Earnings Call: Q3 2012

Jul 24, 2012

Good day, everyone, and welcome to this Apple Incorporated Third Quarter Fiscal Year twenty twelve Earnings Release 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 of Investor Relations. Please go ahead. Thank you. Good afternoon and thanks to everyone for joining us. Speaking today is Apple's CFO, Peter Oppenheimer and he'll be joined by Apple's CEO, Tim Cook and Treasurer, Gary Whippler for the Q and A session with analysts. Please note that some of the information you'll hear during our discussion today will consist of forward statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, stock based compensation expense, taxes, earnings per share and future products. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10 ks for 2011, the Form 10 Q for the 1st and second quarters of fiscal 2012 and the Form 8 ks filed with the SEC today along with the attached press release. Apple assumes no obligation to update any forward looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Peter Oppenheimer for introductory remarks. Thank you, Nancy. We're pleased to report the results of our 3rd fiscal quarter. We established new all time quarterly record for iPad unit sales and new June quarter records for iPhone and Mac unit sales, leading to our highest June quarter revenue and earnings ever. Revenue for the quarter was $35,000,000,000 representing year over year growth of 23%. The $6,500,000,000 increase over the prior June quarter's result was driven primarily by strong growth in iPad and iPhone sales. Operating margin was $11,600,000,000 representing 33 percent of revenue. Net income was 8,800,000,000 dollars increasing 21% over the prior June quarter's results. The quarter's net income translated to diluted earnings per share of 9.32 dollars Turning to the details of the quarter, I'd like to begin with our Mac products and services. We sold 4,000,000 Macs establishing a new June quarter record. This represents 2% growth year over year compared to IDC's latest published estimate of a 1% contraction of the global personal computer market in the June quarter. Last month, we updated the entire Mac book line with faster processors, graphics, memory, flash storage and USB 3 connectivity. We also introduced the all new 15 inches MacBook Pro with Retina display, all flash architecture and quad core processors and customer response has been excellent. While we're seeing tremendous momentum for the iPad in Education, which I'll discuss later, we also experienced our best quarter ever for U. S. Education Institution Max sales with Corribles representing nearly 3 quarters of total Max sales. Notable large education transaction closed during the June quarter include Rutherford County, North Carolina, which has purchased 6,000 MacBook Airs to support its 21st century digital learning environment and Pueblo, Colorado School District 70 where all high school students and K-twelve staff in the 22 school district will convert to MacBook Air. We began and ended the quarter with between 3 4 weeks of Mac channel inventory, which is below our target range of 4 to 5 weeks. Tomorrow, we will release Mountain Lion, the 9th major release of OS X. Mountain Lion more than 200 features including all new messages app, notification center, system wide sharing and Facebook integration. We've built Icloud into the foundation of Mountain Lion, making it easier than ever for customers to keep content up to date across all their devices. Moving to our music products. We sold 6 800,000 iPods compared to 7,500,000 in the year ago quarter. Total iPod sales were ahead of our expectation and iPod Touch continued to account for over half of all iPods sold. IPod share of the U. S. Market for MP3 players remained at over 70% based on the latest monthly data published by NPD and iPod continued to be the top selling MP3 player in most countries we track based on the latest data published by GfK. We ended the quarter within our target range of 4 to 6 weeks of iPod channel inventory. The iTunes store generated very strong results in the quarter with revenue of over $1,800,000,000 thanks to continued strong sales of music, apps and other content. We are pleased to launch the iTunes store in 12 countries, including Hong Kong, Singapore and Taiwan last month. Customers can choose from over 20,000,000 songs to purchase and download from iTunes. We're continuing to see great interest in iTunes U. Since rolling it out in January, there have been over 14,000,000 downloads of the Itunes U app. Over 700 new K-twelve schools and districts in over 125 colleges and universities have enrolled in the ItinjU program, while over 7 50 new courses have been published. I'd now like to turn to iPhone. We sold 26,000,000 iPhones compared to 20,300,000 in the previous June quarter. That represents 28% year over year growth and was ahead of the amount we factored into our guidance following very strong sales and channel inventory build we achieved in the March quarter. We added several small regional carriers during the quarter and now have iPhone distribution through over 250 carriers in over 100 countries. We ended the quarter with about 8,300,000 iPhones in channel inventory, a sequential decline of about 300,000 iPhones and we remained within our target range of 4 to 6 weeks of iPhone channel inventory. Recognized revenue from iPhone handset and accessory sales was $16,200,000,000 during the quarter compared to $13,300,000,000 in the year ago quarter, an increase of 22%. Enterprises across the globe continue to choose iPhone as the standard device for their employees. We estimate that the number of iPhones in the Fortune 500 has more than doubled in the past year. IPhone is helping businesses and employees be more productive wherever they are. PepsiCo has deployed thousands of iPhones with an in house app built specifically for their field merchandisers. This app has eliminated paper reports and provides real time information to managers, sales teams and delivery drivers. And German insurance provider Ergo has built an in house app for iPhone that thousands of agents use to process insurance claims, which has significantly reduced paperwork and improved processing time and customer satisfaction. Turning to iPad. We were thrilled with sales of over 17,000,000 iPads during the June quarter compared to 9,200,000 in the year ago quarter, an increase of 84%. We saw very strong year over year growth in iPad sales around the world and are pleased to be selling iPad in 97 countries. Recognized revenue from sales of iPad and iPad accessories during the quarter was $9,200,000,000 compared to $6,000,000,000 in the year ago quarter, an increase of 52%. We ended the quarter with about 3 200,000 iPads in channel inventory, a sequential increase of about 1,200,000 units, which left us just within our target range of 4 to 6 weeks of iPad channel inventory. The iPad continues to be a great success in the U. S. Education market, with sales setting a new quarterly record and nearly doubling year over year to just under 1,000,000 iPads. While interest in the new iPad was high, sales of the reduced priced iPad 2 in the K-twelve market were particularly strong. And even though, as I mentioned earlier, we achieved all time record Mac sales to U. S. Education institutions during the quarter, we sold more than twice as many iPads as Macs to U. S. Education institutions. We are extremely pleased with these results. One great example of iPad adoption in education is the Mansfield, Texas Independent School District, which has purchased 11,000 iPads. This fall, every Mansfield High School student and teacher will receive an iPad under the district's PowerUp initiative. Some teachers will use a flipped classroom concept, putting their lessons and resources online where students can access them anytime with their iPads. As a result, students take responsibility for their own learning and teachers are able to increase their interaction and personalized content time. IPad continues its rapid adoption within the enterprise. We estimate that the number of iPads in the Fortune 500 has more than tripled in the past year. IPad has become an indispensable tool worldwide to help employees across industries do their jobs more effectively. British Airways has incorporated thousands of iPads across their business from customer support at check-in House in Japan is actively building smart homes that will be controlled by iPads and their sales reps are using iPads to show floor plans and upgrade options. Combining iPhone, iPad and iPod Touch, we surpassed $410,000,000 cumulative iOS device sales, selling more than $45,000,000 in the June quarter. With app stores in 155 countries, the iOS ecosystem continues to grow. The App Store now offers more than 650,000 apps, including over 225,000 apps specifically for iPad. We are extremely pleased to report that we have surpassed $5,500,000,000 in payments to developers and customers are loving Icloud. Since its launch in October, more than 150,000,000 people are using Icloud services. In June, we previewed many of the exciting new features of iOS 6 at our developers conference, including our fabulous new Maps app, new functionality and broader language support for Siri, direct Facebook integration, shared photo streams via Icloud and Passbook, the simplest way to get all your passes in one place. We believe iOS 6 will significantly enhance the experience of owning an iPhone, iPad or iPod Touch and we can't wait to get it into the hands of customers this fall. I'd now like to turn to the Apple retail stores. Revenue was $4,100,000,000 an increase of 17% over the year ago quarter with growth fueled primarily by all time record iPad sales and strong growth in iPhone sales. The store sold 791,000 Macs compared to 768,000 in the year ago quarter and almost half the Macs sold in our stores during the quarter were to customers who had never owned a Mac before. We opened a total of 9 new stores in the quarter and exited the quarter with 3 72 stores, including 123 stores outside the United States. With an average of 367 stores open, average revenue per store was $11,100,000 compared to 10 point $8,000,000 in the year ago quarter. Segment margin was $868,000,000 compared to $802,000,000 in the year ago quarter. We welcomed 83,000,000 visitors to our stores during the quarter compared to 74,000,000 visitors in the year ago quarter, an increase of 12%. That translates to an average of 17,000 visitors per store per week. Total company gross margin was 42.8%, which was 130 basis points higher than our guidance. We experienced upside from better than expected commodity, warranty and other costs. These factors were partially offset by a stronger mix of iPad sales, a higher mix of lower priced iPhones and a stronger U. S. Dollar relative to our expectations. Operating expenses were $3,400,000,000 and included $378,000,000 in stock compensation expense. OA and E was $288,000,000 and the tax rate was 25.6%. Turning to cash. Our cash for short term and long term marketable securities totaled $117,200,000,000 at the end of the June quarter compared to $110,000,000,000 at the end of the March quarter, a sequential increase of $7,000,000,000 And about $81,000,000,000 of the cash was offshore at the end of the June quarter. Cash flow from operations was $10,200,000,000 Today, we are announcing that our Board of Directors has declared a dividend of $2.65 per common share payable on August 16, 2012 to stockholders of record as of the close of business on August 13, 2012. Going forward, subject to declaration by our Board, we expect to announce record and payment dates for future dividends concurrently with our quarterly earnings announcements. Also, as we previously announced, our Board has authorized a 3 year $10,000,000,000 share repurchase program starting in our fiscal 2013, which begins on September 30, 2012. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward looking information that Nancy referred to at the beginning of the call. We expect revenue to be about $34,000,000,000 compared to $28,300,000,000 in the September quarter last year. We expect gross margin to be about 38.5 percent reflecting approximately $70,000,000 related to stock based compensation expense. We expect OpEx to be about $3,500,000,000 including about $390,000,000 related to stock based compensation. We expect OI and E to be about $175,000,000 and we expect the tax rate to be about 25.5%. We are targeting EPS of about $7.65 In closing, we're pleased with our record June quarter results, including sales of over 17,000,000 iPads. We established new June quarter records for unit sales of iPhone and Macs and posted our best quarter ever for U. S. Education. We remain extremely confident in our strategy and the investments we are making in our business. We are very excited to be launching Mountain Lion tomorrow and iOS 6 in the fall and we have some more amazing new products in our pipeline that we look forward to discussing with you later. With that, I'd like to open the call to questions. We'd like to ask that you limit yourself to one question and one follow-up. May we have the first question please? Your first question will come from Katy Huberty with Morgan Stanley. Yes, Thank you. Peter, I want to better understand the gross margin guidance for September given that it's been nearly 2 years since you've operated at a sub-forty percent gross margin. I understand mix may go against you a little bit in the near term, but it should be structurally higher than 2 years ago. You have NAND pricing moving in your favor and the products that you're selling in the market are relatively mature, so manufacturing costs should be favorable. Can you just talk about the dynamics that are pushing gross margins down again in September? And then I have a follow-up. We expect our gross margin, as I said, to be about 38.5%, which is down about 430 basis points sequentially. We expect most of this decline to be primarily driven by a fall transition and to a much lesser extent the impact of the stronger U. S. Dollar. The warranty benefit that we saw in the June quarter not repeating and a full quarter of the back to school promotion. So that's what we see doing at Katy. Okay. And then as a follow-up, Tim, you've obviously seen spectacular growth in China over the last several years, but there are some macro concerns in the market and your Asia Pacific growth rate did decelerate from over 100% to I think 25% this quarter. So can you talk about what you're seeing in China as it relates to overall demand? Thank you. Yes, Katie. Hi, it's Tim. The growth in Asia Pacific was 25% as you indicated and the vast majority of the difference in our sequential growth rate was a result of Greater China, which represents about 2 thirds of our revenue of that region. As we reported for Q2, our Greater China revenue was $7,900,000,000 and in Q3 our revenue was $5,700,000,000 Now the $5,700,000,000 is a 48% year over year increase and so it still is growing at incredible rates. Virtually all of the 2 point $2,000,000,000 sequential revenue decline was due to the was due to iPhone sales in Greater China. And about half of that $2,200,000 is attributable to changes in the channel inventory, not the underlying sell through of the iPhone. As a reminder, in the previous quarter in our fiscal Q2, we launched the iPhone 4S in China in January. We added China Telecom as a 2nd carrier in March. And as we proceeded across the quarter, we increased the channel inventory to accommodate sales and to reach our target inventory of 4 to 6 weeks. The remainder of the sequential revenue decline is mainly attributable to normal seasonality after the very successful iPhone 4s launch. We did not see an obvious impact in Q3 that we would associate with the economy in Mainland China. We look at the economic reports as all of you do and see the press. But again, we did not see something that we would attribute to the economy in China. In terms of iPhones in general in Mainland China, we were incredibly pleased with our results. We were up over 100% year over year. And as you probably know, just last Friday, so in Q4, we launched our new iPad in China after we resolved the iPad trademark issue. And so our sales did not benefit from the new iPad in the June quarter in Mainland China. Also, our new portables that we announced at the Worldwide Developers Conference began to ship in Mainland China last week after we received routine regulatory approval. And once again the June quarter sales did not benefit from these products. So to net, we remain really confident about our plans and are very excited about our opportunity in China and are very much looking forward to incorporating more local services as you probably saw in the Worldwide Developers Conference announcement of iOS 6 which will be coming in the fall. Thank you, Katie. We have the next question please? From Goldman Sachs, we'll hear from Bill Schulte. Okay, great. Thanks. Can you talk about your thoughts on the individual segment trends when looking at your guidance? I know last quarter you'd given us some thoughts on that. Could you walk through how we're thinking about it now coming off of the sequential declines this quarter, particularly on the iPhone segment? Sure. Bill, it's Peter. Let me start off and if Tim wants to add something, he can. I'll first talk about the products and then a little bit about how we're thinking of revenue. For iPhone, we would expect to have a year over year increase in sales in the September quarter. For iPad, we would also expect to have a year over increase, but we would point out that we increased channel inventory in the June quarter by 1 point 2,000,000 units. And in the year ago quarter, we also increased the iPad inventory that time by 1,500,000 units. And for Mac, we would expect a sequential increase. As we think about revenue, we're providing revenue guidance that is up 20% year over year and we've included several things in our thinking. The first, we're not expecting the economies in Europe or the natural resource based countries including Australia, Brazil and Canada to improve from what we saw in the June quarter. As Tim said, we saw no obvious evidence of the economy impacting our sales in China in the June quarter or in the U. S, but we're reading the same things that you all are about these economies. So we'll have to see. Our weekly iPhone sales continue to be impacted by rumors and speculation regarding new products. We exited the June quarter in supply and demand balance and we were within our 4 to 6 week inventory target. We also don't expect to add any significant new country or carrier additions in the September quarter. Regarding iPad, as I said, we were able to increase our iPad channel inventory in the June quarter by 1,200,000 units and we ended the June quarter just within our 4 to 6 week channel inventory target and we increased last year by 1,500,000 units in the September quarter, which also put us in our 4 to 6 week inventory target. These increases in channel inventory will impact both the year over year and sequential compares for iPad. The current iPad lineup that we're selling includes the very successful $3.99 price point, which we did not have in the year ago quarter. So this along with mix in the line will impact the ASPs in the September quarter. And finally, the U. S. Dollar has strengthened against most currencies around the world, including the euro, Brazilian real, the Chinese RMB, British pound, Australian dollar, Canadian dollar, Mexican peso and Swiss franc. We expect this to have an adverse impact to revenue in these countries in excess of $400,000,000 sequentially, net of our hedges. All that being said, we very much look forward to introducing iOS 6 in the fall and we remain very confident in our business and our new product pipeline. Okay. And just a follow-up if I could on the sequential iPhone decline. You gave us a pretty good outline of what was going on in China. But can you walk us through some of the trends you saw for iPhone demand sequentially in the other international regions? Yes, Bill, it's Tim. First of all, at a global level, I think it's important to understand as you compare our Q2 iPhone sales to Q3, there's a fairly large channel inventory difference that is embedded in that. As you recall, in January, we completed the iPhone 4s rollout in all the major countries including China. It was our fastest iPhone rollout ever. We were also able to get the channel at a within our target inventory range of 4 to 6 weeks by the end of March. And so what that did was it increased sell in over sell through by 2 point 6,000,000 units. In the quarter that we just finished, our sell in was less than sell through by 300,000 units. And so the net change in channel inventory across the quarter is about 3,000,000 units. And so I think it's important to understand that to look at the underlying sell through trends. In terms of what we see happening in the different geographies, the U. S. Was very strong, running at 47%. Japan was strong at 45%. I've already mentioned Greater China. Greater China was up 66%, but Mainland China was over doubled as I said before. It's over 100% up. The geography that did not perform well was Europe. Europe was essentially flat, slightly positive year on year and that really hampered our total results. Within Europe now I'll switch from iPhone to talking about more of the gross revenue level. We see a marked difference between the countries. The U. K. Was relatively solid at 30% growth, but France and Greece and Italy were particularly poor and Germany was also only a single digit positive growth for the quarter. Eastern Europe was strong, materially stronger than Western Europe. But obviously, the Western European countries drive the preponderance of the revenue in that segment. And so we are certainly seeing a slowdown in business in that area. Fortunately, the U. S. And China, although I realize it's getting a lot of press, we're not seeing anything there that we would classify as an obvious economic issue. Okay, very helpful. Thank you. Thanks, Bill. Could we have the next question, please? Next, we'll go to Ben Reitzes with Barclays. Yes. Thanks a lot. My first question I wanted to ask about the fall transition you mentioned Peter when you're talking about gross margin. Can you talk a little bit about that? What is the sequential impact on margins and revenue that you're baking in? And then qualitatively, how much would you get back in the December quarter? Or how much of it's short term? Okay. Ben, I don't want to frustrate you or others, but the fall transition that I spoke about is driving most of the decline that we see sequentially in gross margin. It's not something that we're going to talk about in any level of detail today. And we could not be more confident in our new product pipeline. Okay. Just with regard to the iPhone in general, you mentioned there were speculation about new products and rumors though. But do you have any quantification of how much that hurt sales in the quarter either from you or Tim? And how much that maybe channel inventory reduction you'll need to do in the next quarter maybe resulting from that type of speculation? Dan, I think there's a lot of speculation out there. It's difficult to sort out. But I'm fairly convinced based on what I've seen that there's an incredible anticipation out there for future products. And as you would expect, given what we've been able to deliver in the past. And so I think it's a reasonable amount. In terms of channel inventory in the current quarter, we put our current thinking in the guidance that Peter provided you. Okay. Thank you very much. Thanks, Ed. Can we have the next question please? Next, we'll hear from Shannon Cross with Cross Research. Thank you very much. Can you talk a bit about the MAC business? I mean, it was up 2% year over year, clearly still outperforming the market. But can you talk about what you're seeing? How much of the slower growth was from say the product transition versus weak economy? And then any thoughts on cannibalization of Macs by the iPad? Shannon, it's Tim. It's clear the PC market is weak based on the latest IDC data. But frankly, we believe the primary factor for our lower growth rate in the MAC area is the timing of our portable announcement within last quarter. As you know, we announced an entirely new portable lineup that's been incredibly well received. That was done with 3 weeks or less than 3 weeks remaining in the quarter. The year ago compare, we made a transition in the portable area in February. And so we were selling our new lineup for the entire Q3 period. And so if you look at the data underneath that to further illustrate this, prior to the developers conference, our weekly Mac sales were running below the prior year. After the developers' conference, the MacBook Pros and the MacBook Airs drove year over year increases in weekly sell through. And they were to the level that got us back to an overall positive territory for the quarter and our 25th consecutive quarter of growing faster than the market. The MacBook Pro with the retina display was incredibly well received. We ended the quarter in backlog and we still have not caught up with demand yet, but anticipate doing so for the month of June, the NPD data that just came out for the United States showed our Portable share at 25.5% and a record 47% of revenue share in the month of June. And so I would attribute the a large amount to what has happened in terms of the timing of our portable announcement. Okay, great. And then could you talk a little bit Tim about what your conversations are like with the carriers in terms of pricing subsidies? There's been a lot of talk about that over the last few months. So just how are your discussions with the carriers going slowly into the product transition that's coming? Let me avoid talking about the product transition, Richard, very smart to ask that. I don't want to get into specific topics about with different carriers. But generally, I would just say that our role is to make the very best smartphone in the world and that has an incredible user experience far superior than anything else that customers want to use every day. And I think at the end of the day, the carriers want to buy or want to provide their customers with what their customers want to buy. And so the most important thing for Apple by far is to continue making the best products in world. And we are very deeply committed to doing this and we're maniacally focused on it. From the carrier's perspective, I think it's also important to remember that the total subsidy that they pay is fairly small relative to the monthly payments that they collect over a 24 month contract period. And I think many would tell you or they certainly told me that iPhone has several advantages for them over other smartphones. The churn rates are much less. You see carriers now focusing on shared data plans. And I think an iPhone customer is likely more is more likely to have a tablet or an iPad. And so I think they really value these customers quite a bit. Also our engineering teams are very sensitive to working with carriers to find the most efficient way to deal with data. And we think that we're the most efficient smartphone on the market for smartphones that are in an app rich ecosystem. And so we're going to continue focusing on making the best product. And I think that the carriers will be very motivated to make sure that they provide that customers. Thank you. Thank you, Shannon. Next we'll hear from Tony Sakanagi with Sanford Bernstein. Yes, thank you. I have one for Peter and one for Tim, please. Peter, you talked about how you were above expectations relative to your guidance on iPhone. You also mentioned you were above expectations on iPad and you said you were thrilled with iPad, yet your EPS I think came in 5% or 6% above your guidance. So perhaps you can help us illustrate where you were disappointed relative to your original guidance because I think the commentary would certainly point to a much larger beat. Tony, look, we're given what's going on around us, we are happy with our quarter. Sales of each of our products did exceed what we had factored into the guidance. That was especially true of the iPad, which set a new record at 17,000,000 units. And the $35,000,000,000 of revenue that we've reported grew by $6,500,000,000 year over year. We do think some things did impact us in the quarter. So let me comment on that. The economy in Europe is not doing well. We think this impacted our results. We also saw some economic impact in the natural resource based economies including Australia, Brazil and Canada. As Tim discussed regarding the iPhone, we're reading the same rumors and speculation that you are about a new iPhone and we think this has caused some pause in customers purchasing. The timing of availability of Intel's Ivy Bridge and resulting rumors about the new portables impacted our sales in April May. Tim talked about how after WDC, we saw a large increase in sales, both in terms of weekly sales before WDC and on a year over year basis. And customers are loving the new MacBook Pro. And we did not get the benefit of launching the new iPad in China or the new portables as we're pursuing routine regulatory approval. And finally, the dollar strengthened against most currencies around the world, which reduced our revenue growth sequentially by over $200,000,000 net of our hedges. So we think these things impacted the quarter. We're very happy with how the business is performing and are excited about our new pipeline. Thank you for that. Tim, the question that I had for you is whether you could talk a little bit about smartphone growth in emerging markets. China is obviously the biggest one. Some of the data that I've seen suggests that about 70% of the phones that are smartphones that are being purchased in places like China and other merchant countries are under $300 and in many cases under $200 Do you agree with that market characterization? And at some point, does that become a limit does that limit your ability to gain share in a marketplace where it's 70% of the units are at a price point that you currently don't play in? At what point does that math prevent you from gaining share? And what are your strategies ensuring continued share going forward if indeed that's an objective? Tony, the specific data that you've quoted the 70% doesn't map to what I've seen. But let me try to answer your general question without that specific. We've been very focused as you know on China because we see it as an enormous opportunity for us. And I'm very pleased that we were able to grow our iPhone sales over 100% last quarter. And so I feel very, very good about that. And I firmly believe that people in the emerging markets want great products like they do in developed markets and so forth. And so we're going to stick to our knitting and make the best products. And we think that if we do that that we've got a very, very good business ahead of us. So that's what we're doing. And the share objective in and of itself is not an explicit one Tim. That's a consequence of making good products that either happens or it doesn't? Or is that an explicit objective for the iPhone business on a global basis and on an emerging markets basis? Our North Star for the company in total, so not just iPhone, but across everything that we make is to make the very best product. And that's more important and overshadowed as all other things. But we do believe by doing that that we will have a great business. And I think that our results today really show that. Thank you. Thanks, Tony. We have the next question please. From Pacific Crest, we'll go to Andy Hargreaves. Hi. Just first clarification, is the channel inventory commentary all on a look forward basis? You're talking about the weeks, Andy. The week that we quote are forward looking because inventory is in the channel for forward sales. Okay. So then the comment on iPad being just slightly within the range of 4 to 6 weeks would seem to imply a fairly significant slowdown sequentially in sell through. Can you comment on what's driving that expectation? Keep in mind that the channel inventory is only for the indirect channel. But it's not used for to support any direct sales and direct sales are Apple retail sales, Apple online sales, Apple education sales. And so I don't want to give you a specific guidance on iPad sales, it's important to keep that in mind. And then that's just not the case with iPad, but it's the case with all products. I know that there are some companies out there that refer to their channel inventory in terms of their gross sales. But we don't do that because we feel very strongly that it only supports the channel sales. And so that's how we calculate it. Okay. Thanks. And then just you've obviously talked a fair amount about pricing umbrellas in the past. And on the iPhone side, you've done some things to address that. How are you thinking about that now on the iPad side now that there is some slightly higher quality competition like the Nexus 7 at lower price points? We repriced the iPad 2 to $3.99 and it did very well in the quarter. The most popular iPad is the new iPad, but iPad 2 did very well. It was particularly key in the K-twelve area that Peter spoke about earlier where we sold about 1,000,000 units for the quarter. And so we have been very aggressive in this space and I don't see changing that. In terms of competition, we've all seen I think many different tablets, 100 of them come to market over the last year. And I have yet to see any of them really gain what I would call any level of traction at all. We have over 225,000 apps that have been optimized for iPad. There's an incredible experience on iPad. And I still think the market very much or most products. And we're going to keep innovating in the space and keep making great products. And I think we'll keep a very, very strong business going forward. The 17,000,000 iPads was up 84% year over year and we've now shipped over $84,000,000 this is as of the end of last quarter iPads, which if you look at that on a trajectory rate, it took us more than twice as long to achieve that on iPad and a third longer on or we achieved it in a third less time on iPad than iPhone. And so we feel really, really good about our momentum in the space. Thank you. Thanks, Andy. Can we have the next question please? And next we'll hear from Gene Munster with Piper Jaffray. Hey, good afternoon. Tim, I know you just talked a little bit about the iPad, but is there you gave us a little bit more information on the iPhone. Could you talk a little bit more about just what segments have been driving it? You mentioned a little bit of education. Is it U. S. Consumer, U. S. Corporate Market? Is it channel fill and other markets? Any more kind of feedback for us to help kind of navigate how to model this for the few quarters? Yes, sure. Gene, we're seeing with an 84% off year over year, we're seeing triple digit growth rates in many, many geographies. Generally speaking, the international markets in the aggregate are extremely strong or in the triple digits internationally. The U. S. Is a bit lower, but I think it's important to keep in mind that the U. S. Was on a faster adoption curve with iPad. And so we're thrilled with the numbers everywhere. Latin America is tripling. We're seeing growth out of countries that are that border on being shocking in terms of the growth rates. We would not have dreamed of shipping over $17,000,000 last quarter and feel very, very good about it. Okay. That's helpful. And did you give maybe I missed it, did you give an Apple TV number for the quarter and any kind of updated thoughts on how you're thinking about that going forward? Yes. It's a good question. I didn't give it, but I can. We sold 1,300,000 last quarter. This was up over 170% year over year. And it brings our fiscal year to 4,000,000 units, which is pretty incredible. It's still at a level that we would call it a hobby. But we continue to pull the string to see where it takes us. And we're not one to keep around projects that we don't believe in. And so there's a lot of people here that are believers in Apple TV and we continue to invest in it and see where it will take us. So you don't do hobbies for the sake of hobbies. You do it to hope to get to be something bigger? That's right. We do it because we think we can it will lead us somewhere. And so we'll see. But I think the $4,000,000 is not a small number. It's small relative to iPads and iPhones perhaps, but it's not a small number and there's a lot of believers in it. Great. Thank you. Thanks, Gene. Could we have the next question please? From JPMorgan, we'll go to Mark Moskowitz. Yes. Thank you. The first question is around ASPs. The iPad and the iPhone, the blended ASPs seem to have declined a little more this quarter versus the prior quarters. Is that a function of the product portfolio or Apple just testing price elasticity as you expand into the emerging markets? Hi, it's Peter. The iPhone ASP, we don't talk specifically about iPad and iPhone ASPs, but I would like to give you a little bit of color this quarter because they did change some sequentially and in the case of the iPad year over year. Beginning with the iPhone, the ASP was down due to a higher mix of lower priced models and a stronger U. S. Dollar. And that was the case generally on a sequential and a year over year basis. Regarding the mix, we believe that this was largely driven by all the new product rumors, economic conditions, particularly in Europe. And we had a change in the ending inventory by model that also influenced the ASPs. For the iPad, it was down more year over year than it was sequentially. The year over year decrease was really attributable to 4 things. We had a higher mix of lower priced models. We reduced the price of the iPad 2 to $3.99 With our expanded distribution, we had a higher mix of indirect sales this year than we did a year ago and the dollar impacted us as well. Okay. Thank you, Peter for that. Tim, I want to shift gears longer term. You talked earlier about hobbies and their relevance. What about Passbook? I'm not trying to imply that it's a hobby, but could Passbook be perceived as kind of a stepping stone digital wallet infrastructure? Yes. I wouldn't want to comment specifically on that point. But passbook in general is a very key feature. I think all of us have found that we were getting many passes and many tickets and so forth. They were scattered all over maybe boarding passes, etcetera. They were scattered all over our iPhones in different apps. And so, PASBook does an incredible job of pulling all of those to one place, whether it's offers or passes or tickets or whatever it may be. And so it's an important feature of iOS 6 and I wouldn't want to speculate about where it might take us. Okay. Thank you. Thanks, Mark. We have the next question please. From Deutsche Bank, we'll go to Chris Whitmore. Thanks very much. I wanted to follow-up on the pricing question because spending is a little tighter these days? Chris, it's Tim. The reason that we did it was because we believed that the sales would be incrementally larger that was price elasticity and that there was a buyer that really wanted the best product and that needed it to be a little less expensive. And so I believe that we saw that. I think our I think it did help our sales. I think it's particularly helping in K-twelve. The adoption rate of iPad in education is something I've never seen from any technology product in history. Usually education tends to be a fairly conservative institution in terms of buying or K-twelve does. And we're not seeing that at all on the iPad. And so I think it was it's been a big help for us. I'm really glad that we did it. And the follow-up, I wanted to ask about the opportunity that you see in India. A few years back you talked about initial investments in China and having cracked the China code. Why hasn't Apple been more successful in India? And what is your outlook for growth in that geography specifically going forward? Chris, I love India, but I believe that Apple has some higher potential in the intermediate term in some other countries. And that doesn't mean that we're not putting emphasis. In India, we are. We have a business there. That business is growing. But the sort of the multilayer distribution there really adds to the cost of getting products to market. And so we're going to continue putting some energies there. But my own perspective is that in the intermediate term there will be larger opportunities outside of there. Thank you very much. Thanks, Chris. Could we have the next question please? From Stern AG. We'll hear from Shao Wu. Okay. Thanks for having me on. Just a quick question in terms of component availability, particularly new components. Thanks. Sean, it's Tim. We've factored supply into the guidance that Peter has given you. Generally, I should say that we have been short of the MacBook Pro with the retina displays. We ended the quarter with backlog and we're working really hard to deliver those to customers quickly and we believe that we'll be in supply demand balance in August. In terms of new products, I obviously don't talk about new products nor the parts that are in them. And so it's sort of a limit to what I can say there other than anything that we know about we've obviously included in the guidance. And if we were short of something you can bet that we'd all be spending our energies on trying to mitigate that. Okay. Thanks for the color. Just a follow-up. I don't know if you can talk about in terms of for the new iPad with the retina display. I don't know any constraints there? The iPad the new iPad ended the quarter in just over the 4 week line, which we associated with our target of 4 to 6 weeks in terms of channel inventory. Now that said, as a reminder, we did not ship the new iPad in Mainland China until the quarter that we are now in in Q4. But in Q3, we feel like we ended in a balanced situation. Okay. Thanks. We have the next question please. And that will come from Bryan Marshall with ISI. Great. Thanks guys. Clearly Apple's design philosophy has been about building great products as opposed to kind of going in the market and hitting certain price points. But how do you think about the opportunities to address maybe some of those opportunities that are down at some of those lower price points with your existing products without essentially compromising the core features that basically make Apple's products great? Brian, it's Tim. Our North Star is to manically focus on making the world's best products. And economic turmoil may push us side to side, but we're going to stay on that journey and stay focused on making the best product and not deviate from that. We've seen it again and again throughout the years that during these type of periods are where we distance ourselves further from people that don't innovate. And it increases the gap between us. And so that's what we're focused on. Now when we can do that and hit more aggressive price points, we're also going to do that. And I think you've seen that with what we did with the $399 iPad just a few months ago. And the iPhone 3GS is free in the United States and in several other countries. And there's been quite a lot knocked off the price of that in certain other markets. And so our North Star though will be making the best products in the world and that's why we breathe, that's why we live. And we're not changing that. Thanks. And then when you think about how the iPhone has penetrated the planet, obviously, we've had some pretty phenomenal success. And some of that success is there's been some downside to that as well with respect to volatility about rumors and speculation about kind of future products being announced. And so can you talk a little bit about how you try to manage sort of the iPhone transitions and the carrier ramp as well? I mean, obviously, you mentioned you're not going to be launching any major countries or carriers in the September quarter, but it's widely speculated that we're going to see something later on in the year. So if you could talk a little bit about how you kind of manage that whole sort of transitioncarrier ramp that would be great. Thank you. Brian, we try very hard to keep our product road map secret and confidential. And we go to extreme do extreme activities to try to do that. That however doesn't stop people from speculating or wondering and we'll never do that. And so it's a great thing about this country. People can say what they think and so forth. And so I'm not going to spend any energy trying to change that. That's just the environment we're in. I'm glad that people want the next thing. I'm super happy about it. And there are obviously quite a few that want what we're currently doing as well and as witnessed by the amount of products that we're selling. And so I'm not going to put any energy into trying to get people to stop speculating. I don't think it would I don't think that's going to amount to anything. Thank you. Thanks, Brian. A replay of today's call will be available for 2 weeks as a podcast on the iTunes Store, as a webcast on apple.com/investor and via telephone and the numbers for the telephone replay are 888 203-eleven 12 or 719-457-0820 and please enter the code 1260,435. These replays will be available by approximately 5:30 p. M. Pacific Time today. Members of the press with additional questions can contact Steve Dowling. He's at 408-974-1896 and financial analysts can contact either Joan Hoover or Bea with additional questions. Joan is at 408-974-4570 and I'm at 408-974-5420. And thanks again for joining us. Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.