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Apple Inc. (AAPL)

F1Q10 Earnings Call

January 25, 2010 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

Richard Gardner – Citigroup

Bill Shope – Credit Suisse

Benjamin Reitzes – Barclays Capital

Toni Sacconaghi - Sanford Bernstein

Charles Wolf – Needham & Co.

Mike Abramsky - RBC Capital Markets

Katie Huberty – Morgan Stanley

Shannon Cross - Cross Research

David Bailey - Goldman Sachs

Mark Moskowitz – JP Morgan

Maynard Um – UBS

Keith Bachman – BMO Capital Markets

Chris Whitmore - Deutsche Bank

Bill Fearnley - FTN Midwest

Presentation

Operator

Welcome to the Apple Incorporated first 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 call over to Ms. Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma’am.

Nancy Paxton

Thank you. Good afternoon and thanks to everyone for joining us. Speaking today is Apple CFO, Peter Oppenheimer, and he will 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 2009, and the Form 10-Q for the first quarter of fiscal 2010 filed earlier today. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

With that, I would like to turn the call over to Peter Oppenheimer for introductory remarks.

Peter Oppenheimer

Thank you, Nancy. Thank you for joining us. We are thrilled to report our best quarter ever. We posted Apple’s highest quarterly revenues and earnings and set new records in sales of Macs and iPhones.

We are shipping the best products in our history and customers love them. Today we are reporting our current results as well as all historical comparisons under the new accounting principles we discussed with you on our last earnings conference call which I will explain in detail after going through the highlights of our record breaking December quarter.

Revenue for the quarter was $15.68 billion, growing 32% from the prior December quarter’s results and surpassing our previous quarterly record by almost $3.5 billion. Operating margin was Apple’s highest ever at $4.73 billion representing 30.1% of revenue. Net income was $3.38 billion, up 50% over the year-ago quarter and was almost $850 million higher than our previous quarterly record. Earnings per share were $3.67.

Turning to the details of our results, I would like to begin with our Mac products and services. We generated record Mac sales of 3.36 million, beating our previous record set in the September quarter by over 300,000. Quarterly Mac sales grew 33% year-over-year and this compares extremely favorably to IDC’s latest published estimate of 17% growth for the market overall in the December quarter. We are extremely proud of this result and believe our Mac hardware and software are providing outstanding innovation and value that our customers really love.

Response to the new iMac introduced in October was very strong contributing to 70% year-over-year growth in desktop sales. Customers are thrilled with the iMac’s tremendous new features, including enhanced performance, wide screen LED display, wireless keyboard and new magic mouse. Portable sales were also robust during the quarter increasing 18% year-over-year based on strong sales of both MacBook and MacBook Pro.

We experienced very strong demand following the October launch of the new MacBook, which features a durable, unibody design, brilliant LED display, glass multi-touch trackpad and enhanced performance. The new iMac and MacBook launches fueled very strong results in our education business during the quarter. Overall Mac sales through our US education channel increased 16% year-over-year as we set new December quarter records for both K-12 and higher ed channels. We began and ended the quarter with between 3-4 weeks of Mac channel inventory.

Now I will turn to our music products. We sold almost 21 million iPods compared with 22.7 million in the year-ago quarter. As expected, sales of our traditional iPods declined year-over-year but the very strong 55% year-over-year growth in sales of iPod touch resulted in an overall iPod ASP increase of 9% and revenue growth of 1%. Our share of the US market for MP3 players remains at over 70% based on the latest monthly data published by NPD and iPod was the top selling MP3 player and continued to gain share internationally year-over-year in most countries we track based on the latest data published by GFK.

The iTunes store delivered a record breaking quarter with strong sales of music, video and apps. iTunes has the world’s largest online music catalog with a selection of 11 million songs. iTunes also features over 8,000 Hollywood films including 2,000 in HD video, 10,000 music videos and over 50,000 TV episodes. The App Store continues to be an unparalleled success with more than 3 billion downloads to date by iPhone and iPod touch users in 77 countries. We ended the quarter within our target range of 4-6 weeks of iPod channel inventory on a look-forward basis.

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