Apple Earnings Call Nuggets: New Product Line and iPhone Demand

On Thursday, Apple Inc (NASDAQ:AAPL) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Earnings and New Products:

Kathryn Huberty – Morgan Stanley: If you’re guidance comes to fruition, December will be the first quarter in a very long time that Apple EPS declines year-on-year despite what has been the broadest product refresh in the Company’s history over the past few months. The bears will point out that maybe the Company’s price premium or supply chain advantage is weakening, so just curious, how you would respond to that? Then as a follow-up, Peter if you can comment on what’s driving the significant gross margin downtick in December given you should have decent iPhone mix?

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Peter Oppenheimer – SVP and CFO: Katy, let me begin. I’ll address many of the things you asked and then Tim can add a few points. The change year-over-year is being driven by a couple of things. So, first of all last year included a 14th week. This year’s Q1 is a normal 13 week quarter. That along with a stronger U.S. dollar and the changing gross margin. So, let me talk to you about what we see for gross margin, but I’m going to go through some detail on a sequential basis, not year-over-year. As you pointed out, this is the most prolific product period in Apple’s history. We have an unprecedented number of new product introductions over the last six weeks and this has led to record levels of demand. Newer repriced versions of our products announced during this timeframe represent over 80% of the total expected December quarter revenue, but there are costs associated with such dramatic change and demand. The iPhone 5, iPad Mini, iMac, MacBook Pro 13-inch, iPod Touch and iPod Nano have completely new form factors with great new features and we’ve never before introduced so many new form factors at once. All of these products have higher cost than their predecessors and therefore lower gross margins as they are at the height of the cost curve. This has been the case with new products in the past, so nothing new. The difference this time is the sheer number of new products we are introducing in a very short period of time. Additionally, we lowered the price of the iPhone 4S and iPhone 4 delivering incredible value to our customers. We head into this holiday quarter with the strongest iPhone lineup that we have ever had with the iPhone 4 starting at free in the subsidized markets. We also added the iPad Mini to our iPad line up. The iPad Mini has the full iPad experience and we priced it aggressively at $329, delivering incredible value to our customers. Its gross margin is significantly below the corporate average. So, in summary, we expect our gross margin to decline by about 400 basis points sequentially. We expect to benefit from positive leverage on the sequentially higher revenue and a greater mix of iPhones, but we expect these benefits will be more than offset by a number of factors. First, margins on new products are lower than their predecessors, including the iPhone 5 and we have been aggressive with the iPad Mini. Second, we’ve lowered the price of the iPhone 4S and the iPhone 4. Third, we will experience transitionary costs associated with multiple new product ramps. Fourth, the high anticipated volume of iPhone and other new products will generate significantly greater deferred revenues sequentially. As you are aware, we defer a portion of our revenue with every device we sell and amortize it back into revenue over the life of the device. In periods of exceptionally strong sales like the December quarter, the deferred amounts are significantly higher than the revenue amortized in from past sales. Fifth, the favorable items that benefited the gross margin in the September quarter are not expected to repeat in the December quarter. We will work hard to try and get down the cost curves and improve our manufacturing and other efficiencies as we successfully have done in the past. We enter this holiday season with our strongest product lineup ever and we have great choices for customers. To be in a position to anticipate over $50 billion of demand for our products in a single quarter is a reflection of the incredible strength of our products and our business.

Tim Cook – CEO: Katy, if I could just add a couple of things to that. We are dedicated to making the very best products in the world and we think about the smallest of details and we are unwilling to cut corners in delivering the best customer experience in the world. It’s this relentless commitment to innovation and excellence is the reason that our customers choose to buy our products and this will always be the driving force behind Apple. We are managing the Company for the long run and will continue to make great long-term decisions. We remain very, very confident in our strategy and will use our world-class skills in hardware, software and services to delight our customers.

Meeting iPhone Demand:

Bill Shope – Goldman Sachs & Company: Can you walk through how you are thinking about the supply ramp for the iPhone 5 in the holiday quarter and how does some of the challenges you’re facing relative to the strong demand compare to past iOS product launches?

Tim Cook – CEO: Bill, it’s Tim. The demand for iPhone is extremely robust. We’re thrilled with what we see. We are in a significant state of backlog right now. In terms of the production, our output has improved significantly since earlier this month, and I’m very, very pleased with the progress that we’ve made there. I’m pleased with the current level of output in what is the largest volume ramp in Apple’s history. It’s difficult to predict when supply and demand will balance, but I’m feeling very confident on our ability to supply quite a few iPhones.

A Closer Look: Apple Inc Earnings Cheat Sheet>>