Click to listen to full quarterly earnings call > HERE
Steve Jobs was a surprise participant on today’s Apple (AAPL) earnings conferece call. Partial transcript below…
Steve Jobs: Hi, everyone. Some remarkable things are happening at Apple but everything is now set against the backdrop of this global economic slowdown, so it seemed like a good time for me to make a few remarks and help answer some of your questions.
I would like to go back and talk about the non-GAAP financial results because I think this is a pretty big deal. In addition to reporting an outstanding quarter, today we are also introducing non-GAAP financial results which eliminate the impact of subscription accounting. As you know, subscription accounting is the solution we adopted to let us provide free software updates to iPhone users under GAAP accounting rules. In accordance with the subscription accounting treatment required by GAAP, Apple recognizes the revenue and the cost of goods sold for the iPhone over its economic life of two years rather than upon sale as we do for Macs and iPods.
Because by its nature subscription accounting spreads the impact of iPhone’s contribution to Apple’s overall sales, gross margin, and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company’s overall performance. As long as our iPhone business was small relative to our Mac and music businesses, this didn’t really matter much. But this past quarter, as you heard, our iPhone business has grown to about $4.6 billion, or 39% of Apple’s total business, clearly too big for Apple management or investors to ignore. Hence our introduction today of non-GAAP financial results alongside our reported GAAP results.
As you can see, the non-GAAP financial results are truly stunning. By eliminating subscription accounting, adjusted sales for the quarter were $11.68 billion, 48% higher than the reported revenue of $7.9 billion, while adjusted income was $2.44 billion, 115% higher than the reported net income of $1.14 billion. Adjusted net income that is more than double our reported income — if this isn’t stunning, I don’t know what is, all due to the incredible success of the iPhone 3G.
I would like to now highlight two remarkable milestones resulting from iPhone’s outstanding performance last quarter. The first is that Apple beat RIM. In their most recent quarter, Research in Motion, or RIM, reported selling 6.1 million BlackBerry devices. Compared to our most recent quarter sales of 6.9 million iPhones, Apple outsold RIM last quarter and this is a milestone for us. RIM is a good company that makes good products and so it is surprising that after only 15 months in the market, we could outsell them in any quarter.
But even more remarkable is this — measured by revenues, Apple has become the world’s third-largest mobile phone supplier. I know this sounds crazy, but it’s true — as measured in revenues, not units, Apple has become the third largest mobile phone supplier. Let’s look at the ranking — Nokia is clearly number one at 12.7 billion; Samsung number two at 5.9 billion; Apple is number three at 4.6 billion; Sony Ericsson, number four at 4.2; LG, number five at 3.4 billion; Motorola, number six at 3.2; and RIM number seven at 2.1. Pretty amazing.
Now, both of these things, beating RIM in units and becoming the third largest mobile supplier in revenues are amazing feats but part of this was the result of expanding into over 50 countries and there’s no guarantee that sustained sales will equal initial sales. And who knows what the future results will be, given the worldwide economic slowdown but we actually outsold RIM last quarter and ranked as the third largest mobile phone supplier in revenues. Not bad for being in the market for only 15 months.
I would now like to talk about the App Store for a few minutes. One area that where we have completely changed the value proposition for mobile devices is the App Store. Customers will download the 200 millionth application from the App Store tomorrow, only 102 days since its launch on July 11th – the 200 millionth app. We’ve never seen anything like this in our careers. There are now over 5,500 applications offered on the App Store in 62 countries around the world and the rate of new applications being submitted is increasing every week. Competitors are scrambling to copy our App Store but it’s not as easy as it looks and we are far along in creating the virtuous cycle of cool applications begetting more iPhone sales, thereby creating an even larger market which will attract even more iPhone software development. It is clear that customers are now attracted to iPhone not only for its amazing functionality and revolutionary multi-touch user interface but also for its unique ability to let users easily purchase, download, and use thousands of different applications, ranging from free games to financial planning and health management — all of this in only 102 days.
And now I’d like to touch on the notebooks that we just introduced. Last week we introduced our new MacBook and MacBook Pro line. These products are very important since notebooks comprise two-thirds or more of the Macs we sell. These new MacBooks are some of the best products we’ve ever created and it’s already clear that our customers love them. We’ve had a very, very strong launch and we are anxiously awaiting to see the demand trajectory that will unfold during the quarter. The level of quality these products deliver to customers is mind-blowing for their price points. The unibody precision aluminum enclosures would normally cost hundreds of dollars by themselves. The electronics, especially the graphics, are state-of-the-art in mobile computing and features like the glass track pad are unique in the industry. With the introduction of LED backlit displays on these mainstream notebooks, over 90% of the notebooks Apple sells now use LED backlit displays.
Another thing worth noting is that these new notebooks are the greenest products Apple has ever offered. You will hear more and more about that from us in the future.
So now let’s turn to the economy, to the broader market conditions resulting from the global economic slowdown and credit crisis. First, let me say that we are not economists. Your next-door neighbor can likely predict what is going to happen as accurately as we can, but we do know a few things.
First, we have the best customers in the world. I wouldn’t trade our customers for any other company’s customers in the entire world. They are some of the smartest, most product aware customers in the market and they have chosen Apple’s quality, hardware and software products. While they may postpone purchases in tough times, they are unlikely to abandon the quality and seamless integration which they have personally experienced and become accustomed to with Apple’s products. So if the economic downturn does affect them, they are more likely to delay than switch.
Two, we still have a minority market share of the PC market and a miniscule market share of the mobile phone market. While we may not appeal to every prospective customer, the percentage of prospective customers we need to attract in order to significantly increase our market share isn’t that many and we have 250 Apple retail stores that already sell half their Macs to new-to-Mac customers.
Three, we have the best product lineup in Apple’s history. The new MacBooks in particular should trigger a serious upgrade cycle in our installed base. We’ll see. I feel very good about our product lineup as we head into the holidays and beyond.
Four, we have the most talented and creative employees in the world — just look at their results — the new MacBooks, the iMac, the iPhone, the iPod Nano and Touch, Leopard, iLife, and on and on. None of our competitors can deliver products in this class.
And five, we have almost $25 billion safely in the bank and zero debt. This provides us tremendous stability and the ability to invest our way through this downturn. This is what we did during the last downturn — we increased R&D investments and created some of our best new products and businesses, like the Apple retail stores, for one. This downturn may also present some extraordinary opportunities for companies that have the cash to take advantage of them, like Apple does.
In summary, we have the strongest product lineup in Apple’s history, the most talented employees, and the best customers and $25 billion in the bank. We may get buffeted around by the waves a little bit but we will be fine and stronger than ever when the water is calm in the future.
With that, I’d like to open it up for questions for Peter, Tim, or myself.
Click to listen to full quarterly earnings call > HERE