Apple Discusses iPod and iTunes Sales

| About: Apple Inc. (AAPL)

From last night's Apple earnings conference call transcript:

Peter Oppenheimer, CFO and Senior VP

Our music products posted another quarter of strong results, representing 45% of total company revenue and increasing 45% year-over-year. iPod shipments grew 32% year over year, consistent with our expectations, and we exited the quarter within our target range of four to six weeks of iPod channel inventory.

We continue to be very enthusiastic about iPod. Based on the latest data published by NPD, iPod accounts for over 75% of the U.S. market for MP3 players. iPod is also the top-selling MP3 player in many large markets, such as Canada, Australia, the U.K., France, Spain, Italy and Japan, according to the latest data published from NPD, GFK and BCN.

Other music product revenue was $457 million, up 90% year over year. These results were a function of continued strong sales from the iTunes Music Store and very solid performance for iPod accessories.

The iTunes Music Store continues to lead the industry, accounting for 85% share of the market for legally purchased and downloaded music in the U.S., based on the latest data available from Nielsen SoundScan. We have continued to enhance and expand the iTunes Music Store, now offering over 3 million songs, 9,000 music videos and over 150 television programs to the U.S. market.

We are investing heavily in iPod and iTunes engineering and are very enthusiastic about our products in the pipeline. The iPod ecosystem continues to thrive with innovative new products, such as the Nike + iPod Sport Kit, which allows runners to get real-time feedback on their performance through their iPod Nanos...

In the analyst Q&A session:

Robert Semple - Credit Suisse

Then just switching gears to iPod. I noticed ASP was off about $15 sequentially. Is that more of a mix issue, or was it because you started the kind of back-to-school free iPod with the Mac a little bit earlier than you did last year?

Peter Oppenheimer

The main thing that drove that was the introduction in Q2 of the 1-gigabyte Nano for $149, and so in Q3 we had a full quarter at that...

Harry Blount - Lehman Brothers

Peter, last thing on the housekeeping side of the equation, can you maybe give us a sense of how many distribution points you have for both the iPod and the Mac? Also, a rough sense as to how many of the Macs sold in the quarter were tied to the iPod promotion? Thank you.

Peter Oppenheimer

On the iPod side, we have close to 40,000 distribution points, which is up slightly from the previous quarter, as we have added a few select resellers around the world...

Richard Farmer - Merrill Lynch

Thank you. Peter, I would like to ask a couple of questions on gross margins, please. In the past, you have commented, at least qualitatively, on the iPod hardware gross margin. I wonder if you can provide any color there on how much that might have changed sequentially and year over year.

Peter Oppenheimer

In terms of product gross margins, we have a long-standing practice of not releasing specific gross margins, specific product gross margins. However, the iPod gross margin was up sequentially in the June quarter and that was really attributable to the very favorable commodity environment...

Bill Fearnley - FTN Midwest Securities

Just a follow-up question on the iPod units -- what was the effect of the major and Mac promo being moved up in June? Was that significant to contributing to the iPod units for the quarter?

Tim Cook

It was not significant.

Bill Fearnley - FTN Midwest Securities

Then on the iPod ASPs, how should we be thinking about the blended ASPs going forward for the category? Should we be thinking that they should stay within the range that they have been the last few quarters?

Peter Oppenheimer

Bill, I am sorry. That is a question we cannot answer. We do not provide product level forecast...

Bill Shope - JP Morgan

Thank you. I believe last quarter, you know that you got more aggressive with the market efforts overseas for the iPod. Can you give us some comment on the progress you might have seen in this arena throughout the quarter?

Tim Cook

We did get more aggressive. We had put more energy outside the U.S. as we had the supply capability to do that. As a consequence, we saw share gains in several countries in Europe, including the U.K., Spain, Italy and France. We are very pleased with that.

Also, through the month of May, BCN has reported that we saw more of the 50% share in Japan as well, and so we appear to be making good progress...

David Bailey - Goldman Sachs

Thank you. Similar to what you have done on the Mac side, have you done any studies on what percentage of iPod sales are to existing owners? To go along with that, what are you doing to drive sales into your install base between product cycles?

Peter Oppenheimer

I am not aware of studies or data that we have in that regard, David. In terms of what are we doing -- great marketing, offering great points of presence around the world, both in our retail stores and online and through our channel partners, and offering customers what we think is the absolute best products in the marketplace, in not only the iPod but the iTunes Music Store. I think the market share that we command around the world supports that.