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Apple

3Q Conference Call Notes


July 20, 2011

1555 NorthPark Drive #102 Weston, Florida 33325 p 954-349-0800 f 954-349-1414

Apple Conference Call Notes 3Q 2011


General Comments: Apple provided a stellar quarter and a major earnings surprise. The Margins were nicely higher than expected, but the company believes that was a one-off and will return to a more normalized margin next quarter. Emerging markets played a key role this quarter as activations of iPhones within the region were strong. In particular, China sales were up by 600%. Guidance was low-balled again as is the tradition with Apple. Overall, the beat by Apple and Google provide confirmation that the mobile handset and computing craze continues and appears to be gaining traction. Apple now has over $70b of cash and securities on its balance sheet.

Highlights of the 3rd Quarter


Apple 3Q EPS $7.79, Estimates were for $5.87 Apple 3Q Rev. $28.57b, Estimates were for $25.02b Apple Sold 20.34m IPhones In Quarter, Estimates were for 17.1m Units Apple 3Q IPhone Units Sold was up 142% Apple Sold 3.95m Macs During quarter, Estimates were for 4.2m Units Apple Sold 9.25m iPads During Quarter, Estimates were for 7.8m Units Apple Sold 7.54m ipods, Estimates were for 8.2m Units Apple 3Q International Sales Accounted For 62% of revenue Apple Sees 4Q EPS About $5.50, Estimates were for $6.41 Apple Sees 4Q Rev. About $25b, Estimates were for $27.73b Apple 3Q Gross Margin 41.7%, Estimates were for 39.2%

Conference Call Notes


Before the conference call (5pm ET), stock was up 5.7% in after hours. Shares trade as high as 7%, above the $400 mark initially. Peter Oppenheimer The highest level of quarterly revenues and earnings in Apples history. Company is very pleased with results. 82% YoY growth in revenue, a record. Mac sales were helpful, but incredible growth of sales of iPhone and iPad. Asia Paciic segment 55% growth of Mac, which was the best region. Launching OS Lion, on Wednesday. 55% of Global 500 companies are either using or testing of the iPhone. iPad - 9.2 million sales were a record and they are able to increase production by 4.5 million and sold every one produced. 33 countries now have access. Only 1.05 million iPads in inventory. This is well below estimates and provides a clue into the demand. 86% of Fortune 500 are now using or testing the iPad. Enterprise is a big part of sales and this is a big surprise. iO5 was introduced last quarter, and will be launched this fall. Apple retail stores generated record results. Growth was driven primarily by higher volumes Macs, iPhones, iPads and iPods. A good majority of sales came from new customers who never before bought an Apple product. Average revenue per store increased 20%, YoY. Store traffic is very strong, 70 million visitors to stores last quarter, an increase of 20%. 30 news stores to open by end of year. This will provide a total of 40 stores in 2011. $76 billion of cash and marketable securities at end of quarter. This is an increase of 10% from last quarter. There is a new revenue recognition process for the rights to releases in the future for certain software. The amounts ($16-$22, depending on device) will be recognized over 4 years.

Company Guidance
Sales - $25b Gross margin to be 38% OPX to be $2.725b Tax rate 24%. EPS of about $5.50

Q/A
12% downtick in revenue for the Sept quarter. A future product transition that they are not going to discuss today will affect some earnings, but otherwise it appears that there is a very high level of confidence by management. (It appears that there was a one-time benefit this quarter and margins will move back to more normalized levels in the future.) Cannibalization of products? There are some customers that have chosen to buy iPad over Mac, but more so there has been a good amount of Windows PCs that were not purchased due to iPad purchases. Update on China China was very key to our results. Greater China, Taiwan, Hong Kong. YoY revenue was up over 600%. This far in 2011, revenue from the region was $8.8b. Margin. What will impact? Gross margin will be down 370 bps sequentially, at 37%. Some of this will be loss of revenue on product transition and back to school promotions. RAM, DRAM, LCD, optical drives are in positive supply and price declines are expected. Hard drives are not as available and prices may rise. One-time benefit on Gross margins Warranty and phone support area. They are not seeing a follow through of these benefits.

What drove iPhone strength in the quarter? We added 42 new carriers and 25 new countries in the quarter. However, those occurred throughout the quarter. The real sequential improvement was emerging and developing markets. China was a big part, as was Brazil and the Middle East. This is good as these have not been traditional markets that Apple has been involved with. They are seeing a big demand and will continue to see the fruits of their labor there. What about Android? It is difficult to get our hands around the number of Android devices that are being activated. Apple has a simple method of seeing how many are activated, but it is not so clear with Android. Apple has 100,000 apps and Android has only hundreds. Also, other tablets are not getting traction. Apple TV? Apple TV continues to do well, but we do not want to mislead. It is still a hobby here and do not want anyone to conclude that it is another leg of the stool. We love the product and customers love the product and we really got it right when we went to the new Apple TV last fall. It continues to evolve and we continue to invest in it. China and Prepaid phones China Mobile China Mobile selling phones at a breakneck pace Prepaid or unlocked phones, are very key in China as well as many emerging markets since credit systems are not as well established as other areas. iPhone volume was up 500% YoY. Apple is not saying that they have figured out how to play perfectly in that environment, but they feel very very good about their progress there. All numbers from China has exceeded any of Apples thoughts and expectations from that region. Why not more movie titles on iTunes? We have a broad library of movies and TV shows, especially in US. Look for more content later this quarter, there are some very cool things coming. --Apple stock finished at $396 after at the conclusion of the call, up 5.3% in the after-hours session. 4.4 million shares traded after-hours.

1555 NorthPark Drive #102 Weston, Florida 33325 p 954-349-0800 f 954-349-1414

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