are delivering great value to customers and it has a higher cost structure than its predecessor product and I don't want to comment on its specific gross margin.
Chris Whitmore - Deutsche Bank: Last question for me, back to you Tim. Just trying to ballpark the size of the supply/demand gap for the iPhone and the iPad, again back of the envelope, are we talking about a couple of million iPhone units short of demand and may be half a million iPads short of demand, is that the kind of gap we're talking about?
Tim Cook - COO: I don't know. That question is very difficult to answer because the way that you truly find out what it is at least from my own experience and perspective is you have enough supply to serve the demand and then you know what the demand is. And, today we don't have enough on either iPhone 4 or iPad and so I truly don't know. Obviously, we have taken (debts) internally in terms of the capacities that we're going for and we've rolled those into the guidance that I think you can get from the guidance but I think it's extremely strong that we are pretty confident with being able to pick up the supply.
Nancy Paxton - IR: 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 the confirmation code is 4748846. 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'm at 408-974-5420. Thanks again for joining us.
Operator: Ladies and gentlemen, that does today's presentation. We do thank everyone for your participation.