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Apple execs talk product transitions, iPhone expansion, more...

post #1 of 18
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With most of the attention surrounding Apple's third quarter earnings on Wednesday focusing on iPhone metrics, several interesting revelations by members of the company's executive team have gone largely undocumented.

During a 60-minute conference call with analysts and members of the media, Apple chief operating officer Tim Cook and chief financial officer Peter Oppenheimer discussed changes to the way the company will measure its retail performance, upcoming product transitions, and a plan to grow its iPhone business "model by model."

Excerpts from the relevant sections of the call have been transcribed for reader appreciation.

Apple Retail Performance

During his opening comments, Oppenheimer spoke at some length about Apple's ongoing retail story and how recent changes will alter the way it measures the segments performance:

Oppenheimer: "The stores offer customers a great experience for buying Macs, iPods and now iPhones. As we compensate iPhones sales through our stores that will result in significant amount of deferred revenue and cost of goods sold, we revisited how we measure our stores performance. Since the stores inception, operating income for our retail segment reflected cost of sales for Apple products at the amount normally charged for the same product to Apples major US channel partners operating retail stores, less the cost of sales program and incentives to those partners."

"We believe this enables us to measure the stores performance in way that would allow comparability to the performance of those results. Today and with more than six years of retail operating history and given the subscription accounting for the iPhones, we have determined that this is the right time to begin measuring our retail segment operating performance in a manner that is generally consistent with the way we measure Apples other operating segments. Therefore, beginning with the June quarter, we are using cost of sales for Apples products sold through our retail stores that are similar to those used for Apples other operating segments."

Similarly, Oppenheimer added, the company has altered the way it records revenue for time-oriented services such as .Mac and AppleCare.

Oppenheimer: "We are also changing the way we measure AppleCare and Mac sales through our retail stores. Historically, revenue and cost of sales were recognized by the retail segment at the time of sale for AppleCare and .Mac. We are now recognizing revenues in cost reduced products over the life of their respective agreements consistent with the accounting treatment in our other segments. We believe all those changes will allow greater comparability of results between our various operating segments."

Upcoming Product Transitions

During an ensuing question and answer session, Oppenheimer was asked by UBS analyst Ben Reitzes why he was again providing extremely conservative guidance for Apple's current fiscal quarter, to which Oppenheimer responded with some intriguing remarks.

Reitzes: "Good afternoon. Thanks a lot. Couple of questions if I may. Peter... I guess with regard to guidance, you just guided $0.66 and came up with $0.92. Why should we believe that this is $0.66 -- $0.65 this time when you have been so conservative. Are you really that worried about the component costs, or is there something else going on with regard to our coming price cut for product?"

Oppenheimer: "Ben we gave you guidance that have reasonable confidence in achieving. Regarding gross margin, I have guided down to 29.5%. As a result primarily of these factors. Were going to run the back-to-school promotion for most of the quarter, great promotions for the company and bring us each year many new customers, but it is an expensive one. We do expect to see higher commodity costs and I will let Tim comment on that in a moment, and we got some product transitions, but I cant get into it."

iPhone Expansion

Reitzes: "Well, I am sure someone will ask the component question. I guess can you give us any more flavor on the iPhones -- perhaps how many have been sold to date. What do you think of just various reports and chatter out there, I mean this is a new frontier for us as analysts and were trying to navigate all the headwinds and tailwinds etc? Can you give us any more commentary as to what you think demand is like right now as you see it and how it should build into year-end and how we fight this battle as investors and trying to match the hike?"

Cook: "Hi Ben, it's Tim."

Reitzes: "Hi, Tim."

Cook: "Let me take this one. As Peter said in his opening comments, we sold 270,000 units in the first 30 hours. And AT&T said that more iPhones were sold in the first week than they have sold in the first month of any other wireless device in their entire history. More important than this our customers looked at iPhone as Peter mentioned in this opening comments with a recent survey finding that a stunning 90 percent of iPhone owners were extremely very satisfied with the iPhone. And so, our view is the starting gun has been fired and we have gotten off to a great start.

However our primary focus is not initial sale. We are focused on building a third great business for Apple over the long-term, alongside our Mac and iPod businesses both of which you can see from the results reported today are doing very well.

It wont be easy to build the third business because the competitors are at large entrenched and it will not be done overnight. Our perspective is measured in years not months. But the rewards we believe are huge for Apple. And Apple clearly has the skills including world-class hardware and software engineering that make us confident that we can succeed.

As Peter mentioned earlier, our next step is to begin selling the iPhone in Europe next quarter starting with the few major countries and then expand over the whole of 2008. We hope to as a result of this and other things, we hope to grow our sales step by step, year by year and model my model. Just like we have done in the prior product lines. And I do think its interesting to note that it took Apple seven quarters -- almost 2 years -- to sell our one millionth iPod. We hoped to sell our one millionth iPhone in the first full quarter of sale."

Reitzes: "Okay."

Cook: "What we think so far, it gives us a lot of confidence to reiterate our goal to sell 10 million units before [the end of] 2008."

iPhone Royalty Payments?

At one point, David Bailey from Goldman Sachs asked Oppenheimer whether Apple received any royalty payments from companies such as Google who have their services linked promptly from the iPhones home screen.

Bailey: "Great, good afternoon. In addition to the payment that youre getting from AT&T, are you receiving any fees from the other vendors that have placement for their services on the main screen of the iPhone?"

Oppenheimer: "David, we dont discuss the terms of various agreements that we have with vendors and suppliers. I am sorry, we cant answer that question.

Bailey: "You cant even answer if you are or if you are not?"

Oppenheimer: "No."

Best Buy and Component Pricing

Richard Gardner from Citigroup then asked for an update on Best Buy and component pricing.

Gardner: "Thank you very much. I was wondering Tim, if you could give us an update on the Best Buy roll out and how thats coming and how many stores you are in at the beginning of the quarter or how many stores exiting the quarter and whether that was a contributor -- a material contributed to the Mac unit shipment number in the quarter?"

Cook: "Richard the beginning of the quarter we were around 15, by the end of the quarter we were around 75. By the end of this quarter we will be over 200 and we expect to be almost 300 by the end of the calendar year. So its going very well, both parties are very happy about it and thats the reason we are expanding."

Gardner: "Okay. And then I guess I will ask the component question, Tim. I was just hoping maybe you could give us a sense of what was better than expected in the second quarter and how you see component prices trending for the categories in the third quarter?"

Cook: "Yes, sure. Component prices particularly DRAM, which bottomed in the quarter later than we predicted and lower than the predicted. Both of those were led component prices in general will be more favorable than the predicted. And this contributed to the higher than expected gross margins as Peter talked about product plans going forward, as you know historically in the second half of the year, the commodity markets tighten as the industry heads into a seasonally stronger demand period, and I dont envision this year being fundamentally different.Specifically, we see the NAND flash market tightening, we expect DRAM to stabilize from its recent oversupply state, and on LCDs, our fundamental lack of new capacity investment combined with flat-panel TV demand is creating a greater than typical imbalance between supply-demand. For other commodities, we expect them to follow more historic trends."

Gardner: "Tim, if I could follow up. Was -- did pre-buys or forward purchases on NAND during the first calendar quarter contribute meaningfully to the gross margin upside in the second quarter?"

Cook: "Rich, I dont want to go into that level of detail."

Gardner: "Okay. All right. Thank you."

Cheaper iPhones and iPhones for Business

Two final questions of interest came from Merrill Lynch analyst Richard Farmer, who asked about the potential for cheaper iPhone models, and from Bear Stearns analyst Andy Neff, who questioned how Apple planned to address the corporate market with iPhone.

Farmer: "Okay. Thanks. And then just a broader question about the iPhone price points overtime. If you look at the history of your iPod business, you started at higher price points and ultimately had a broad line all the way down to $79, obviously the first iPhone is at $500 or $600. Should we reasonably assume that over time we will have a broader line and lower price points and kind of a family of phones to choose from?"

Oppenheimer: "We dont really comment on that. We believe the iPhone offers tremendous value that customers couldnt even have imagined before. As you know, this is really three product in one, its a revolutionary mobile phone, a wide screen iPod, and Internet in your pocket with the best desktop class e-mail Web browsing and Map application ever on a mobile phone before. And we think, customers are clearly seeing as witnessed by the customer satisfaction ratings that we talked about."

Farmer: "Okay, thank you."

Neff: "Great. Two things I guess, one just one of the comments, you seen a lot of issue about corporate e-mail, are there thoughts about relative to the phone about trying to address that market began discussions with some of the major providers corporate e-mail along those lines or thought about how you guys try to address that corporate market? The second was just again to clarify in terms of the accounting treatment, just relative to what are you going to recognize in the deferred revenues going forward, can you clarify for us what you are going to put in there?"

Oppenheimer: "Andy in terms of the corporate market, we think the iPhone is a breakthrough product for all customers including business customers. Its a great Internet device that includes the best e-mail client out there with the best Web-browser ever on a mobile device. And with a very little bit of help from the corporate IT department that can be set up to work with corporate e-mail. We already have a number of corporate customers that are piloting the iPhone in their enterprises and they have told us that they are very happy with the results so far."

Gary Wipler:" Andy with regard to your deferred revenue question, we provided to you the deferred revenue scheduled this quarter for iPhone and Apple TV, it has 180 million of total deferred revenue which again related only to the hardware from the iPhone and from Apple TV, so there was no accessories revenue included in this or payments from AT&T. We will provide a similar schedule to you in October to the September quarter and I will walk you through then how the various revenue streams impacted the financials."
post #2 of 18
It's nice to be associated with a company that so obviously knows how to handle a whizbang product.
:-)
post #3 of 18
If anyone wonders why there is so much speculation about Apple's finances, and plans, you can see why here.

These weren't the only questions Apple didn't answer.

I've listened,to, or read, other analyst calls with other companies, mostly tech, and they answer much more of these questions than Apple does.

Perhaps Apple likes the speculation, I don't know.
post #4 of 18
10 million iPhones before 2008? Only if they start some international releases and it goes over well in those places. Excusive carrier contracts won't go over well in Europe. Given the current 3rd party software limitations, I doubt it'll fly as well in Asia either. It's doable, but they need to have their act together.
post #5 of 18
Quote:
Originally Posted by pmjoe View Post

10 million iPhones before 2008? Only if they start some international releases and it goes over well in those places. Excusive carrier contracts won't go over well in Europe. Given the current 3rd party software limitations, I doubt it'll fly as well in Asia either. It's doable, but they need to have their act together.

Typo obviously. I'm sure it should read 2009.
post #6 of 18
Umm, cliff notes please?
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post #7 of 18
Quote:
Originally Posted by melgross View Post

Typo obviously. I'm sure it should read 2009.

Yeah, unless they somehow expect to sell nine million in the last three months of the year.
post #8 of 18
I'm always amazed at the consistency of Apple's messages. Their PR staff is spectacular at making sure every person in the company says the same thing, almost word for word. I don't know how many times I've heard that the iPhone is three devices in one and the "best iPod (Apple's) ever made."

It's not just the iPhone either. Every every employee from the executives down to the part time retail store employees project the same message for every product. Pretty amazing.
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post #9 of 18
I am impressed by the quiet confidence, and the lack of braggadocio in the following statement, in particular: "Our perspective is measured in years not months. But the rewards we believe are huge for Apple. And Apple clearly has the skills including world-class hardware and software engineering that make us confident that we can succeed."

As many others have pointed out, this is a stock for the long haul, from a company that projects the sense that it knows what it is doing.

There will be repeated instances of the kind of volatility that we witnessed over the past couple of days, but that's just noise.
post #10 of 18
Quote:
Originally Posted by CosmoNut View Post

I'm always amazed at the consistency of Apple's messages. Their PR staff is spectacular at making sure every person in the company says the same thing, almost word for word. I don't know how many times I've heard that the iPhone is three devices in one and the "best iPod (Apple's) ever made."

It's not just the iPhone either. Every every employee from the executives down to the part time retail store employees project the same message for every product. Pretty amazing.

I agree with that observation. More companies should display this kind of discipline in the way they align their messaging to external constituencies. It's very frustrating some times, since we all want to know more, but boy, they are disciplined.

The other one I noticed is: ".....a revolutionary mobile phone, a wide screen iPod, and Internet in your pocket with the best desktop class e-mail Web browsing....."
post #11 of 18
edited
post #12 of 18
Quote:
We already have a number of corporate customers that are piloting the iPhone in their enterprises and they have told us that they are very happy with the results so far.

Will corporate customers be required to have iTunes Store accounts and credit card numbers for each employee like regular home users? And didn't AT&T say that the iPhone does not qualify for business accounts?
post #13 of 18
New iMacs, iPhone nanos, and a 11" tablet Mac. That's what I want, now get your ass in gear Apple!
Citing unnamed sources with limited but direct knowledge of a rumoured device - Comedy Insider (Feb 2014)
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post #14 of 18
Quote:
Originally Posted by Ireland View Post

New iMacs, iPhone nanos, and a 11" tablet Mac. That's what I want, now get your ass in gear Apple!

I just want a decent mini-tower.
A friend of mine wants an 80GB iPod with the iPhone screen (it would be used exclusively for video)
The medical community would love a tablet Mac and are lining up for Modbooks even though they cost far more than an Apple solution would.
My bosses would love iPhones to be available here in Canada on a reasonably priced plan (nothing currently exists in this country that's even close to prices in the rest of the world)

I agree it's quite amazing how everyone at Apple spouts the same meaningless marketingspeak when asked direct questions about their products.

I wish I'd bought AAPL when it slid down to $50 last year.
post #15 of 18
Quote:
Originally Posted by Bregalad View Post

I agree it's quite amazing how everyone at Apple spouts the same meaningless marketingspeak when asked direct questions about their products.

They're a well-oiled machine, for sure.

Proud AAPL stock owner.

 

GOA

 

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Proud AAPL stock owner.

 

GOA

 

Get the lowdown on the coming collapse:  http://www.cbo.gov/publication/45010

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post #16 of 18
Apple consistently under-promises and over-delivers.
post #17 of 18
Quote:
There will be repeated instances of the kind of volatility that we witnessed over the past couple of days, but that's just noise.

Well, you could say that, but you could also lift your head up from your Macbook and realise that there is a world outside and in that world the global economy is going through some pretty serious shakes at the moment. All markets in all countries are feeling the effects of an incredibly weak dollar, a potential disaster in the US sub prime mortgage market and soaring inflation rates accross other western economies. Steve Jobs could announce a cure for cancer and the share price would still go south if the rest of the economy went tits up!
post #18 of 18
Quote:
Originally Posted by Bregalad View Post

I wish I'd bought AAPL when it slid down to $50 last year.

I sold my 500 shares in the dark days of 2000-2001, just months before the iPod. $27.50 a share. Damn it.

<sniff>
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