Apple Discusses iPods and iTunes

Oct.19.06 | About: Apple Inc. (AAPL)

These excerpts from Apple Computer, Inc.'s (NASDAQ:AAPL) earnings conference call gather together all the comments made about Apple's iPod and iTunes business. CFO Peter Oppenheimer and COO Tim Cook are speaking and fielding analyst questions:

Peter Oppenheimer

Our music products generated another quarter of strong results, representing 42% of total company revenue and increasing 36% year over year. iPod shipments grew 35% year over year, to $8.73 million, bolstered by the announcement of our new iPods on September 12th, and our very popular back-to-school promotion.

Reviews of the new iPods have been very positive, and we are very confident in our new line-up, despite increased competition this holiday season.

Channel inventory of iPods as of the end of the quarter was within our target range of four to six weeks on a look-back basis.

The iTunes store continues to be the world's leading online music store, and now offers movies in addition to over 3.5 million songs, 220 television programs, 9,000 music videos, and 20,000 audiobooks. Based on the latest data available from Nielsen SoundScan, iTunes accounts for 85% of songs purchased and downloaded in the U.S.

The iPod ecosystem continues to thrive, with over 3,000 accessory products currently available. We estimate that over 70% of the 2007 model year cars sold in the U.S. will offer direct iPod integration as an option.

And later in the Q&A:

David Bailey - Goldman Sachs

Great, thank you very much. Two short questions, please. Can you help us understand the impact of the lower price points associated with the new iPods are going to have on your blended ASP and gross margin for the December quarter?...

Peter Oppenheimer

David, I'll start with the iPod questions and Tim can discuss the component environment. As a result of the price reductions that we took on September 12th and the introduction of the new $79 Shuffle, we believe that our ASPs and iPods will be down in the December quarter from what they were in September, but we are very excited about the line that we just announced and are looking forward to the holiday season and confident.

...Bill Richards - UBS

I guess with regard to a couple of other things. With regard to other music, that line was a little below expectations while virtually every other line was much better than expected. Is there something going on with download habits, Peter or Tim, and can you elaborate there? Should that line pick up with the addition of movies?

Peter Oppenheimer

Ben, in the quarter, it was relatively flat sequentially, but up over 70% year-over-year. In the quarter, we reduced our channel inventory on the Apple-branded iPod accessories in advance of our announcements on September 12th, so that played into it. Also, the summer is usually not the best quarter for music sales. People are on vacation and it generally is not the strongest quarter for new album releases either.

Bill Richards - UBS

So you would expect that to pick up quite a bit into the holidays, normal seasonality? Nothing special to --

Peter Oppenheimer

Not providing a quantitative forecast, but qualitatively, seasonally, and with album releases, we have seen that in the past.

...Bill Shope - JP Morgan

Great, thanks. Can you guys give us an update on the progress you're seeing in the international markets with the iPod as you did last quarter? Then on the iTunes side, do the video sales have similar economics to music sales, as you've said in the past, or is this changing as U.S. scales the video business?

Peter Oppenheimer

Bill, we don't report individual product gross margins, but we're running the music store at above breakeven levels. Our view continues to be that selling music and TV shows and now movies helps us to sell iPod and accessories.

As it relates to international iPod results, we continue to be happy with our progress. In the U.K., Canada, Japan, and Australia, our market share ranges from 40 to 50% and in many western European countries, we've picked up market share year-over-year, typically 6 to 7 points in place like France and Germany and Italy and Spain.

...Robert Semple - Credit Suisse

Yes, thanks. Guys, can you characterize the demand for the new Nano launch? I guess in the context of last year, Tim, last year you found the demand staggering and you could only get a million units out the door in the final three-four weeks of September. How did the rollout go this year relative to last?

Tim Cook

The customer reception was excellent, the analyst reviews have been very, very favorable. If you look at the quarter in the months, iPod demand really accelerated significantly post the launch and it was that acceleration that allowed us to exceed our expectations for the quarter.

...Harry Blount - Lehman Brothers

Okay. You guys have made significant improvements in the bill of materials on the iPod. Would it be fair to say that the iPods have now achieved similar gross margins as the PC product line?

Peter Oppenheimer

I don't want to comment quite that specifically. I will say that the iPods' gross margin was above 20% in the September quarter, but the gross margin was down a bit from the June quarter as a result of the price reductions that we took in September and our transition.

...Shannon Cross - Cross Research

Can you give any metrics in terms of iTunes store, games were just launched, videos. What kind of take rates? At one point, I heard a goal of 1 million videos, or movies per week, by the end of the year. Is that still a goal?

Peter Oppenheimer

We will likely re-release game and movie sales at a future date. I don't want to comment specifically, but we are very happy with the performance of the iTunes store with everything that it's selling, and as I said, we think it's a big reason why people are buying iPods and accessories and certainly think it's helping us in the Mac business.

...Charles Wolf - Needham & Co

Hi, guys, I've got a couple of questions. Do you have any preliminary indication of demand for the Shuffle? I've been hearing it could be huge.

Tim Cook

We've been taking orders, obviously, Charlie, from our online store and our channels and we're very excited to get shipments underway in a couple of weeks to really test it.

...Brian Blair - Wedge Partners

Hi, thank you. I was wondering if you could comment at all on any iPod or marketing promotions you're doing in the international markets right now that are different from what we're seeing in the U.S.? If there's anything special going on to try to drive demand in some of the international markets?

Peter Oppenheimer

Sure. We have some work that we're doing with Coke in Europe, specifically in the U.K. and Germany. They are going to put a specific web site out that is linked directly into iTunes and they will be giving away 70 million free songs over the next month or two.

Brian Blair - Wedge Partners

Okay, great. Are there any updates on any of the iTunes stores launching in international markets? It seems like in a number of countries, like Japan, the iPod sales really preceeded iTunes stores for whatever reason. Any update you can give on iTunes as it progresses in international markets, movie downloads in international markets, et cetera?

Peter Oppenheimer

We today have the iTunes music store in 21 countries, which is covering off close to 90% of where music is legally purchased. We look forward to bringing movies international in 2007.

...Bill Fearnley - FTN Midwest

Then one last question on iTunes, if I could. Could you give any more color on profitability of movies versus music? Any update on that since you're getting further down the road here with videos?

Peter Oppenheimer

Bill, we don't give products' specific gross margins; our philosophy is to run the store a little bit over breakeven.

...Steve Lidberg - Pacific Crest Securities

Good afternoon. Peter, I was hoping you could provide some thoughts with regards to your ability to attract additional major studio content into the feature film category for iTunes. If there is hesitation or hurdles, what are you facing there? Thanks.

Peter Oppenheimer

Last October we announced TV shows with just five programs and within a year have over 220 today from over 40 networks. We've just launched movie downloads with one studio and have 75 titles and we plan to add more over time.

For more, see the entire Apple conference call transcript (free). A full list of the most recent conference call transcripts on Seeking Alpha is here.