Notes from Apple’s Q2 2010 earnings conference call
During Apple’s Second Quarter 2010 Financial Results Conference Call, Apple CFO Peter Oppenheimer and Apple COO Tim Cook made several comments concerning its media-related products, including the iPod, iPhone, iPad, and Apple TV. In his opening statements, Oppenheimer said that sales of the iPod touch were up 63% year-over-year, with overall iPod revenue growing 12%, the strongest growth seen in the last two years. According to NPD, the iPod has retained over 70% market share, and continues to gain market share year-over-year in every country tracked, including the U.K. and Japan.
The iTunes Store had its strongest quarter ever, with sales of $1.1 billion, and now offers 12 million songs. Oppenheimer said the App Store now offers 185,000 apps, with four billion downloads to date across 90 countries; the store also now offers 3,500 apps for the iPad. Speaking about the iPhone, Oppenheimer said year-over-year iPhone sales growth was three times IDC’s published estimate for overall smartphone market, and accounted for $5.45 billion in revenue, compared to $2.43 billion in the year-ago quarter. Average Selling Price for the iPhone was about $600, and is based on the sales value of the iPhone, not accessories, and not carrier payments. The device is now available on 151 countries in 88 countries, and is seeing very strong year-over-year growth worldwide, particularly in Asia. Oppenheimer referred to the iPad’s pricing as “very aggressive,” and said the company thinks the market will be large, and wants to capitalize on its “first mover advantage.” The CFO also referred to a “future product transition” that would impact numbers in the upcoming third quarter.
During the Q&A session, Tim Cook said that the company saw “no obvious impact” on Mac or iPod sales from the iPad announcement, although he admitted that the company doesn’t really have enough experience to come to a judgment of possible Mac cannibalization by the iPad. Cook also said that initial iPad sales have “far exceeded” the company’s expectations, and said that it was too early to tell what the mix would be of Wi-Fi versus Wi-Fi + 3G iPad units, as the company has only been selling the Wi-Fi version in stores, and needs to sell them side-by-side in an “unconstrained” environment to get an idea about possible consumer preference for one model or the other.
Regarding iPad production capacity, Cook said the company has “done very well” versus planned capacity, so there’s not exactly a production problem; instead, demand in the U.S. is “much, much stronger” than the company expected, which led them to push the international launch back. Cook said the company is adding production capacity, and will “see where this thing goes,” but said that the level of initial demand had “shocked” the company. The pair declined to say whether Apple will be deferring iPad revenue or instead charging for software updates, stating that the company would discuss that in July on the Q3 conference call, but Cook did say that he was “already personally addicted to mine and couldn’t live without it.” Apple will report the iPad as a line item in its data summary, similar to how it handles the iPhone, including revenue for iPad units and iPad-specific accessories.
Speaking on the company’s record-setting iPhone sales, Cook said that channel inventory was essentially flat, but the company saw “staggering” year-over-year growth rates in Japan (183%), Europe (133%), and Asia (470%), some of which can be attributed to adding new carriers, as well as strong performance from existing carrier partners. China, in particular, saw strong growth, with mainland China, Hong Kong, and Taiwan seeing iPhone unit growth of 9x, with 800 distribution points added, and has accounted for $1.3 billion in revenue through the first half of Apple’s fiscal 2010, up roughly 200% year-over-year.
Cook also said that AT&T continues to work “very hard” and has made big strides towards improving its network, something that Apple expects to continue. He did note, however, that the U.S. is one of only three main countries where Apple has a contractual exclusive relationship with the iPhone’s carrier, and that the company has seen unit sales and market share improve everywhere they’ve moved from an exclusive to non-exclusive arrangement, although he also said that’s not proof that moving to a non-exclusive arrangement would work everywhere. In response to a questioner who noted that average iPhone sales per operator were 58,000, Cook responded that the number isn’t meaningful because some carriers do a few million units while others do very low numbers, but overall the company can drive those numbers up through product innovation, including software and hardware, as well as through new products, new carriers, new distribution points, geographic expansion, and great marketing. Another questioner noted that Cook had not mentioned price, to which he responded that sales of the iPhone 3GS at a higher price point than the iPhone 3G demonstrated that consumers were willing to pay more for innovative products containing the sort of hardware and software Apple has developed. The response suggested that price was not a critical issue from Apple’s perspective at this point in time.
On the Apple TV, Cook said that unit sales for the second quarter were up 34% year-over-year, but added that the absolute number of units is still small, and the company still classifies it as a “hobby.” Cook went on to point out the large markets for the Mac (300 million units/year), iPhone (1.2 billion units/year), and iPod (100 million units/year), all “enormous markets.” The market for the Apple TV is not nearly as large yet, but he said that the company continues to think there’s something interesting there and is continuing to invest in it.
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