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Apple Inc. (AAPL)

F3Q09 Earnings Call

July 21, 2009 5:00 pm ET

Executives

Nancy Paxton - Senior Director, Investor Relations and Corporate Finance

Peter Oppenheimer - Chief Financial Officer, Senior Vice President

Timothy D. Cook - Chief Operating Officer

Gary Wipfler - Treasurer

Analysts

Gene Munster - Piper Jaffray

Bill Fearnley - FTN Midwest

David Bailey - Goldman Sachs

Richard Gardner - Citigroup

Ben Reitzes - Barclays Capital

William Shope - Credit Suisse

Shannon Cross - Cross Research

Toni Sacconaghi - Sanford Bernstein

Mike Abramsky - RBC Capital Markets

Andy Hargreaves - Pacific Crest Securities

Katy Huberty - Morgan Stanley

Bryan Marshall - Broadpoint Amtech

Chris Whitemore - Deutsche Bank

Charles Wolf - Needham & Company

Presentation

Operator

Good day and welcome to this Apple Incorporated third quarter fiscal year 2009 earnings release conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Nancy Paxton, Senior Director of Investor Relations. Please go ahead, Madam.

Nancy Paxton

Thank you. Good afternoon and thanks to everyone for joining us. Speaking today is Apple CFO Peter Oppenheimer and he’ll be joined by Apple COO Tim Cook and Treasurer Gary Wipfler for the Q&A session with analysts.

Please note that some of the information you will 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 forecasts.

For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2008, the Form 10-Q for the first two quarters of fiscal 2009, and the Form 8-K filed with the SEC today and the attached press release.

Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

And with that, I would like to turn the call over to Peter Oppenheimer.

Peter Oppenheimer

Thank you, Nancy. Thank you for joining us. We are very pleased to report the record June quarter revenue and earnings and to once again report the highest non-holiday quarter revenue and earnings in Apple's history.

It was an extremely busy quarter for new product introductions and customers have responded enthusiastically.

Revenue for the June quarter was $8.34 billion, representing 12% growth over the prior June quarter’s results. We are very proud of this results, particularly given the economic environment around us.

Operating margin percentage for the quarter was over 20%, higher than our guidance due to better-than-expected revenue and gross margin. Net income was $1.23 billion, which translated to earnings per share of $1.35.

In terms of non-GAAP measures, adjusted sales totaled $9.7 billion for the June quarter, which was $1.4 billion higher than our reported revenue. Adjusted gross margin was $4 billion, which was $1 billion higher than our reported gross margin. And adjusted net income was $1.9 billion, $700 million higher than our reported net income.

We continue to believe that these non-GAAP financial measures provide added transparency to our business and hope they are helpful to you in you analysis and understanding of our performance.

Turning to the details of our results, I would like to begin with our Mac products and services. We generated outstanding sales of 2.6 million Macs, setting a new June quarter record and nearly meeting the all-time quarterly record we set last September. Mac sales increased by more than 100,000 units over the prior year’s June quarter. This represents 4% year-over-year growth and compares favorably to IDC’s latest published estimate of a 3% contraction for the market overall.

We followed up the transition of our entire desktop lineup in March with significant updates to our entire portable lineup in the June quarter, delivering increased performance and value across the lines.

Mac portable shipments increased 13% year over year, driven by continued strong growth in sales of Macbooks and our new Macbook Pros. Customer response to the new portables has been very favorable and we saw an acceleration of sales following the launch.

We began and ended the quarter with between three and four weeks of Mac channel inventory.

Now I’ll turn to our music product. We sold 10.2 million iPods, which was down from 11 million in the year-ago quarter. There were two key reasons for this decline -- first, we reduced channel inventory by over 400,000. Second, sell-through declined by 4% year over year.

I would like to discuss how we are looking at this market. We have three categories of what we call pocket products. Traditional MP3 players, iPod Touch, and iPhone. For traditional MP3 players, which includes Shuffle, Nano, and Classic, we saw a year-over-year decline which we internally had forecasted to occur. This is one of the original reasons we developed the iPhone and the iPod Touch. We expect our traditional MP3 players to decline over time as we cannibalize ourselves with the iPod Touch and the iPhone.

However, we have a great business that we believe will last for many, many years and which we will continue to manage well and offer the world’s most innovative products.

Despite the decline in our sales, our research shows that about 50% of our recent traditional iPod purchasers are buying their first iPod, including those in our high market share countries such as the U.S., Japan, Australia, Canada, and the U.K.

The iPod Touch did extremely well in the quarter, growing more than 130% year over year. Customers continue to embrace this outstanding platform experience, which has been increasingly enhanced by the tremendous offering for the App store.

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