Apple sold 1.1 million iPhones during the quarter.

The customers are loving the product. The research shows that an amazing 95% of iPhone customers would recommend the iPhone to others. Additionally, the research firm Strategy Analytics, estimates that iPhone was the fourth highest selling handset in the U.S. market in the September quarter.

The firm is recognizing revenue from iPhone handset sales using subscription accounting over a 24-month estimated economic life. Total revenue recognized during the quarter from sales of iPhones, iPhone accessories, and payments from AT&T was $118 million. Total deferred revenue from iPhone and Apple TV was $636 million at the end of the September quarter compared to $180 million at the end of the June quarter. After lowering the price of iPhone to $399 last month, the firm offered $100 credit to customers who had purchased an iPhone prior to the price reduction. The company is accounting for the credits as they are redeemed by charging the associated product cost to cost of goods sold. The firm anticipates most of these redemptions to occur by the end of the December quarter.

The firm is on track to begin selling iPhones in Europe on November 9th, partnering with O2 in the U.K. and with T-Mobile in Germany. The company will begin selling the iPhones in France beginning on November 29th, partnering with Orange.

The Apple retail stores posted record quarterly revenue and traffic, driven by very strong interest in Macs, new iPods, and the iPhone.

Revenue was $1.25 billion, representing 42% year-over-year growth. The stores generated $268 million in segment margin compared to $156 million in the year-ago quarter. Apple opened 12 new stores during the quarter, ending with 197 stores. With an average of 190 stores open during the quarter, average revenue per store was $6.6 million compared to the $5.6 million in the year-ago quarter. The stores sold 473,000 Macs during the quarter, representing 46% year-over-year growth. Once again, over 50% of the customers buying Macs in the stores during the quarter were new to Mac.

The company delivered over 300,000 personal training sessions and ended the quarter with 387,000 members in its one-to-one and pro-care programs. Over 31 million people visited the Apple stores during the quarter, representing over 12,500 customers per store per week. The firm will continue to invest in new stores in the U.S. and internationally, with approximately 40 stores scheduled to open in the coming year, including previously announced high-profile stores in New York and Boston. The company is also pleased to announce plans for its first store in China, which will open in Beijing next summer.

The U.S. education channel also posted an outstanding quarter, with record revenue and Mac shipments.

The new account initiative in the K12 market was very successful and the firm’s extremely popular back-to-school promotion drove strong Macbook and Macbook Pro sales, contributing to the best, higher education quarter ever, with 36% year-over-year growth in total Mac sales.

Outlook

- For the quarter, the firm is targeting revenue of about $9.2 billion.
- The firm expects to generate EPS of about $1.42, including an anticipated 7 cents per share related to stock-based compensation.
- The management expects the total quarterly costs of non-cash, stock-based compensation to be approximately $92 million.

- The firm expect gross margin to be about 31%, reflecting approximately $12 million related to stock-based compensation expense. The company is guiding gross margin down sequentially as a result of several factors, including the full quarter impact of the recent product transitions and reduced pricing, lower sales of iLife and iWork in their second quarter, seasonally higher component costs, and a higher mix of indirect sales.

- The company expects operating expenditure to be about $1.165 billion, including about $80 million related to stock-based compensation.
- The firm expects OI&E to be about $195 million.
- Apple expects the tax rate to return to about 32%.

Key questions and answers from the fourth quarter fiscal 2007 earnings call conducted by Apple Inc. on October 22, 2007.

Ben Reitzes (UBS): With regard to your guidance, you seem to be more conservative usually. You guided up versus the street by quite a bit to $9.2 billion. What are you seeing that allows you to be so confident in the face of some people being worried about the economy at this time?

Peter Oppenheimer: We’ll leave forecasting the global economy to others. But Apple is shipping the best products that we have ever made in our history. We eclipsed the record that we set for Mac sales last quarter by 400,000. iPod sales accelerated after the transition and we’ll shipping the best iPods that we’ve ever made, and the iPhone is doing well. We’re quite confident in the business and we’ve exited the September quarter with a lot of momentum.

Ben Reitzes (UBS): On the guidance for iPods, did you feel that a lot of iPod sales are pushed into the December quarter and how do we reconcile the sequential for Macs as well?

Peter Oppenheimer: For Macs, in the two most recent quarters, units have been relatively flat from the September quarter to the December quarter, as our education business falls off and is more or less offset by holiday consumer buying. This year, it’s possible that Mac sales could be sequentially a little lower, given the extraordinary success of the back-to-school promotion, which intensified the seasonality of the September quarter.

Timothy D. Cook: In terms of iPod, sales accelerated dramatically after the introduction of the new iPod and based on some early market share data we’ve seen from the U.K., France, and Germany, our share is up significantly in the month of September. The U.K. is up 12 points, Japan is up 12 points, and France is up 6 points. Given these increases, we feel that we are very well positioned going into the holiday quarter.

Gene Munster (Piper Jaffray): Could you talk about the iPhone related products and services? As per my math, the revenue contribution per quarter for the iPhone is 1/8th? Is it by the month or by the quarter? How does it work for the AT&T revenue share and is it also calculated by day, by month or by quarter?