Wednesday, April 20, 2011

iPad Details from Apple Inc Q2 2011 Earnings Call

During the April 20, 2011 earning call (full transcript here), Apple's business was discussed, but I will focus on the iPad specific information here.

Peter Oppenheimer, the SVP and CFO of Apple Inc. spoke about the iPad sales, "we are thrilled with the momentum for iPad... Revenue for the quarter was $24.7 billion, which was $11.2 billion over the prior March quarter's result, and represents the largest year-over-year quarterly revenue growth we've ever generated. This tremendous increase of 83% was fueled by, primarily, by record iPhone sales, very robust demand for iPads..."

"We continue to be thrilled with its momentum. We sold 4.7 million iPads during the March quarter launching iPad 2 in U.S. on March 11 and in 25 additional countries on March 25th. Customer enthusiasm has been tremendous for iPad 2 and we are working hard to get it into the hands of customers as quickly as possible."

"Including both the original iPad and iPad 2, we had distribution in 59 countries by the end of the March quarter. Given the very strong customer demand and despite the increased geographic distribution, iPod channel inventory declined by 400,000 from the beginning of the quarter implying sell-through of about 5.1 million. This resulted in ending channel inventory of below 850,000 which was below our target range of four to six weeks. We sold every iPad 2 that we could make during the quarter, and would have liked to end the quarter with more channel inventory. Recognized revenue from sales of iPad and iPad accessories during the quarter was $2.8 billion."

"Employee demand for iPad in the corporate environment remained strong and CIOs continue to embrace iPad at an unprecedented rate. In just over a year since its debut, 75% of the Fortune 500 are testing or deploying iPad within their enterprises."

"Some recent examples of enterprises that are deploying iPad include; Fortune 500 companies such as Xerox, AutoNation, Yum! Brands, ADP, Boston Scientific, Estee Lauder, Disney, Stryker, Prudential Financial, Rite Aid and USAA."

"Combining iPhone, iPad and iPod touch, we reached just under 189 million cumulative iOS device sales through the end of the March quarter. In March, we introduced iOS 4.3 with new features including faster supply and mobile browsing performance with the Java Nitro Script engine, iTunes Home Sharing, enhancements to AirPlay, and the Personal Hotspot feature for sharing in iPhone 4’s cellular data connection over Wi-Fi."

"In closing, we’re thrilled with the results and accomplishments of our record March quarter. We're extremely pleased with customer response to iPad 2, and are working hard to get it into the hands of customers as fast as we can. We remain very confident in our strategy and are very excited about our new product pipeline."

After the above announcement, the call was opened to questions. Here are the iPad specific questions and answers.

Bill Shope - Goldman Sachs, "I guess digging into another area of supply, looking at your iPad 2 constraints since launch in March, can you give us some color on where the constraints lie and how you're doing in terms of getting supply back in line with demand?"

Tim Cook - COO, "Well, the demand on iPad 2 has been staggering, and we're still amazed that we are still heavily backlogged, not only at the end of the quarter, but also up-to-date. However, I can tell you that I am extremely pleased with the progress of the manufacturing ground, and we were so confident that we rolled out to 25 additional countries at the end of last month, and we are shipping to an additional 13 countries next week and we are planning to add even more countries through the quarter. So, I'm very confident that we could produce a very large number of iPads for the quarter."

Ben Reitzes - Barclays Capital, "I guess my other question was with regard to the iPad constraints, when do you think that you will be to equilibrium or have channel inventory where you need it to be? You were able to say that you increased production a lot for the iPhone. When can you say at least the same thing for the iPad where you feel like you've alleviated the shortage?"

Peter Oppenheimer - SVP and CFO, "Ben, what I would say to this is that, I'm confident we are going to produce a very large number for the quarter. Whether that will be enough to meet demand? I don't know. Demand has been staggering. I am not ongoing to predict when supply and demand will come into balance. I can only be confident on the supply side."

Tim Cook - COO, "Mike, I just saw yesterday, it’s interesting (you should part of) the U.S. The comScore data released yesterday reported that the iOS platform outreaches Android by 59% in the U.S. So, this is a enormous percentage. On a worldwide basis, we just had 18.6 million iPhones, which is up 113%, which is materially faster than the market rate of growth and we launched the iPad 2 and sold everyone of them that we would make. As we said before, we're gaining traction in enterprise with iPhone and iPad with astonishing 88% and 75% respectively of the Fortune 500 companies deploying or testing these. We've got the largest App Store with over 350,000 apps for iPhone and over 65,000 iPad-specific apps on iOS versus what appears to be fewer than 100 on Android. So, we feel very, very good about where we are and we feel great about our future product plan. We've also paid over $2 billion to developers, and we've had well over 10 billion applications downloaded, and so our business proposition is very, very strong. As we said before, we continue to believe and even more and more everyday that iPhone’s integrated approach is materially better than Android’s fragmented approach where you have multiple OSs on multiple devices with different screen resolutions and multiple app stores with different rules, payment methods and update strategies. I think the user appreciates that Apple can take full responsibility for their experience whereas fragmented approach turns the customer into a systems integrator and few customers that I know who want to be a systems integrator."

Gene Munster - Piper Jaffray, "Then, separately, it's great to see Steve attending the iPad 2 event, and since going on medical leave, how closely has he stayed involved with the Company's decisions and do you have any idea when he might return?"

Tim Cook - COO, "He is still on medical leave as you say, but we do see him on a regular basis, and as we've previously said, he continues to be involved in major strategic decisions and I know he wants to be back full times as soon as he can."

Toni Sacconaghi - Sanford Bernstein, "I wanted to revisit the supply question on both iPhone and iPad. So, last quarter, you were chasing iPhone demand, and you said you're going to work as hard as possible to try and make sure you catch up with your demand, and given the inventory build it sounds like you're comfortable and you've gotten there. On the iPads side, it's a little less clear to me. You made I guess over 7 million iPads in the last quarter, in fiscal Q1. This quarter, including the inventory drawdown, maybe there were 5.1 million made. So, was this – I mean, you've proven that you have the capacity or the relationships to build a lot more. Was this simply a forecasting error on the iPad side, and can you comment about linearity of demand and why you couldn't have kept production at a similar rate to the prior quarter and been able fulfill a lot more?"

Tim Cook - COO, "Let me mention a few things for you to consider Toni. First off, product transitions are never simple, and as you can probably appreciate, we are in a position that we have to call them for many, many weeks in advance in terms of how many of the current product we want to produce and the dates at which we will announce the new product. We drew the channel down on the current product or the original iPad I should say, by 570,000 units during the quarter and we added at the end of the quarter 170,000 of the new iPad 2s although most of that was in transit at the end of the quarter. So, the net reduction was 400,000, and so our sell through was about 5 million for the quarter. Again, this has to be planned quite a ways in the future. I think the key point here is – also the dates, just to remind you, we sent out an invitation to the event towards the end of February. We had the event in early March. We placed the units on sale in the United States on March 11 and our quarter ends about two weeks thereafter. So, there was some expectation of a new product and we would have obviously factored that into our thinking about the product transition as we planned a number of the original unit to build. So, I think the key point here is that I am extremely pleased with the progress that we are making on the manufacturing ground. We have gotten off to a materially better start and produced a lot more units than we did on the original ramp of the first iPad, and that when we're so confident with our ability to supply that we've already put on 25 additional countries at the end of March and we will be placing on 13 more next week, and we'll do even more as we step through the quarter."

Chris Whitmore - Deutsche Bank, "Just a follow-up on the iPad question. Can you give us a split of iPad 2 versus iPad 1 as a percentage of the 5 million you shipped in the March quarter?"

Tim Cook - COO, "We purposely aren't giving that because we don't want to help out any of our competition. But I would tell you, I wish we could have produced a lot more iPad 2 because there were certainly a lot of people waiting for."

Peter Oppenheimer - SVP and CFO, "It's a difficult funding environment for schools here in the U.S. We don't see any evidence of share lock and Macs are very popular in schools and iPads are proving to be as well. On a year-over-year basis, we would expect to see a sequential – I am sorry, a year-over-year very significant increase in Mac sales, and are very confident about the product line as we head into the back-to-school season."

Tim Cook - COO, "One thing I would add to that is, this was surprising to me, and I think to several people here is, K-12 is sort of even more conservative than enterprise on a (.Net) technology. Last quarter, we were about a one-to-one ratio of iPads to Mac which is I think very amazing with the short life of the iPads and really demonstrates (what time) the opportunity that probably is there."

Shaw Wu - Sterne, Agee & Leach, "Just on the iPad, in terms of the selling model, does it make sense or is there interest in terms of having it subsidized by service providers at some point?"

Tim Cook - COO, "The iPad today is subsidized in a few markets. It's subsidized in Korea if people sign a 24-month contract. It's subsidized in Japan with a 24-month contract, and a couple of European countries, but the vast majority of people that are using the iPad on 3G are doing so on pay as you go plan and no commitment plan, and yes, carriers can do that, but I think that many customers prefer the pay as you go plan."

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