- Mac shipments were up 32% over the first half of 2006.
- iPod shipments grew 40%.
- The company has recently shipped 100 millionth iPod.

The management believes that the iPhone is a revolutionary device that is years ahead of the competition.

At MacWorld the company demonstrated a number of the iPhones break through feature including its pioneering multi-touch display in user interface, visual voicemail, desktop-class email and web browsing and the best iPod ever. Apple plans to build on this foundation by continuing to develop new software features as well as entirely new applications and incorporate them into the iPhone.

Since iPhone customers will be the best advocates for the product, the company wants to get them many of these new features and applications at no additional charge as they become available. Since the company will be periodically providing new software features to iPhone customers free of charge, it will use subscription accounting and recognize the revenue and product cost of goods sold associated with iPhone handset sales on a straight-line basis over 24 months.

The cash from iPhone sales will be collected at the time of sale, the company will be reporting deferred revenue and cost of goods sold on its balance sheet and amortizing both of them into its earnings on a straight-line basis over 24 months.

The company also plans to recognize payments from AT&T Cingular as revenue over time as earned.

Apple will report iPhone results each quarter that will include unit sales and recognized revenue for iPhones, iPhone accessories and payments from AT&T Cingular. Similar to iPhones, the company plans to periodically provide new features and enhancements at no charge to Apple TV customers. The company will also recognize the revenue and product good costs associated with Apple TV on a straight-line basis over 24 months.

Third Quarter Outlook

- For the quarter, the company is targeting revenue of about $5.1 billion.
- Total quarterly cost of non-cash stock-based compensation is expected to be $55 million.
- Gross margin is expected to be about 32% reflecting $9 million related to stock-based compensation expense.

OpEx is expected to be about $950 million including about $56 million related to stock-based compensation.

- This includes increased marketing expenses related to the launch of the iPhone. The company expects OI&E to be about $150 million and tax rate is expected to be about 32%.
- The company expects to generate EPS of about 66 cents, including an anticipated 5 cents per share related to non-cash stock-based compensation expense.

Key questions and answers from the second quarter earnings call conducted by Apple, Inc. (AAPL: chart) on April 25, 2007.

Could you give any Apple TV numbers at this point?

The company has gotten some incredible reviews from many different sources. The company has just started shipping on the third week in March. The management is not releasing the exact unit shipments expectations.

How do you feel about your current staffing levels ability to higher employees? Are you looking to staff up at this point?

The company has no issue at all in hiring really great people. iPod is a very revolutionary product, it uses the Mac OS, as you know, and so the company had always planned on using Mac OS resources to complete the iPhone. It is taking more time than more of resource than was thought and so the company made a choice and delayed Leopard and it thinks it is the right choice.

Could you walk through the puts and takes behind the sequential decline in gross margin. Is the component environment outlook the most important factor to hear about?

The company is guiding gross margin down sequentially, largely as a result of the commodity pricing beginning to trend up and also the beginning of the education buying season which the company sees higher purchases this quarter, typically lower at price points. And a couple weeks ago the company completely repriced its display line and that had an impact as well.

You talked about payments from Cingular AT&T. Are you getting subsidies for the phone or are you getting a percentage of the monthly service contracts that the customers enter into?

The management is not able to comment specifically. Apple will recognize payments from AT&T Cingular as revenue overtime as earned. The commodity environment last quarter was more favorable than expected, particularly in the memory area. This quarter the company sees some commodities, moving from an oversupply condition to more of a supply demand balance position, particularly NAN Flash and memory in general.

What was the CapEx for the quarter?