Apple Inc. (AAPL): Apple F2Q08 (Qtr End 3/29/08) Earnings Call Transcript - Seeking
`
`Page 1 of 32
`
`Seeking Alpha“
`
`Apple F2008 (Qtr End 3/29/08) Earnings Call
`Transcript
`
`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 V\fipfler - Treasurer
`
`Analysts
`
`Ben Reitzes - Lehman Brothers
`
`Bill Fearnley - FTN Midwest
`
`Mike Abramsky - RBC Capital Markets
`
`David Bailey - Goldman Sachs
`
`Katy Huberty - Morgan Stanley
`
`Richard Gardner - Citigroup
`
`Andrew Neff - Bear Stearns
`
`Gene Munster - Piper Jaffray
`
`Shannon Cross - Cross Research
`
`Keith Bachman - Bank of Montreal
`
`Shaw Wu - American Technology Research
`
`Jeff Fidacaro - Merrill Lynch
`
`Toni Sacconaghi - Sanford Bernstein
`
`Charles Wolf - Needham & Company
`
`Apple Inc. (M) F2Q08 Earnings Call April 23, 2008 5:00 PM ET
`
`Operator
`
`Good day, everyone and welcome to this Apple Incorporated second quarter 2008 quarterly results 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
`Nancy Paxton, Senior Director Investor Relations and Corporate Finance. Please go ahead.
`
`Nancy Paxton
`
`Thank you. Good afternoon and thanks to everyone forjoining 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 may consist of forward-looking
`statements regarding revenue, gross margin, operating expenses, other income and expense, stock-based
`compensation expense, taxes, earnings and future products. Actual results or trends could differ materially from our
`forecasts.
`
`12/29/2013
`http://seekingalpha.com/article/73697-app1e-f2q08-qtr-end-3-29-08-earnings-ca11-transcri...
`SIGHTSOUND TECHNOLOGIES
`EXHIBIT 2142
`
`CBM2013-00020 (APPLE v. SIGHTSOUND)
`PAGE 000001
`
`

`

`Apple Inc. (AAPL): Apple F2Q08 (Qtr End 3/29/08) Earnings Call Transcript - Seeking
`
`Page 2 of 32
`
`For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2007, the Form 10-Q for the
`first quarter of fiscal 2008, 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 for introductory remarks.
`
`Peter Oppenheimer
`
`Thank you, Nancy and thank you forjoining us. We are very pleased to report the highest March quarter revenue
`and earnings in Apple's history. Revenue in the March quarter was $7.51 billion, an increase of more than $2.2 billion
`over the previous March quarter’s revenue of $5.26 billion. The tremendous growth in the quarter was driven by very
`strong demand for Macs, higher revenue from iPod and iTunes and the continued popularity of the iPhone.
`
`Operating margin for the quarter was better than expected at 17.5%, primarily due to the higher-than-anticipated
`revenue and gross margin. Net income was $1.05 billion, which was up 36% over the prior March quarter’s results
`and translated to earnings per share of$1.16.
`
`Before going through the details of the March quarter, I would like to give you a few data points indicating just how
`exceptionally well Apple performed. Revenue growth in the March quarter accelerated to 43% year over year, which
`is more than twice the 21% growth rate we achieved in the March quarter last year.
`
`We saw healthy growth in all regions, with the U.S. sales growing 40% and international sales growing 47%.
`
`Sales in our 208 retail stores, most of which are in the U.S., were extremely strong, growing 74% year over year,
`driven in part by traffic of 33.7 million visitors, up 57% from the year-ago quarter.
`
`In the retail stores, 50% of the CPUs we sold were to customers who were new to the Mac, adding growth to our
`platform.
`
`And finally, our U.S. education business generated Mac unit growth of 35% year over year, its highest growth rate in
`any quarter in the last eight years.
`
`I would now like to talk about our Mac products and services, which represented 59% of total quarterly revenue. We
`are extremely pleased to have shipped 2.29 million Macs, just shy of the record number of Macs we sold this past
`holiday quarter and representing 51% growth over the prior March quarter’s results.
`
`This is a 3.5 times the overall PC market rate of growth for the March quarter based on the latest forecast published
`by IDC, up from the 2 to 3 times market growth rate we have been reporting almost every quarter for the last three
`years.
`
`Sales of desktops grew 37%, driven by strong demand for the iMac, as well as increased sales of Mac Pro, which we
`updated in January.
`
`Sales of portables grew 61%, driven by continued strong demand for Macbook and Macbook Pros, both of which
`were refreshed during the quarter, as well as the successful launch of the Macbook Air. Macbook Air represents a
`new portable category for Apple and customers have responded very well to its breakthrough design and ultra
`portability.
`
`We ended the quarter with between three and four weeks of Mac channel inventory.
`
`Now I would like to discuss our music products and services, which accounted for 36% of total revenue during the
`quarter. We sold 10.6 million iPods, an increase of 1% from the year-ago quarter, and we experienced about the
`same seasonal rate of decline between the December and March quarters as we did last year.
`
`iPod revenue grew 8% year over year from higher ASPs in every geographic segment due to the success of the iPod
`Touch. We continue to be very pleased with customer response to the iPod Touch and believe the introduction of the
`software development kit in late June will broaden this appeal even further as great new applications are developed.
`
`After declining 17% year over year in the December quarter, Shuffle sales were also down significantly in the March
`quarter but the weekly rate of sales improved considerably following the February 19th price reduction.
`
`We continue to achieve our objectives of maintaining our high MP3 market share in the U.S. and gaining share
`internationally. Our share of the U.S. MP3 market was 73% according to the latest data published by NPD. Outside
`
`http://seekingalpha. com/article/73 697-app1e-f2q08-qtr-end-3 -29-08-earnings-ca11-transcri. ..
`
`12/29/2013
`PAGE 000002
`
`

`

`Apple Inc. (AAPL): Apple F2Q08 (Qtr End 3/29/08) Earnings Call Transcript - Seeking
`
`Page 3 of 32
`
`the U.S., we gained share in nearly every market we have data for based on the latest information from GFK and
`BCN.
`
`We began and ended the quarter within our target range of four to six weeks of iPod channel inventory.
`
`Sales from iTunes were very strong in the quarter and NPD reported that we have surpassed Wal-Mart to become
`the largest music retailer in the U.S. The iTunes store has over 50 million customers and over 85% share of the U.S.
`market for legally purchased and downloaded music based on the latest information from Nielsen Soundscan.
`
`Our movie rental service has been well-received by customers and we have also just begun selling TV shows in
`Germany and will continue to expand video content internationally.
`
`We are very pleased with iPhone momentum and customer feedback continues to be outstanding. We remain
`confident in achieving our goal of selling 10 million iPhones in calendar 2008.
`
`We sold 1.7 million iPhones during the March quarter and expanded our sales presence to include Austria and
`Ireland. Total revenue recognized during the quarter from sales of iPhone, iPhone accessories, and payments from
`carriers was $378 million. Total deferred revenue from iPhone and Apple TV was $1.93 billion at the end of the
`March quarter, compared to $1.44 billion at the end of the December quarter.
`
`Developer response to the iPhone 2.0 beta software we announced on March 6th has been tremendous. Over
`200,000 developers have signed up and downloaded the software development kit. Interest in the iPhone enterprise
`beta program has also been off the charts. We have received applications from over one-third of the Fortune 500 and
`over 400 higher ed institutions. Hundreds of companies and institutions have been accepted into the program and
`more are being added each week.
`
`Because we announced the specific new features to be included in the iPhone 2.0 release and plan to provide them
`to iPhone customers as a free upgrade in late June, we will delay the start of revenue recognition for all iPhones sold
`on or after our March 6th announcement date until the iPhone 2.0 software is delivered.
`
`The revenue and cost of sales associated with these iPhones will be recognized ratably over the remaining terms of
`their respective 24-month estimated lives. Revenue recognition of handsets sold prior to March 6th and payments
`from carries has not changed as a result of our announcements.
`
`I would now like to turn to the Apple retail stores which had another terrific quarter with revenue growing 74% year
`over year to $1.45 billion. The stores sold 458,000 Macs during the quarter, an increase of 67% year over year. We
`opened four stores during the quarter to end with 208. With an average of 205 stores opened during the quarter,
`average revenue per store was $7.1 million, compared to $4.8 million in the year-ago quarter, an increase of 48%.
`
`Operating profit doubled year over year to $334 million from $164 million. A primary objective in our stores has been
`helping people to get more out of their Macs and the stores delivered 580,000 one-hour personal training sessions
`during the quarter.
`
`We opened our 15th store in the United Kingdom during the March quarter and we looked forward to opening our
`first stores in Australia, China, and Switzerland in the coming months. We expect to open about 45 stores during
`fiscal 2008 and continue to be very confident in the investments we are making in the stores and the asset we are
`building.
`
`Total company gross margin was 32.9%, which was a little stronger than our guidance due to a more favorable
`commodity environment, higher overall revenue, and a weaker dollar.
`
`Operating expenses were $1.16 billion, including $112 million in stock-based compensation expense. O|&E was
`$162 million, below our guidance due to the lower interest rate environment.
`
`The tax rate for the quarter was about 29%, below the expected 32% due to higher foreign earnings and lower
`interest income. We expect the tax rate for the second half of fiscal 2008 to be 31%.
`
`We generated $1 billion in cash during the quarter, ending with $19.4 billion. Cash flow from operations was $1.2
`billion. In the first half of fiscal 2008, we generated $4 billion in cash from $2.6 billion in net income, the difference
`being driven largely by the iPhone and strong working capital management.
`
`Looking ahead to the June quarter, I would like to review our outlook which includes the types of forward-looking
`information that Nancy referred to at the beginning of the call.
`
`For the quarter, we are targeting revenue of about $7.2 billion, or approximately 33% growth over the prior June
`quarter. We expect the total quarterly costs of non-cash stock-based compensation to be approximately $135 million.
`
`http://seekingalpha. com/article/73 697-app1e-f2q08-qtr-end-3 -29-08-earnings-ca11-transcri. ..
`
`12/29/2013
`PAGE 000003
`
`

`

`Apple Inc. (AAPL): Apple F2Q08 (Qtr End 3/29/08) Earnings Call Transcript - Seekin... Page 16 of 32
`
`Okay. Thank you very much.
`
`Operator
`
`We’ll move to Charles Wolf with Needham & Company.
`
`Charles Wolf - Needham & Company
`
`I have a couple of questions; one is do you have any color that you can provide on the demographics of Macbook Air
`purchases? You know, I originally thought it would be for road warriors but the numbers suggest it is selling far better
`than that.
`
`And sort of in the same vein, do you have any sense of how many V\findow users purchased a Macbook Air?
`
`Timothy D. Cook
`
`We don’t on the latter, Charlie. What we would share is that it is appealing to all sorts of people, from college
`professors to students to people that travel a lot. It seems to have universal appeal and also the cannibalization
`factor was extremely low to the other portables, which is one of the key reasons we were able to have a very minor
`sequential decline from Q1, where usually it would be much deeper.
`
`Charles Wolf - Needham & Company
`
`Thank you.
`
`Nancy Paxton
`
`Thanks, Charlie and thanks to everyone forjoining us. A replay of today’s call will be available for two weeks as a
`podcast on the iTunes store, as a webcast on apple.com/investor and via telephone. And the numbers for the
`telephone replay are 888-203-1112, or 719-457-0820, and the confirmation code is 7414725. These replays will be
`available beginning at approximately 5:00 pm. Pacific Time today.
`
`Members of the press with additional questions can contact Steve Dowling at 408—974-1896, and financial analysts
`can contact Joan Hoover or me with additional questions. Joan is at 408—974-4570 and I am at 408—974-5420.
`Thanks again.
`
`Operator
`
`That does conclude today’s conference call. We do thank everyone for their participation.
`
`Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an
`important resource for bloggers and journalists, and are excited to contribute to the democratization of financial
`information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for
`transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the
`condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to
`www.SeekingAlpha.com. All other use is prohibited.
`
`THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S
`CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE
`EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS,
`OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO
`PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY
`INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB
`SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO
`PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY
`INVESTMENT OR OTHER DECISIONS.
`
`Ifyou have any additional questions about our online transcripts, please contact us at:
`transcripts@seekingalpha.com. Thank you!
`
`Executives
`
`Nancy Paxton - Senior Director, Investor Relations and Corporate Finance
`
`Peter Oppenheimer - Chief Financial Officer, Senior Vice President
`
`http://seekingalpha. com/article/73 697-app1e-f2q08-qtr-end-3 -29-08-earnings-ca11-transcri. ..
`
`12/29/2013
`PAGE 000004
`
`