Timothy D. Cook: We believe that the number of phones bought with the intention of unlocking was significant in the quarter but we are unsure how to reliably estimate the number. In the December quarter particularly, we saw sales increase across the quarter similar to what you would expect with the holiday gift-buying pattern. As we are new in the business, we are unsure when all the recipients will activate. Some people wait until their existing contracts expire, some may initially use the non-phone features only, others activate in the future, and so at this point we do not have a precise estimate for you. We see this phenomenon as being an expression of strong interest in iPhone globally and in that way, it is a good problem to have.
Toni Sacconaghi (Sanford Bernstein): Qualitatively, do you believe the percentage would be higher or lower this quarter, or is it too early to tell based on your experience?
Timothy D. Cook: It is too early to tell.
Toni Sacconaghi (Sanford Bernstein): You had mentioned initially at the end of the first quarter of iPhone sales that you did not want to talk about iPhone channel inventory, that it was still a relatively small and insignificant product. Given that it has over $1 billion in deferred revenue, why are you choosing not to disclose that number?
Peter Oppenheimer: That is not the reason we gave. We said that since we only have one channel partner in each of our first four countries, we are not going to report the inventory but we are going to employ our proven systems and processes to manage the iPhone differently, or effectively.
Mike Abramsky (RBC Capital Markets): Could you reconcile the 2.3 million iPhones shipped in December versus over the 4 million announced at MacWorld?
Peter Oppenheimer: At MacWorld, the 4 million iPhones were to date as of the keynote and the 3.7 million iPhones that we had sold cumulatively through the December quarter were part of that.
Mike Abramsky (RBC Capital Markets): Would you say that suggests a significant increase in run-rate since December?
Peter Oppenheimer: Our customers are raving about their iPhones and we remain confident in our goal for 10 million for calendar 2008.
Mike Abramsky (RBC Capital Markets): How European iPhone uptake is faring versus your U.S. experience?
Timothy D. Cook: We just launched in France at the end of November. We launched in the U.K. and Germany in November and earlier November, and so we had limited experience but we are happy with all of the launches so far.
Mike Abramsky (RBC Capital Markets): Are 3G and Bluetooth important to that 10 million iPhone outlook, as well as to your plans for the European market?
Timothy D. Cook: We do not talk about new products but we are confident in meeting the 10 million for the year of 2008.
Mike Abramsky (RBC Capital Markets): Do you have any plans to talk about next regions or countries at all?
Timothy D. Cook: We have nothing to announce today.
Tavis McCourt (Morgan Keegan): The last couple of quarters, you have mentioned in relation to the guidance for gross margin, the expectation of component costs creeping back up. You did not mention that this quarter. Does your guidance presume a flat component cost environment?
Timothy D. Cook: For the current quarter, we believe both DRAM and NAND Flash memories will remain in an oversupply condition. We see LCD, hard drives, and optical markets being close to a supply/demand balance, which should result in some improvement in costs from last quarter. For most of the other components, we see the seasonally slower March quarter resulting in historic level price declines.
Shaw Wu (American Technology Research): Your desktop business was stronger than your portable business, at least on a sequential basis and even on a year-over-year basis. Why that happened?
Timothy D. Cook: The iMac announcement in August was well-received and the iMac had enormous momentum. If you look at desktops, the iMac grew faster than notes but the total of our desktops grew at 53% and that compares to an IDC projected growth rate of the desktop market of only 10%, so over five times the market rate of growth.
Shaw Wu (American Technology Research): Your guidance implies seasonality for the whole company. What do you think of iPhone seasonality at this point?
Peter Oppenheimer: This is not something that I can comment on this quarter. We have not yet been through a March quarter with iPhone so we do not have any history go by as we do with Mac and iPod, so we will report to you in April what we did for the March quarter.
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