Notes of interest from Apple's Q2 2010 conference call

Apple blew out Wall Street expectations yet again Tuesday when it announced sales of 8.75 million iPhones and 2.94 million Macs last quarter, pushing the company to a 90 percent increase in profit. Following the news, Apple executives conducted a financial conference call with analysts and the press, and notes of interest follow.

The second quarter of Apple's 2010 fiscal year produced $3.33 earnings per share, well above Wall Street's expectations of $2.45. The company posted revenue of $13.50 billion and net quarterly profit of $3.07 billion.

On Tuesday's call were Apple Chief Financial Officer Peter Oppenheimer and Chief Operating Officer Tim Cook.

Apple's regional business segments

CPU units in America alone were up 20 percent year-over-year, representing a 26 percent increase in revenue. Worldwide Mac sales were up 3 percent, increasing revenue by 49 percent. The worldwide leader in growth was Asia Pacific, where Apple shipped 67 percent more Macs for an 184 percent revenue increase.

China: Added another 800 points of distribution. Through the first half of the fiscal year, revenue was almost $1.3 billion. Up over 200 percent year over year.

Will open two stores in Shanghai this summer, target having 25 stores open in China by the end of calendar 2011.

Apple's Mac business

$1.7 billion in Mac revenue came from desktop sales, while a majority — $2.8 billion — came from sales of MacBook portables. In all, CPUs accounted for $4.5 billion in revenue, up from $3 billion a year ago.

Desktop sales grew 40 percent from the second quarter of 2009, and saw a 45 percent increase in revenue. Portable notebook sales grew 28 percent year-over-year, good for a 17 percent rise in revenue.

Best March quarter for Mac sales ever

Beat IDC's estimate of 24 percent. Strong, double-digit growth in desktop and portable categories. Last week they improved the MacBook Pro lineup even more.

Apple's iPhone and Apple TV businesses

The 8.75 million iPhones sold in the second financial quarter represents 131 percent growth over the same frame a year ago. Total iPhone revenue for the quarter was $5.6 billion, well up from the $2.4 billion a year ago.

Best quarter for iPhone sales ever

131 percent year-over-year growth over the previous March quarter's results, and more than 3 times the IDC estimate of 41 percent growth of overall smartphone growth.

Average selling price of iPhone continues to be about $600.

Customers ranked iPhone first in JD Power study again in 2010.

Developer response to iPhone OS 4 has been "very positive." Customers will enjoy the over 100 new features including multitasking and folders.

Are on track to begin shipping the 3G version of the iPad on April 30 and 9 additional countries at the end of May.

Strong performance from new and existing carriers carried iPhone to record quarter. "It was widespread and just generally terrific results," Cook said.

DRAM pricing is constrained, which will lead to higher prices.

iAd is Apple "putting its toes in the water," Oppenheimer said. Don't expect much from Apple this year, but they expect to learn a lot in 2010.

Both additions and existing carriers were important to growth. Added eight carriers. Out of the 151 carriers at the country level, "it's a good number but not a significant number," Cook said.

Three main countries where Apple has a contractual exclusive relationship: U.S., Germany and Spain. A few smaller countries have exclusive or co-exclusive, but those three are the major ones. Over the past year they've moved a number of markets to non-exclusive. In each case they've seen unit growth accelerate and market share improve. "That's our learning so far, that's the results that we've seen so far. We think very carefully about each of these at the country level to conclude what's in our best interest," Cook said.

Apple drives iPhone demand with product innovation. New software, new hardware, new products, new distribution points, new carriers and geographic expansion.

Cook: Smartphone category is a "great" market to be in. High growth rates and revenue. Numbers were even better outside the U.S. than they were inside the U.S.

"We do everything we can to try to get the best deal possible for the consumer." Regarding lowering monthly rates. $99 iPhone 3G mix surprised, because many people opted for the higher-priced iPhone 3GS.

"There are other things that people really want, like an extremely innovative product and all of the apps and the ecosystem and the great OS and the incredible hardware that we've got. I think it (monthly price) is just one of the factors."

Apple TV: "The units were up for the quarter 34 percent year over year, but the absolute number of units are small, and we still classify the product as a hobby for the company."

The Mac competes in a market of 300 million units a year. The iPhone competes in a market of 1.2 billion phones a year. iPod competes in a market of 100 million units a year. "These are enormous size markets," Cook said. Apple TV market is not nearly as large. Don't want anyone to get the "wrong impression."

"A number of us love the product, use the product, and we continue to think there's something interesting there and we continue to invest in it."

Apple's iPad business

iPad sales did not begin in the last quarter, but analysts still had questions for Apple executives about the new device.

iPad announcement had no obvious impact on the Mac or iPod sales in the March quarter. "We really don't have enough experience to come to a judgment yet," Cook said. "We're obviously thrilled with the sales of the iPad. They have far exceeded our expectations."

As for 3G vs. Wi-Fi, "It's too early to tell," Cook said. "We really need to be selling both models side by side in an unconstrained environment before we can really know what the mix will be."

No production problem, but the demand in the U.S. was stronger than predicted. "Regrettably we had to push out the international launch to be able to launch the 3G unit in the U.S. and to be able to get enough Wi-Fi units into the United States."

"It has shocked us, the level of demand, at least initially," Cook said.

iPad margins: Apple doesn't give out specifics for products, but refer to the company's gross margin. "We priced it very aggressively in order to deliver tremendous value to our customers," Cook said. "We think the market size for the iPad is very large, and we want to capitalize on our first mover advantage."

Priced it "extremely aggressively" because they think there's a huge market for it. "Certainly our initial results suggest that's the case."

No comment on iPad software upgrades and whether they plan to charge for them. Will reveal that information in the June conference call when they report first iPad sales.

Cook: "Although we announced the iPad in January, there was nothing obvious in the iPod numbers or the Mac numbers to suggest cannibalization." They don't know what the impact will be until they go forward. "We are thrilled with how the iPad is selling and the enormous response that we've received."

Vs. netbook market: "To me it's a no brainer. iPad, netbook, it's sort of 100 to zero. I can't think of a single thing the netbook does well, and iPad does so many things so very well. I'm already personally addicted to mine. I couldn't live without it."

Cook thinks the iPad is better at e-mail, browsing, listening to music, watching videos, reading books. "The larger canvas provides an artist a lot more room to do things that are very cool." Said he thinks it's a new category of device. "Certainly it's early, but we really, really like what we see right now."

"We had what we thought were high hopes, and we have exceeded those."

Accessory portfolio as it pertains to the iPad: Over 5,000 accessories for the iPhone and iPod largely work for the iPad. "We've come out with some great accessories for the iPad in the first weeks, and the developer community is rallying around it as well. Let's give it a little time and presumably some great things will happen there, just like it has for iPhone and iPod," Oppenheimer said.

iPad will be reported similarly to the iPhone. Separate iPad unit listings on its quarterly report.

"We are not focused on trying to make a lot of money on the App Store," Oppenheimer said. They run it a bit over break even, but have been pleased with the performance of App Store for new iPad owners.

Apple's iPod business

Apple earned $3.3 billion in revenue from its iPod business, based on sales of 10.89 million devices. That was a 1 percent decline from the same period in 2009, but total revenue increased by 12 percent to $1.7 billion.

About equal to 11 million a year ago. Sales of iPod touch are strong, with units growing 63 percent year over year. Strongest iPod revenue growth rate in last two years.

Share of U.S. MP3 player market remains over 70 percent, iPod is the top player and continues to gain share internationally in Australia, U.K., Canada and Japan

Sales of $1.1 billion in iTunes. Best quarter ever.

Well over 4 billion downloads of software from App Store.

Apple's retail business

Increase of 22 percent in revenue. 606,000 Macs sold, up 38 percent over last year. Half of sales continue to go to people who never owned one before.

Average of 284 stores open, average revenue per store was $5.9 million, compared to $5.5 million in the year ago quarter.

47 million visitors during the quarter, compared to 39.1 million a year ago.

607,000 in One to One program.

Will open 40 to 50 locations in 2010, including locations in London, Paris and Shanghai.

Retail stores had a "great" March quarter, Oppenheimer said. Average increase of revenue per store was up 8 percent, the best they have seen in six quarters. Same-store Mac sales were up over 20 percent. Stores are a great place for customers to come in, look at and buy the iPad.

"We are just ecstatic about the fact that roughly half of the Mac sales that occur each quarter are to people who have never owned a Mac before," Oppenheimer said.

Apple's next (Q3 2010) fiscal quarter

Apple has projected revenue between $13 billion and $13.4 billion, with earnings per share between $2.28 and $2.39. Apple earned $9.7 billion in the June quarter last year, with EPS of $2.01.

Have revised forecast of 2010 tax to 27 percent, down from 29 percent, due to higher mix of international earnings.

Expect a stronger U.S. dollar, a Mac portable transition, the beginning of the education buying season, and a future device transition.

Guidance has sequentially lower ASPs from the beginning of the education buying season. Also factored in lower iTunes, which is typical as holiday gift cards are used in the March quarter. For Mac, they expect to see a sequential increase in sales because of eduction buying season as well as recent refresh of MacBook Pro line.

Not much experience with seasonality with current distribution of carriers and countries for the iPhone.

"We feel very good about the start of iPad," Oppenheimer said.

Guidance factors in legal expenses for pending litigation.