Apple Inc. (AAPL
Q4 2008 Earnings Call Transcript
October 21, 2008 5:00 p.m. ET
Nancy Paxton - Senior Director, Investor Relations and Corporate Finance
Peter Oppenheimer - Chief Financial Officer, Senior Vice President
Steven P. Jobs - Chief Executive Officer, Director
Timothy D. Cook - Chief Operating Officer
Bill Shope - Credit Suisse
Richard Gardner - Citigroup
Ben Reitzes - Barclays Capital
Shannon Cross - Cross Research
Gene Munster - Piper Jaffray
Charles Wolf - Needham & Company
Toni Sacconaghi - Sanford Bernstein
Bill Fearnley - FTN Midwest
Mike Abramsky - RBC Capital Markets
Good day and welcome to this Apple Incorporated Apple fourth quarter fiscal year 2008 conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director Investor Relations and Corporate Finance. Please go ahead.
Nancy Paxton -- Senior Director, Investor Relations and Corporate Finance
Thank you. Good afternoon and thanks to everyone for joining us. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, and earnings per share. Actual results or trends could differ materially from our forecasts. For more information, please refer to the risk factors discussed in Apple''s Form 10-K for 2007, the Form 10-Q for the first three quarters of fiscal 2008, and the Form 8-K filed with the SEC today and the attached press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.
And with that, I would like to turn the call over to Apple''s CFO, Peter Oppenheimer, for introductory remarks.
Peter Oppenheimer – Chief Financial Officer
Thank you, Nancy. Thank you for joining us. We are very pleased to report our September quarter results, which were record-breaking on a number of fronts. First, we sold more Macs than we have in any other quarter in Apple''s history. Second, we sold more iPhones in the September quarter than in all previous quarters combined. Third, we sold more iPods than in any prior non-holiday quarter and finally, we generated more revenue and earnings than in any previous September quarter in Apple''s history. Revenue for the quarter was $7.9 billion, representing 27% growth and an increase of $1.68 billion over the previous September quarter’s revenue of $6.22 billion. Operating margin for the quarter was better than expected at 18.3%, due to higher than anticipated gross margin. Net income was $1.14 billion, which was up 26% over the prior September quarter’s results and translated to earnings per share of $1.26.
As we have discussed in the past, because we may provide new features and software applications to iPhone and Apple TV customers in the future free of charge, in accordance with GAAP, we use subscription accounting to recognize revenue and cost of sales for these products on a straight line basis over their two-year estimated economic lives. This, results in the deferral of almost all revenue and cost of sales related to iPhone and Apple TV during the quarter in which these products are sold to customers. In contrast, we generally recognize revenue and cost of sales for our other hardware products, such as Macs and iPods, at the time of sales as we do not provide new features or software applications for those products free of charge.
As we reported in our press release, iPhone unit sales grew significantly in the September quarter, resulting in a material increase in the amount of iPhone revenue and product costs that had been deferred for recognition in future periods. Specifically, deferred revenue from iPhone and Apple TV sales grew to $5.8 billion at the end of the September quarter, an increase of nearly $3.8 billion from the end of the June quarter. If iPhone revenue was not deferred, iPhone would have represented 39% of Apple''s revenue in the September quarter. While our GAAP results provide significant insight into our performance, we are supplementing our analysis of the business internally by using non-GAAP financial measures that correspond to the total sales and product costs of iPhones and Apple TVs sold during the quarter. We believe these non-GAAP measures provide us with meaningful additional insight into the performance of our business, as well as provide information about iPhone and Apple TV that is similar to the information we use to analyze the performance of Macs and iPods.
Beginning with this quarter’s earnings release, we plan to provide you quarterly with non-GAAP financial measures we use internally to help us evaluate our performance and make operating decisions. I encourage you to read the earnings press release as it provides a full description of these non-GAAP measures, including how we use them, how they are derived, and their limitations.
I would now like to go through several of the non-GAAP measures. First, we use a non-GAAP measure that we call adjusted sales to provide more information regarding our underlying sales trends and to evaluate the sales dollars of products sold in the period. We calculated adjusted sales by backing out the September quarter’s amortization of deferred revenue from iPhone and Apple TV sales and adding back all amounts generally due at the time of sale for iPhones and Apple TVs shipped in the September quarter. Adjusted sales totaled $11.7 billion, which was about $3.8 billion higher than our reported revenue of $7.9 billion. Second, we use a non-GAAP measure we call adjusted cost of sales that corresponds to adjusted sales. We calculated adjusted cost of sales by backing out the September quarter’s amortization of deferred costs related to iPhone and Apple TV and adding back the total cost of the iPhones and Apple TVs shipped in the September quarter. We also used an estimate of the total future warranty expense related to the iPhones and Apple TVs sold in the September quarter rather than reflecting the actual iPhone and Apple TV warranty expenses incurred during the September quarter. We then calculated the non-GAAP measure of adjusted gross margin by subtracting adjusted cost of sales from adjusted sales. For the September quarter, adjusted gross margin was $4.6 billion, which was $1.8 billion higher than recorded gross margin.
Third, we used the non-GAAP measure of adjusted net income to evaluate our performance based on the current period iPhone and Apple TV sales and to facilitate ongoing operating decisions. For the September quarter, adjusted net income was $2.4 billion, which was $1.3 billion higher than reported net income. We believe that these non-GAAP financial measures provide added transparency to our business and hope they are helpful to you in your analysis and understanding of our performance during the September quarter. Now turning to details of our results, I would like to begin with the iPhone, which had a breakout quarter, thanks to the July 11th launch of the iPhone 3G. We sold nearly 6.9 million iPhones during the September quarter, exceeding the 6.1 million units shipped over the entire lifetime of the first generation iPhone. And with more than two months to go in the calendar year, we have already surpassed our goal of 10 million iPhone sales in calendar 2008.
Recognized revenue from iPhone handset sales, iPhone accessories, and carrier payments totaled $806 million during the quarter. We dramatically expanded iPhone distribution in the last quarter. We increased the number of countries where we are selling iPhone from six to 51, and we expect to be in more than 70 countries by the end of the December quarter. With the addition of Best Buy, we have over 3,100 points of iPhone distribution in the U.S. and with our international expansion we currently have over 30,000 points of distribution around the world. I would like to now talk about our Mac products and services. We are pleased to have shipped over 2.6 million Macs, which was a new company record for any quarter. This represents 21% year-over-year growth and is higher than the overall PC market rate of growth for the September quarter based on the latest estimate published by IDC. Although Mac sales grew faster than the market, we believe Mac growth was impacted by purchase delays based on speculation about the new launch of our portables and budgetary constraints affecting education institution purchases. We are unsure how the economy may have affected Mac sales in the quarter.
And of course, we are very enthusiastic about the new notebooks introduced last week. The new MacBook and MacBook Pro redefined notebook design while dramatically lowering the entry price for advanced notebook features, including all metal enclosures, pro performance notebook graphics, brilliant instant on LED backlit displays, and new large glass multi-touch track-pads. We began and ended the quarter with between three and four weeks of Mac channel inventory.
Now I’d like to discuss our music products and services. We sold 11 million iPods, a new record for a non-holiday quarter and an increase of 8% over the year-ago quarter. Last month we introduced our new line-up of iPods, including the fourth generation iPod nano featuring a sleek new curved aluminum and glass design in nine great colors. We also introduced the second generation iPod Touch, building on its groundbreaking original features while redefining the entry price of $229. Both iPods incorporate the new iTunes 8 Genius technology, which automatically creates play lists from songs in users’ libraries that go great together with just one click. We remain very pleased with iPod market share. Our share of the U.S. market for MP3 players was over 70% in the month of September based on the latest data published by NPD, and we continued to gain share year-over-year in most international markets, including the U.K., France, Germany, Japan, Canada, and Australia, based on the latest data published by GFK and BCN. We began and ended the quarter within our target range of four to six weeks of iPod channel inventory.