Apple Inc AAPL
Q1 2011 Earnings Call Transcript
Transcript Call Date 01/18/2011

Operator: Good day, everyone and welcome to this Apple Incorporated First Quarter Fiscal Year 2011 Earnings Release Conference Call. Today's call is being recorded.

At this time for opening remarks and introduction, I will like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am.

Nancy Paxton - IR: Thank you. Good afternoon and thanks for joining us. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings per share and future products. Actual results or trends could differ materially from our forecast.

For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2010, and the Form 8-K filed with the SEC this afternoon, along with the attached press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

With that, I'd like to turn the call over to Apple's CFO, Peter Oppenheimer for introductory remarks.

Peter Oppenheimer - SVP and CFO: Thank you, Nancy. Thank you for joining us. We are very pleased to report the outstanding results of our December quarter. The performance of our business was extremely strong as we sold more Mac, iPhones and iPads than in any previous quarter in Apple's history.

As a result, we are thrilled to announce all-time record quarterly revenue and earnings. Revenue for the quarter was $26.7 billion, an increase of more than $11 billion over the prior December quarter's results representing growth of 71%. The robust revenue growth was fueled by record iPhone, iPad and Mac sales.

Operating margin was over $7.8 billion, representing 29.3% of revenue. Net income was $6 billion, which exceeded our previous quarterly earnings record set in the September quarter by $1.7 billion and represented 78% growth over the year ago quarter's earning. These results translated to earnings per share of $6.43.

Turning to the details of the quarter, I'd like to begin with our Mac products and services. We established a new quarterly record with sales of 4.13 million Macs, representing 23% growth over the year ago quarter. That's almost eight times IDC's most recently published estimate of 3% growth for the PC market.

We experienced strong sales growth in each of our geographic segment, with over 50% growth in both the Asia-Pacific region and Japan. The growth was fueled primarily by strong demand for the new MacBook Air which was launched in October, as well as continued strong sales of MacBook Pro. Customers love the new thin and light unibody design of the MacBook Air and the impressive response of this and reliability of its (cloud-based) storage.

While MacBook Pro continues to provide customers tremendous speed and high-performance graphic at an excellent value.

We ended the quarter with between three and four weeks of Mac channel inventory. We opened the Mac App Store on January 6, bringing what we've learned from iOS Apps to Mac users to make discovery, installing and updating apps easier than ever. The Mac App Store is available in 90 countries and features more than a 1,000 free and paid apps in categories like education, games, graphics and designs, lifestyle, productivity and utility. We've been very pleased with customer response with over 1 million download on the first day alone.

Moving to our music products, we sold 19.4 million iPods, compared to 21 million in the year ago quarter. We experienced continued strong sales of iPod touch, which grew 27% year-over-year and accounted for over 50% of all iPods sold during the quarter. iPod share of the U.S. market for MP3 players at over 70% based on the latest monthly data published by MPD and iPod continues to be the top selling MP3 player in most countries we track, based on the latest data published by GFK. We ended the quarter within our target range of 4 weeks to 6 weeks of iPod channel inventory.

The iTunes Store generated another strong quarter, with revenue exceeding $1.1 billion, thanks to strong sales of music, video and apps. We were extremely pleased to bring the legendary music of The Beatles to iTunes during the quarter and to introduce movies to the iTunes Store in Japan. As we announced a few weeks ago, iTunes users are now renting and purchasing over 400,000 PD episodes and over 150,000 movies per day.

I would now like to turn to iPhone. We were thrilled to have sold 16.2 million iPhones compared to 8.7 million in the previous December quarter. This represents 86% year-over-year growth compared to IDC's latest published estimate of 70% growth for the global smartphone market overall in the December quarter.

Recognized revenue from iPhone handset and accessory sales was $10.47 billion during the quarter compared to $5.58 billion in the year ago quarter, an increase of 88%. The sales value of iPhones alone was over $10.1 billion, which yields an ASP of about $625.

At the end of the December quarter, we had iPhone distribution through 185 carriers in 90 countries. We continue to experience very strong year-over-year growth in all of our segments, with sales in the Asia-Pacific region and Japan, both more than doubling year-over-year.

Enterprise customers continue to embrace iPhone with 88 of the Fortune 100 companies and almost 60% of the Financial Times' Europe 100 Companies now testing or deploying iPhone. Strong employee demand and custom apps development are fueling deployment within the corporate sector.

Enterprise CIOs continue to add iPhone to their approved device list worldwide. Most recently, Fortune 500 like Wells Fargo, Archer Daniels Midland, DuPont, Staples, Starbucks and Genworth Financial, and Global 500 accounts, such as Nissan Motor, BBVA, Standard Chartered Group and Denon have made iPhone available to their employees.

We ended the quarter with about 3.5 million iPhones in channel inventory, a sequential increase of about 250,000. We continue to have a sizable backlog and believe we could have sold even more iPhones if we had been able to supply them. We're thrilled to begin working with Verizon next month to offer iPhones 4 to its more than 93 million customers, as well as to new customers who want iPhone 4 on Verizon.

Turning to iPad, we continue to be thrilled with its momentum and customer interest. We sold 7.3 million iPads, a sequential increase of over 3 million, with distribution in 46 countries by the end of the December quarter. We continue to see great enthusiasm for iPads from consumer, business and education customers. Employee demand for iPad in the corporate environment remains strong and the response to the product continues to be significant.

Enterprise CIOs are adding iPads to their approved device list at an amazing rate. Today, over 80% of the Fortune 100 are already deploying or piloting iPad, up from 65% in the September quarter. Some recent examples include JPMorgan Chase, Cardinal Health, Wells Fargo, Archer Daniels Midland, Sears Holding and DuPont.

Recognized revenue from sales of iPad and iPad accessories during the quarter was $4.61 billion. The sales value of iPods alone was over $4.4 billion, which yields an ASP of about $600. We increased the supply of iPads during the quarter and expanded both the number of countries and the number of channel partners carrying iPad.

Channel inventory increased by about 525,000 units from the beginning to the end of the quarter to support increased sales and channel expansion, and we ended the quarter within our target range of four to six weeks.

Combine iPhone, iPad and iPod touch, we reached over 160 million cumulative iOS device sales through the end of the December quarter. In November, we launched iOS 4.2, which brings over 100 new features to iPad users, including multitasking, folders, unified inbox, Game Center, AirPlay and AirPrint. The App Store continues to be incredibly successful with over 300,000 apps available and well over nine billion downloads to-date.

We continue to be very pleased with iAd which combines the narrative quality of TV ads with the interactivity of digital to provide a new kind of advertising experience. During the quarter, we expanded iAd beyond U.S. to Europe and Japan, and provided iAd producer to marketers.

I'd now like to turn to the Apple Retail Stores, which had a record breaking quarter. Retail revenue almost doubled year-over-year to $3.85 billion compared to $1.97 billion in the year ago quarter, an increase of 95%. iPad sales in our stores were very strong in the first holiday quarter.

The stores also delivered a record Mac quarter, selling 851,000 Mac compared to 689,000 Mac's in the year ago quarter, an increase of 24% and about half Mac's sold in our stores during the December quarter were to customers who had never owned a Mac before. International retail stores sales were particularly strong with our average international store volume exceeding our very productive average U.S. store volume.

Additionally, our four stores in China were on average our highest traffic and our highest revenue stores in the world. We opened six stores during the December quarter, bringing us to a total of 323 stores worldwide, as of quarter end, with 87 of them outside the United States. With an average of 321 stores opened during the December quarter, average revenue per store was $12 million compared to $7.1 million in the year ago quarter, an increase of 69%.

Retail segment margin exceeded $1 billion for the first time, and more than doubled from $481 million in the year ago quarter. We hosted a record 75.7 million visitors in our stores during the quarter compared to 50.9 million visitors in a year ago quarter, an increase of 49%.

Total Company gross margin was 38.5% which was about 250 basis points higher than our guidance. About half this difference was due to better commodity costs than we had planned. The remainder of the difference was due to the leverage on the higher revenue and lower other product costs including freights, warranty and phone support.

Operating expenses were $2.47 billion and included $247 million in stock-based compensation expense. OI&E was $136 million, ahead of our guidance primarily due to the positive impact the fluctuating foreign exchange rates on net assets.

The tax rate for the quarter was 24.6% below our guidance of 25.5%, due to the one-time benefit of the retroactive extension of the R&D tax credit from January 1, 2010. We expect our tax rate for the remaining quarters this fiscal '11 to be about 25.5%.

Turning to cash, our cash plus short-term and long-term marketable security totaled $59.7 billion at the end of the December quarter, compared to $51 billion at the end of the September quarter, an increase of $8.7 billion. Cash flow from operations was $9.8 billion, an increase of 69% year-over-year.

During the September and December quarters, we executed long-term supply agreements with three vendors, through which we expect to spend a total of approximately $3.9 billion in inventory component prepayment in capital expenditures over a two-year period. We made approximately $650 million in payments under these agreements in the December quarter, and anticipate making $1.05 billion in payments in the March quarter.

As we move ahead into the March 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. We expect revenue to be about $22 billion, compared to $13.5 billion in the March quarter last year. We expect gross margins to be about 38.5%, reflecting approximately ($15 million) related to stock-based compensation expense. We expect OpEx to be about $2.35 billion, including about $250 million related to stock-based compensation. We expect OI&E to be about $50 million and we expect the tax rate to be about 25.5%. We are targeting EPS of about $4.90.

In closing, we are extremely pleased with our record breaking results and customer response to our products. We look forward to expanding the reach of the iPhone to United States with the addition of Verizon and we remain very confident in our strategy and our new product pipeline.

With that, I'd like to open the call to questions.

Nancy Paxton - IR: Thank you, Peter. Also joining us for Q&A are Apple's COO, Tim Cook and Treasurer, Gary Wipfler. We ask that you limit yourself to one question and one follow-up. Operator may we have the first question please?

Transcript Call Date 01/18/2011

Operator: Shannon Cross, Cross Research.

Shannon Cross - Cross Research: I have a question for you with regard to availability of iPhones, especially with Verizon launch. I think, you had mentioned that there was a backlog that you weren't able to meet in the December quarter. So, I don't know, Tim and Peter, if you could talk a little bit about what you're doing to ensure that you have sufficient quantities of iPhones, and any changes you've made to ensure more component availability?

Tim Cook - COO: As I mentioned on the last quarter's call, we made it very bold bet on taking iPhone capacity for the September quarter with the new iPhone 4 in the line-up to 14 million. As you may remember, we sold over 14 million that quarter in total iPhones, so it was a fantastic quarter. That was up from a previous number that was in the 8ish range. We were able to step that up in this past quarter to over 16, as Peter said in his opening remarks, and so we were able to increase over 2 million. We obviously have continued to work on increasing this further, but as with all good things it takes some time to do that. Relative to Verizon, we are thrilled to offer the iPhone 4 to Verizon's 93 million customers, as well as any new customers who want an iPhone 4 on Verizon and we’re going to do everything possible to get the iPhone into as many hands of those customers as possible.

Shannon Cross - Cross Research: With regards the Mac App Store, which clearly just started, so I am not sure how much you'll talk about it, but we’ve noticed your best selling apps tend to be Apple software apps. So, how should we think about the Mac App Store, any initial thoughts you have on it and initial things you've seen?

Tim Cook - COO: It's just getting going, but we are thrilled to have reported over one million in a very short amount of time. So, we're very happy with the start of it.

Operator: Kathryn Huberty, Morgan Stanley

Kathryn Huberty - Morgan Stanley: First question for Tim. How comfortable are you right now with the availability of iPhones and iPads, and if you still see shortages, how quickly do you think they can be addressed early this year?

Tim Cook - COO: Katy, let me take each of those separately. On iPad, we increased dramatically last quarter. We sold 7.3 the previous quarter we were in the low 4s as you know. That did get us into supply demand balance, and also allowed us to expand to 46 countries or to a total of 46 by the end of the quarter, which added 20 during the quarter. We are confident enough to add another 15 countries during the month of January that will take us over 60. So, we feel very, very good about the progress that we've made here. Relative to iPhone 4, I also feel very, very good about what we've been able to do, however, it's not enough. We do still have a significant backlog. We are working around the clock to build more and I feel great that the demand is so high, but at this point, I'm not going to predict when supply and demand will meet. We believe the reaction and results from the Verizon customer's will be huge. So, I don't want to give a prediction right now, when the supply and demand will (crawl).

Kathryn Huberty - Morgan Stanley: Tim, one of the most impressive metric is the sequential year-on-year growth at Asia Pacific. Can you just talk about what's driving that, and what plans you have in place going forward to sustain that growth?

Tim Cook - COO: That's a very good question. First of all, let me say that of the BRIC countries Brazil, Russia, India and China, we several years ago identified China as our top priority and we put enormous energy into China and the results of that have been absolutely staggering. To give you some numbers there and some specifics and we look at Greater China as a region and Greater China, just for clarity, is Mainland China, Hong Kong and Taiwan. The revenue from Greater China for Apple for last quarter was $2.6 billion, which was up or at from the prior year quarter and to further just from explanation point by that, we did a little over $3 billion for the entire fiscal year '10. So, we're very, very proud of the team and the results that we've gotten there. Korea has also been a very, very good market for us. We had an outstanding Q1 there, primarily driven by iPhone and iPad, and there are several other Asian countries doing extremely well. Japan is not in the segment that you're looking out, but Japan by itself, the revenue was up 83% year-over-year and if you're familiar with the Japanese economy and the growth there to grow 83% on the base that we're doing is stunning. So, we are placing more and more resource in these areas and continue to look for expansion possibilities throughout Asia.

Operator: Gene Munster, Piper Jaffray.

Gene Munster - Piper Jaffray: Question for Tim in terms of the long-term business planning. There's been a lot of questions in terms of how far out you guys actually planned it out? I was wondering, if there is any insight you can give us in terms of what your long-term business plan is, in terms of product roadmap? Obviously, you can't share what that roadmap is, but how far out you guys go in retail stores and so forth? Is it a one-year plan? Is it a five-year plan? Any sort of insight would be helpful.

Tim Cook - COO: Gene, that's a part of the magic of the Apple. I don't want to let anybody know our magic, because I don't want anybody copying it. What I would tell you is that, in my view, Apple is doing its best work ever, that we are all very heavy with product pipeline, and the team here has an unparalleled breadth and depth of talent and a culture of innovation that Steve has driven in the Company, and excellence has become a habit. So, we feel very, very confident about the future of the Company. I would also note to those people that haven't thought about it is, we've done outstanding in our Mac business. We've had 19 quarters straight of growing faster than the market, but we still have a relatively low share of a very large PC market despite having great momentum there. So, it would seem like there's enormous opportunity still there. We have relatively low share in the handset market. In handset market, it's well over a billion units a year, and the smartphone market is growing faster than (weed). So, there's enormous opportunity here and we have incredible momentum in that space. iPad just got started. It's a new category. We sold almost 15 million through the first three quarters and we believe the market is huge. IDC, I saw this morning is predicting it to quadruple in two years. I don’t know what to predict in terms of specific numbers. However, we believe it's a huge market as we've said before and so we're in some great market, some fast moving markets. We have the best products we've ever done and an incredible product pipeline. We feel very, very confident.

Gene Munster - Piper Jaffray: In terms of iPhones you mentioned that if not for production constraints, you could have sold more, is there any way to help us back into how many more?

Peter Oppenheimer - SVP and CFO: You can't run the experiment both ways. The demand for iPhones has just been incredible. We could not make enough in the quarter and we would have loved to have ended with more channel inventory than we did.

Operator: Richard Gardner, Citigroup

Richard Gardner - Citigroup: I was just hoping that you could talk about what components were better than you thought in terms of price during the quarter. Tim, if you could give us your thoughts on the commodity environment going into the March quarter, given that flat panels are below cash cost for some providers? What are you looking for going into the March quarter please?

Tim Cook - COO: Rich, in terms of the go forward in March quarter and what is embedded in the guidance that Peter gave earlier is that, we expect a favorable pricing environment for DRAM, where supply exceeds the demand still. Some prices for raw materials, such as key metals, is currently increasing due to the anticipated strengthening of the worldwide economy, and it remains to be seen whether that continues. The bulk of the other commodities from NAND flash to batteries to HDDs to ODDs to LCD, and most other commodities they are generally in a supply demand balance. So, we would expect this group of commodities to fall in prices consistent with their historical trends. In terms of what we saw last quarter, frankly speaking, in most areas we saw favorability and it was a key part of us over achieving our guidance gross margin.

Richard Gardner - Citigroup: Can you talk about which component areas you're making long-term commitments in on supply?

Tim Cook - COO: It's something I don't want to get down, Rich, I view it as the competitive, something I just don't want our competition knowing, but let me talk about it in general and hopefully that will suffice. From our point of view, on the design side, we design components where we believe we can innovate beyond what's available in the market. The most recent example of this is the A4 chip, but with the A4 chip, we didn't feel like we had to invest in the fab itself and build the fab, because we felt like there were good options in the market for doing that, but not good option in terms of buying a design and so we really focused on design. On the operational side of the house, as you probably remember, we've historically entered into certain agreements with different people to secure supply and other benefits, and the largest one in the recent past has been, we signed a deal with several flash suppliers back at the end of 2005 that totaled over $1 billion, because we anticipated that flash would become increasingly important across our entire product line and increasingly important to the industry. So, we wanted to secure supply for Company. We think that was an absolutely fantastic use of Apples cash and we constantly look for more of these. So, in the past several quarters, we've identified another area and come to some recent agreements that Peter talked about in his opening comments, these payments consists of both prepayments and capital for process equipment and tooling and similar to the flash agreement, they are focused in an area that we feel is very strategic. I prefer not to go into more detail about what specific area it's in, but it's the same thinking that led us to those deals that led us to the flash deals.

Operator: Bill Shope, Goldman Sachs.

Bill Shope - Goldman Sachs: In the past year your build materials for the key devices has generally come down at the rate that allowed for fairly healthy gross margin expansion over time and I'd say that it's generally been true for iPad refreshes in the past, iPhone refreshes. Is there anything different about the iPad that we should consider going forward that would make it difficult for margins to follow this historical pattern, and did you see some of this in the most recent quarter as well?

Tim Cook - COO: Margins consist of a number of different factors, like which direction the commodity markets are going, where the product is within the product lifecycle, as well as the value engineering that we do, and negotiating, and so forth we do. So, I don't think that you can take a single product kind of out by itself and speak about it with any accuracy. As you know, we don't guide at the product level on margin. We're confident with the guidance that Peter provided on gross margin in his opening comment.

Peter Oppenheimer - SVP and CFO: I would add to that that we have always aggressively worked to lower our costs. I think we have a good track record in this regard and we shipped a lot of iPads in the December quarter, and had very strong gross margin. So, I think we were quite happy with our progress.

Bill Shope - Goldman Sachs: On the iPad side again, I know you've had the opportunity over the past few weeks to see more detailed specs and in some cases the price points for all the countless tablet devices coming in 2011. Can you comment on how you're currently viewing the competitive landscape for the iPad and has that changed, if at all, over the past few months?

Tim Cook - COO: If you look at what's shipping today, there's not much out there, as you know. Generally speaking, there are two kinds of groups today. They are at least on the market today. The ones that are using a Windows-based operating system are generally fairly big and heavy and expensive. They have very weak battery life. They require keyboard or a stylus as an input device. From our point of view and what we've seen, customers frankly just are not interested in them. Then you have the Android tablet and the (variety) that are out shipping today, the operating system wasn't really designed for tablet and Google has said this. So this is not just an Apple's view by any means. So, you wind up having a size of a tablet that is less than what we believe is reasonable or even one that would provide what we feel is a real tablet experience. So, basically, you wind up with kind of a scaled up smartphone, which is a bizarre product in our view. Then you have got kind of a third group. So, those are the two that are shipping today and frankly speaking, it's hard for me to understand if somebody does a side-by-side with an iPad, I think some enormous percentage of people are going to select an iPad there and those are not tablets that we have concern of. The next generation Android tablets, which are primarily what you mentioned in terms of CES, there is nothing shipping yet. So I don't know there is generally they lack performance specs, they lack prices, they lack timing, so today they are vapor. We'll assess them as they come out. However, we're not sitting still. We have a huge first-mover advantage and we have an incredible user experience from iTunes to the app store, and in enormous number of apps and huge ecosystem. So, we're very, very confident with entering into a fight with anyone.

Operator: Toni Sacconaghi, Sanford Bernstein.

Toni Sacconaghi - Sanford Bernstein: You've said on previous earnings call that the move to iPhone non-exclusivity in regions of the world that has had no impact on your ASPs. Can you comment on whether that is still the case today, and whether we should expect any impact in the migration away from U.S. exclusivity? Related to that, there are several large carriers globally that the iPhone is still not offered in. Can you talk about some of the reasons why that isn't the case, many of them are CDMA-based and given that you now have a CDMA-based offering, is it unreasonable to expect that we should see more CDMA carriers going forward?

Tim Cook - COO: Relatively to the ASP, I generally would not do though and I want to be specific that this comment isn't related to the U.S. or any specific carrier or any specific region, but to specifically answer your question, I don't envision the overall iPhone ASP decreasing from the December quarter that we just completed to the March quarter that we're currently in. As you know, as our longstanding practice has been, we don't comment on after that period of time. Relative to other carriers, we are always looking and assessing in every country who we should be doing business with, and exploring different deals and arrangements et cetera. So we'll continue to do that. What I've said before and we have seen this in every case literally that we've done is where we moved from a exclusive carrier arrangement to a dual or multi-carrier arrangement, our growth has changed significantly and our market share increased. So, that doesn't mean that would happen in every country nor does it mean that, we're just out doing that in every country. We look at each one individual because each market has its own individual characteristics and parameters and technology. On the CDMA phone, specifically I don't have any specific thing to announce today other than we are truly thrilled to be working with the Verizon team, they have built quiet a company and earned a great deal of respect from the customers and some of them have waited a long time to get iPhone. We're very, very happy to give them iPhone and any other customers that are non-Verizon customers who wish to buy an iPhone. We're also very happy that we've signed a multiyear non-exclusive deal with AT&T. So, we're very happy that we'll have shortly a dual carrier setup in the United States.

Toni Sacconaghi - Sanford Bernstein: If I could follow-up on that. Given your previous comments on China and the importance of that country strategically for you and the investments that you're making in stores, et cetera, can you maybe use that as a case study for, why you're only in one carrier there? I think, you've said that there are no longer any exclusive conditions that you have in place globally with any carrier. So can you talk about other either impediments or hindrances beyond technology, of which CDMA is one, that maybe limiting your ability to sign important carrier agreements in potentially very important and strategic areas for the Company?

Tim Cook - COO: Toni, I've generally found people really want to do business with us and their customers are very much desired to have the iPhone. So, I don't really see a lack of desire. I don't want to comment about any specific country, because I view any conversations that we have going confidential in nature. It is true, as you said that we are not under a contractual exclusivity now in any country in the world. The last one was the United States, and we have moved away from that. I can guarantee you that we always are looking at opportunities to grow. Of course, in the very short-term, I would also remind you that we're constrained on iPhone 4 and we are working round the clock to get as many of these out to our existing partners as we can.

Operator: Brian Blair, Wedge Partners

Brian Blair - Wedge Partners: Can you maybe give us your updated thoughts on the Mac side and maybe specifically address the impact of iPads. With a tremendous iPad unit this quarter, the cannibalization question is going to come up. I am just wanted to get your latest thoughts on that if we could.

Tim Cook - COO: What we saw on the Mac this quarter was, we grew 23% at the worldwide level and that is compared to a market growth of only 3% and so we grew almost eight times the market rate of growth, which is I think stunning. Every region outgrew the market, so it wasn't just one region. Asia Pacific led the growth with a whopping 67% year-over-year increase and that's almost 10 times what the market did there to put in context. Japan grew at 56%, which is about six times the market, and Europe and the United States both grew in double digits despite both markets contracting overall. So, we did significantly better than the market in every major region and we're very proud of that. Was there any cannibalization by iPad? Honestly, I don't know for sure, but yes, I think there is some cannibalization, but I also think there is halo effect. As we've seen on the Mac by the iPod some years ago, I think there is a halo effect from Apple product to Apple product, and of course, we have introduced millions of people in Asia to Apple through the iPhone. We're now introducing many more through the iPad and I think some of those decided to buy Mac. So, when you look at the Mac growth in Asia, it's 67% and you look at the Japan growth at 56% and you look at the U.S. and Europe growing in double-digits against shrinking markets. If this is cannibalization, it feels pretty good. The other point I would make is that if the iPad or tablets do cannibalize the PC market, keep in mind that we have low share of the PC market. The other guys lose a lot more and we have a lot more to win because of that. So, honestly, cannibalization is not something that we are spending one minute on here. With iPad team are building the best iPads for the future and the Mac teams are building the best Mac. I can tell you that both groups believe that they can continue to grow and do great stuff, and I believe that, so.

Brian Blair - Wedge Partners: That's a great way to look at it. One of the things that's interesting to me as I see this trend of you're bringing a lot more of the functionality from the tablet side, you're bringing it on to the Mac side. It was talked about earlier that the Mac App Store that's now on Mac OS X and then as we're getting teaser shots of Lion, it looks like the next OS is also taking even more design and UI elements from the iPad side. So, maybe if you can just talk about that a little bit? Are these two platforms really merging into one and is this the future of computing as you see it or are you just grabbing one or two aspects of tablets in bringing it into the OSX?

Tim Cook - COO: I think one of the part of the magic of Apple is that there is not high walls between these product groups. They like each other, talk to each other. They are at the same DNA. They want to build the best products in the world. So, if one has a great idea, there is not, (indiscernible) here in the other group. So, one of the key learnings from the iPad was that people love instant on. They really love that and so the MacBook Air incorporated that. That's just one simple example, but there are tons of examples throughout all of our products where something started on one and went to a different one, and it's not always in the same direction either. It can start on the phone and then flow forward. It can start on the iPad and flow and starting so forth. So, just a part of the way we run the Company. I think Steve said it's great when he said, if the Mac Company were a separate Company, and the iPad Company were a separate Company, what would the Mac Company build to compete with the iPad? I think the answer is the MacBook Air. I think that's the phenomenal insight, and I think a great way to look at it. It's not that the groups are competing they're sharing and coming up with these incredible products that people really want.

Operator: Keith Bachman, Bank of Montreal.

Keith Bachman - Bank of Montreal: It actually relates to what you're just talking about. Tim, do you have data that you've gathered on the phone and or the iPad, on new to the brand. You typically talk about Macs in the stores, you're getting 50% in newer brand. Do you have any data related to the newness of the brand? I would assume it's substantially higher, but wanted to hear a little bit about that. Depending on that outcome, if you talk a little bit about how you think these products, in particular the Pad, in emerging markets may help to continue drive share opportunities for you?

Tim Cook - COO: I don't want to – do we collect it, yes, of course, we do. The numbers for iPhone are – there are many such numbers there now, because we've been shipping iPhones for a while. Any product that you ship for a while looks a little different at the (front end) when you are in the early adopter cycle versus when you get into the mainstream. Now, iPad went through that cycle quickly and moved from mainstream enterprise and all the rest in record time. Nevertheless, that data needs to settle some even before internally we put a lot of weight in it. The bulk of your question doesn't need specific numbers to make the point. If you look at our Asia Pacific business, the revenue growth was 175% or so. So, this is incredible. The size of business in Asia that we've now built is massive. To do $2.6 billion in China in three months where just two years ago we did less than $1 billion in the whole year, it is phenomenal – actually for the year before. So, it's clear that we are introducing a lot of people to Apple who previously had not been introduced to the Company. I think that helps across the product line.

Keith Bachman - Bank of Montreal: In the U.S., I'm just trying to understand how you see the tablet market more broadly having greater penetration rates, say in established markets versus emerging markets? Typically, the notion is, the tablets in many cases are more about consumption versus creation. I just wanted to hear your thoughts, not on growth rate but on absolute unit opportunities between the established markets and the emerging markets.

Tim Cook - COO: I think the tablet market is – the opportunity is so large, it's large everywhere, honestly.

Operator: Ben Reitzes, Barclays Capital.

Ben Reitzes - Barclays Capital: I just wanted to (patch up) the revenue outlook. Your sequential decline of, I guess, 17% is a little more than last year's, but you have Verizon now for the iPhone. So, what components I guess, other than iPod, are expected to have contributed to the big decline, if intuitively maybe iPhone asked some support from Verizon?

Peter Oppenheimer - SVP and CFO: Ben, I'll answer your question in a couple of ways. First of all, we're working hard to increase supply of iPhones. Tim's talked about that, but that will come over a period of time and not necessarily overnight, as we said. In terms of the sequential guidance this year, let me start by saying, we are thrilled to be giving you guidance for 63% revenue growth year-over-year, which will translate to 50% earnings growth. So the business is performing extremely well. We're shipping the best products in Apple's history and customer response has been tremendous. As I said in my prepared remarks, we increased the iPhone and the iPad channel inventory by about 775,000 units and this will have a bit of an impact on the sequential compare that you referred to. In terms of the products, for Mac, we've just reported the highest Mac sales ever and we've outgrown the market for 19 consecutive quarters. We would expect to see a sequential unit decline, which is typical for us after the holiday season. For iPod, we would also expect to see a large sequential decline, which is also typical for us after the holiday season. For iPhone, we'd expect to see a significant year-over-year increase. For iPad, this will be our first experience going from the December to March quarter. So we'll see. However, it was clear to us that the iPad was a hot holiday gift item, which field the 75% sequential growth that we saw in the December quarter. Given this, we would expect a sequential decline in the March quarter. So that's what's gone into our thinking, Ben.

Ben Reitzes - Barclays Capital: Just a follow-up for Tim. Last call or one of the last calls, Steve had a lot of comments around Android and perhaps some of its disadvantages versus your platform. Is there any other observation you'd like to make now that we're – had a few more months to see the market develop further and with Verizon and even more tablet sales on the horizon, feedback you're getting from developers or anything else you'd like to add on the battle with Android, kind of updating Steve's recent comments from last quarter?

Tim Cook - COO: If you look at the iPhone portion, we had record sales on iPhone with 16.2 million units sold in the quarter. Peter said we believe we could have sold more, get more supply. From the market estimates that we've seen, it suggests that we grew faster than the market. Obviously, we're working around the clock and increasing supply. We are continuing to expand countries and carriers. I've talked a little bit of that with Toni's question. We're getting enormous enterprise traction with 88% of the Fortune 100, which is mind blowing, I believe, 83% of the Fortune 500, 50% of the FT 100. So the enterprise traction is gaining. We have the highest customer sat ratings in the industry versus Android or whatever. We have the largest App Store with over 300,000 apps. We've now sold over 160 million iOS devices. This is huge. We fundamentally believe that our integrated approach delivers a far superior customer experience than the fragmented approach. You can see this in a variety of ways from the fragmentation of the number of App Stores out there that people are going to pull their hair out because they're going to have a variety of updating methodologies in a variety of payment methods and slightly different derivatives. You can see from surveys people are doing to see who is on the latest OS and you'll notice that the iOS is always off the charts on the percentage of people that have the latest version versus the other guys. We are launching with Verizon next month. We believe there is a huge pent-up demand there and we think that that will help us in the U.S. So, I think I probably just repeated much of what he said before, but the net-net is we think that our integrated approach is much better for the end user because it takes out all the complexity for the end user instead of making the end user a system's integrator themselves. I don't know about you, but I don't know very many people that want to be systematic – maybe a consumer or somebody in the enterprise. So I think that the more iPhones that we can get out there into people's hand, the more people love them, and I think we've got a very bright future. I think the same thing about iPad. It's the same set of issues at the end of the day, but the difference on iPad, of course, is that we've been running three quarters without any significant competition of any type, and I think that the customer sat ratings on the iPad are also off the chart. So I don't know if any of that's new; I doubt that it is. I think we're in a very good position.

Operator: Mark Moskowitz, JPMorgan.

Mark Moskowitz - JPMorgan: Peter, I wondered if you can give us a little more insight on the iPad gross margins going forward. Just given Tim's comments earlier about the bounty of underachievers out there, (indiscernible), should we assume then the Apple can really improve the feature set with the next generation and kind of hold pricing stable?

Peter Oppenheimer - SVP and CFO: I'm sorry, Mark that's not a question that I can answer. We don't talk about future products, but I can tell you that in terms of what we're shipping today, we're always aggressively working to lower our cost and I think we have a good track record in doing so. Our gross margins were stronger than we thought for the December quarter and I provided guidance for the March quarter, it's 38.5% but we feel very, very good about the performance of our products and our cost in our products.

Mark Moskowitz - JPMorgan: Tim, I apologize if this question has been asked, I fell off for a moment. I want to come back to the MacBook Air, just given the initial success here and momentum, can you give any sort of insights in terms of how you are looking at that platform now? Is that kind of a premium tablet, is it kind of more of a notebook still, just want to get a sense of, is this just kind of one or two punch in terms of the iPad with the Macbook Air kind of given you kind of double coverage if you will, both notebooks and in tablets?

Tim Cook - COO: The way that we look at it is, the (indiscernible) shipping today and it was a phenomenal part of our growth on the Mac last quarter. It has gotten off to a unbelievable start. The customers love it. They love the precision of it, they love the thinness, the weight, the instant on, the list is long, I think. So, we're really happy with how it's doing as a starting block. As you know, we've only been shipping it for less than 90 days, and so we've just gotten going.

Operator: Jason Maynard, Wells Fargo.

Jason Maynard - Wells Fargo: There's been a lot of talk about this consumerization of enterprise technology, and obviously it's being driven by folks bringing in their iPhones and their iPads to work. I know you said it's some big share gains within your statistics, but I was curious, if you think there still are some barriers around maybe developer training at the corporate level, or security, or things that just sort of naturally need to get worked through before you start to see those penetration numbers even increased further or start to see a wider swathe of employees use iPhones and iPads in business?

Tim Cook - COO: I think the consumerization that you speak of, of enterprise, is one of the megatrends that are occurring. I think the most forward-looking CIOs are coming to the realization that the productivity of the person, the creativity of employee is materially more important than everyone using the same thing. The ability to write apps in a simple and straightforward manner over the phone or the iPad through the SDK is an incredible thing and you can wind up literally running your whole business off of an iPad or an iPhone. So, I think the list of ideas and places that people can go there were unimaginable just a few months ago. So, I see an enormous potential there. The numbers are already incredible. Think about this, the iPad started shipping in April and we're already out to 80% of the largest companies deploying or piloting the product. This is unheard of, at least, in my dealings with the enterprise over the years. Generally, enterprise is much slower, much more cautious and uses things that have been on the market for a long time. I think to everyone's credit they have seen the value of this from a productivity and creativity point of view, and they are really moving fast. So, I think we're just scratching the surface right now. In terms of inhibitors, the iPad has a huge advantage, because as you probably remember, as we went to various different iOS releases, we always put in a huge chunk of enterprise feature, and so this isn't something that we just started focusing on. We started focusing on this before we shipped the first phone. With the synergy that exists with the iOS, between the different products, other products get the advantage of it, not just the product that it ships on initially. So, I think there is a huge (take here) for us.

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, and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820, the confirmation code is 2752840, 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.