Historically you have given a gross margins range, which it was much lower than it is now, and you have made relative comments. Could you provide any further details on a relative basis?

Both Mac and iPod hardware margins were strong in the quarter. They both benefited from a favorable commodity environment and the company had better service costs and leverage from the revenue and a good mix.

Your revenues have been growing at about 20% a quarter. Your R&D expense has been flat for the last 6 quarters. Is there an inflection point or a bend where particularly with some of the ostensible increasing functionality that you are going to hope to bring in the form of software to both your Apple TV platform and your phone offerings? Do you expect an inflection point in R&D and why hasn’t it gone up commensurately with sales especially given all the new the product initiatives that you have?

The company is confident in not only what it plans to do with iPhone and Apple TV, but also OS10 and applications. In the last quarter, the company has capitalized software development. The R&D as a percent of revenue was about 3% this quarter. It had been running at four and without the capitalization, you would have seen a trend that was a similar to the past.

It has been your long-standing practice to pass favorable component prices through to customers when you introduce new products. Why wouldn’t you make an exception in an environment like the one in the first quarter where you had dramatic declines in prices? Is it because you don’t believe that there would be enough elasticity there to justify it or is it because of the intricacies of managing price protection and channel inventories and so for. What is your strategy there?

The company believes its products are competitively priced. If you look at the Mac, the company grew at 36% year-over-year. This is over three times the industry growth. The IDC was projecting a 4% growth rate for the US. The company grew in the Americas at 36%, so 9 to 10 times. IDC was projecting 5% Europe, the company grew 38%. This is the 9th quarter out of the past 10 that the Mac has grown over the market. The Mac seems to have momentum. If you look at iPod and look at the share that the company has over 70% in the US, over 60% in Australia and Canada, over 50% in Japan and Hong Kong and growing on a year-over-year basis in most of Western Europe.

Were there any changes in the mix between HDD flash based iPods this quarter versus last?

The company doesn’t get into reporting that level of product detail, but if you look at the ASPs from the December to the March quarter, you will see that they are relatively flat.

On the new EMI deal you announced this quarter, assuming the other labels or some of the other labels follow suit and you reach the target for the end of the year for DRM-Free Music. Will the economics of iTunes change in any way from margin perspective given the increased price for the higher quality tracks?


Company’s philosophy has been to run the music store over break-even because the company thinks that selling music and videos, helps to sell iPods and accessories.

Could you give an update on direct sales versus indirect mix and then did the mix of direct versus indirect help margin in the quarter?

The direct sales, which the company defined as sales for the retail stores, online, direct to education and enterprise customers and through the music store rose 50% in the quarter and that was close to expectations.

You have been thinking about revenue by geography and the opportunity for iPod outside the United States. Could you give some additional color on how the iPod did outside the U.S. and how it did versus your expectations and sort of the same thing for the Mac as well. And I see that the, I see the revenue and things like that by geography, but if you give that additional color on the product side, or even directionally that would be helpful.

On sort of the Mac point of view, the company is growing at a multiple of the market in the U.S. and Europe and in Asia Pacific, Asia Pacific is fastest growing region. It grew at 89% year-over-year. The IDC projection for Asia Pac was only 14%. That is over 6 times the market. As the company has gotten out of the Intel transition infact it has been over 3 times the market growth for the last three quarters. September was 30%, December with 28%, March with 36%. On the iPod, like the Mac, the company is doing well outside the U.S. The company is now over 60% in Australia and Canada in share. The companies continue to be over 50% in Japan, the company has now gone over 50% in Hong Kong. Apple is in the 40% to 50% range in the U.K. in Switzerland, in Singapore, in Denmark. The company hit a high in Germany of 28%.

Over the last couple quarters, you have given seasonality on both the iPod and Macs. Could you help understand was it better for the June quarter in terms of what the normal declines or increases would be? Is the Leopard push out any part of the reason why you might be more conscious on the Mac side of things?

For Mac, sales have typically increased from the March to June quarters but at lower ASPs as a result of the education buying season beginning. The June quarter typically seize higher K to 12 sales while the September quarter tends to see stronger higher education sales. But the June and September quarters are really bigger education selling seasons. For the iPod, the June quarter is usually seasonally the weakest from a customer perspective. Last year the company saw iPod sales decline sequentially from the March to June quarters despite there being some constraints in the beginning of the March quarter. This year the company was in good supply and demand balance throughout the March quarter.

Is it safe to say gross margins are consistent with the 35% level?

For the June quarter, the company has guided gross margins to 32%. The company continues to target gross margin in the 27% to 28% range on a longer-term basis despite recent results which have benefited from a number of factors including a favorable commodity environment. Now looking forward, the company is likely to see other factors which will drive gross margin down, such as different commodity environment or product mix. The company does not see the current gross margin level that is sustainable and doesn’t want to count on them.

You are guiding expense is up sequentially, you talked about iPhone related expenses. What types of programs and promotions do you plan to do there?