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Executives

Nancy Paxton -

Timothy D. Cook - Chief Executive Officer and Director

Peter Oppenheimer - Chief Financial Officer and Senior Vice President

Analysts

Benjamin A. Reitzes - Barclays Capital, Research Division

Katy Huberty - Morgan Stanley, Research Division

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Shannon S. Cross - Cross Research LLC

Kulbinder Garcha - Crédit Suisse AG, Research Division

Apple Inc. (AAPL) Announcement of Dividend and Share Repurchase Program March 19, 2012 9:00 AM ET

Operator

Good day, everyone, and welcome to this Apple Incorporated conference to announce the outcome of the company's discussions concerning its cash balance. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Nancy Paxton, Senior Director of Investor Relations. Please go ahead, ma'am.

Nancy Paxton

Thank you. Good morning, and thanks to everyone for joining us. Speaking this morning will be Apple CEO, Tim Cook; and CFO, Peter Oppenheimer, and the purpose of today's call will be to announce the outcome of the company's discussions concerning its cash balance. We will not be providing a business update nor will we be discussing any other topics today. Tim and Peter will provide some opening remarks, and we'll follow that with a short Q&A session with analysts.

Please note that some of the comments you'll hear during our discussion today will consist of forward-looking statements including, without limitation, those regarding anticipated dividends and share repurchase activity and the expected performance of Apple's business. Actual execution of these activities and results of business operations could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's Form 10-K for 2011 and the Form 10-Q for the quarter ended December 31, 2011. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.

With that, I'd like to turn the call over to Tim Cook.

Timothy D. Cook

Thank you, Nancy. Good morning to everyone, and thanks for joining us. I'd like to start by discussing how confident we feel about Apple's future. We are participating in some very large and growing markets, and we see significant opportunities ahead of us.

Starting with iPhone. In our mostly recently reported quarter, we sold 37 million iPhones. That's a very large number, but it represented less than 9% of handsets sold during the quarter. The handset market is expected to grow dramatically in the years ahead from 1.6 billion in 2011 to over 2 billion by 2015, and it's our belief that eventually, all handsets will be smartphones, so the potential for iPhone is enormous.

We're off to an amazing start with iPad, selling 55 million from the launch of the first iPad in the spring of 2010 through the end of our most recent quarter. And with the launch of the new iPad, it just keeps getting better. Gartner estimates that the tablet market will be 325 million units by 2015. And as I've said many times before, we believe that the tablet market will eventually surpass the PC market in size. It's just a question of when.

And with the Macintosh. As of last quarter, we had outperformed the PC market for 23 consecutive quarters, yet we have less than 6% market share of this 350 million unit per year market. We are innovating at an incredible pace, building a tremendous ecosystem with apps and content, providing great services such as iCloud, which has already eclipsed over 100 million users within just a few months of its launch, and we're delivering incredible developments like Siri, a profound new way to interface with the iPhone.

We are also investing in distribution around the world. We continue to open our own stores, including 40 this fiscal year alone. We are expanding our footprint with new carrier partners and other third-party resellers, and we are investing in our direct enterprise sales force. Simply stated, we don't see ceilings to our opportunities.

All of this innovation and success have led to generation of substantial amounts of cash, both domestically and abroad. We have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain and building out of our infrastructure, and you will see more of all of these in the future.

Even with these investments, we can maintain a war chest for strategic opportunities and have plenty of cash to run our business. So we are going to initiate a dividend and share repurchase program. We have thought very deeply and very carefully about our cash balance. We will continue to invest in the business, and we will maintain our disciplined and focused approach in the future.

Innovation is the most important objective at Apple, and we will not lose sight of that. These decisions will not close any doors for us. Subject to a board declaration, we plan to initiate a quarterly dividend of $2.65 per share beginning in the September quarter. A quarterly dividend will provide current income to our shareholders, and we also believe it will broaden Apple's investor base by attracting new investors who don't currently own Apple stock.

Additionally, in the December quarter, we plan to commence a share repurchase program. The board has authorized the repurchase of $10 billion of stock over the next 3 fiscal years with the primary objective of neutralizing dilution from future grants through Apple's employee equity programs. We will continually assess the opportunities to invest further in our business, and in consultation with our board, we will review our dividend and share purchase plans periodically. We will continue to do what we believe is in the best interest of Apple and our long-term shareholders.

I'd now like to turn over the call to Peter, who will provide more details on our programs.

Peter Oppenheimer

Thank you, Tim. Apple's cash has increased substantially for all the right reasons. Our business is performing extremely well, and we have been very disciplined with our stewardship of the cash, making great investments on the business.

In fiscal year '11, our cash increased by $31 billion with $24 billion of that growth coming from abroad. During the first quarter of fiscal year '12, we generated another $16 billion. That left us with about $98 billion of cash at the end of the December quarter, of which about $64 billion was outside the United States. As Tim said, that's plenty of cash to run the business, so we're announcing today a dividend and share repurchase program.

In thinking about our cash, we want to achieve several objectives. First, we want to maintain the flexibility to take advantage of investment opportunities that present themselves. Second, we want to provide some current income for our long-term shareholders. Third, we want to increase the attractiveness of Apple to a wider investor base. And finally, we want to limit future dilution from our employee equity programs.

The program that we are announcing today will have 2 elements: a dividend and a share repurchase. Subject to board declaration, we plan to initiate a quarterly dividend of $2.65 per share beginning in our September quarter. We plan to declare the dividend concurrent with our quarterly earnings release in July and to establish the record and payment dates at that time.

Our board has concluded to amend existing RSU agreements so that unvested RSUs can participate in dividends declared. This would apply to both historical grants that are unvested as of the dividend record dates as well as future grants. Dividend equivalents on unvested RSUs will be deferred and paid with an underlying RSUs vest. At Tim's request, none of his unvested RSUs will participate in dividends. Based on anticipated shares and RSUs outstanding, we would expect the first year's annual dividend payments to be over $10 billion.

With respect to share repurchase, our board has authorized a $10 billion program beginning in our fiscal year '13 to be executed over 3 years with the primary purpose of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs. Commencing in fiscal year '13, which begins on September 30, 2012, we will begin to repurchase shares primarily to offset the amount of shares we expect will ultimately be issued from the current year employee equity grants. We intend to execute these repurchases over the course of each fiscal year.

We expect cash used to repurchase shares through the share repurchase program and to net-share-settle vesting RSUs to consume approximately $4 billion in the first fiscal year. Combining dividends, share repurchases and cash used to net-share-settle vesting RSUs, we anticipate utilizing approximately $45 billion of domestic cash in the first 3 years of our program.

In closing, we remain very confident in the future of our business, are extremely enthusiastic about the opportunities that lie ahead and look forward to executing our plans to initiate a dividend and share repurchase program.

With that, I'd like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question will come from Ben Reitzes with Barclays.

Benjamin A. Reitzes - Barclays Capital, Research Division

Tim and Peter, can you talk about your philosophy on dividend growth? Within the $45 billion, is there any growth to the dividend thought about in there? And how do you -- how are you going to shepherd us through the process each year do you envision?

Peter Oppenheimer

Ben, it's Peter. In consultation with the board, we will review our dividend payments periodically. We believe that our quarterly dividend of $2.65 per share will be attractive to both current and prospective shareholders. Based on our anticipated shares and RSUs outstanding, we expect our dividend payments to be over $2.5 billion per quarter or more than $10 billion a year, which would make us one of the highest dividend payers in the United States. We want to maintain sufficient U.S. cash to be able to quickly take advantage of strategic opportunities that might present themselves, and we do not want to incur the tax cost to repatriate the foreign cash at this time.

Benjamin A. Reitzes - Barclays Capital, Research Division

All right. And then just finally, sometimes, when companies do a dividend and the shareholder base changes, and you guys have been very clear to talk about your growth and whatnot and how -- what lies ahead. I know you guys don't like to announce new products, but last quarter, you talked about we haven't seen anything yet, I think. Or on the last product launch, you said that there was many more things to come. And can you just reiterate a little bit more about your confidence in the product pipeline and your growth outlook even though you did a pretty good job during the pre-sell?

Timothy D. Cook

Ben, it's Tim. We actually do love to announce new products. We just don't do it in conference calls. We had an incredible growth last quarter. It was 73% despite the base that it's growing upon being very large, and so I think the growth speaks for itself. And let me tell you, I am extremely confident in our future. The pipeline is full of stuff, and I think our customers are going to be incredibly pleased with what they see coming out.

Nancy Paxton

Thanks, Ben.

Operator

From Morgan Stanley, we'll go to Katy Huberty.

Katy Huberty - Morgan Stanley, Research Division

You both mentioned that Apple retains the flexibility to use the extra U.S. cash for other investments, but I wonder about the international cash. At the end of this calendar year, you could be approaching $100 billion of cash that's stuck overseas. Did the board discuss how you might go about putting that to use? I know, Peter, you said that at this time, you don't want to bring it back to the U.S. But what are you going to do with that $100 billion of international cash?

Peter Oppenheimer

Katy, it's Peter. So today, we've got plenty of U.S. cash to invest in the business, to pay a dividend and to initiate our share repurchase program. Repatriating the cash from offshore would result in significant tax consequences under current U.S. law. We have expressed our views with Congress and the administration. We think that the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash that they have. And that's our view, and we've expressed it.

Nancy Paxton

Thank you, Katy.

Operator

We'll go to Gene Munster with Piper Jaffray.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Tim and Peter, you both mentioned periodically revisiting the dividend. Is that a yearly or a couple of times a year? Any color on that? And then a couple of follow-up questions.

Timothy D. Cook

Gene, we'll continually discuss it. And so -- but there's not a certain period of time where -- that we've decided that we would change it, but we will continually discuss it as you would expect us to.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. And then -- and just in terms of the stock split, can you talk a little bit about your methodology on stock splits?

Timothy D. Cook

This is something that we have looked at while we were looking at this cash question, and the current information we have would suggest that there's very little support that it helps the stock. However, we are in a unique position and at a unique point in time, and so this is something that we continue to look at. And if we reached a decision that we thought it was in the best interest of Apple and its shareholders, we would do it. But again, at this point, that's not how we see it.

Charles Eugene Munster - Piper Jaffray Companies, Research Division

Okay. And then my last question. I know we're not talking about fundamentals on this call, but do you guys think you will put a press release out in terms of how the new iPad did over the opening weekend?

Timothy D. Cook

We had a record weekend, and we're thrilled with it, but this call isn't to discuss the current business, as you know.

Nancy Paxton

Thank you, Gene.

Operator

We'll go to Bill Shope with Goldman Sachs.

Bill C. Shope - Goldman Sachs Group Inc., Research Division

Okay. Great. After doing this analysis, I guess as a follow-up to Ben's question, how do you think about growth in share repurchases versus growth in dividend program? I guess, in other words, if your earnings or cash performance would have continued to exceed your expectations over time, do you think the potential excesses would go into a larger buyback or a larger dividend? And sort of how are you thinking about that?

Peter Oppenheimer

Bill, it's Peter. We remain very, very confident in what we're doing, our business and the products that we've got in the pipeline, and we are squarely focused on achieving our potential in the business. We will continuously assess the opportunities to invest in the business in a deliberate and disciplined manner. In a consultation with the board, we will review our plans periodically, and we'll make changes to the program that we've announced today that we believe are in the best interest of Apple and our shareholders but don't have anything further to say today.

Nancy Paxton

Thanks, Bill.

Operator

We'll go to Shannon Cross with Cross Research.

Shannon S. Cross - Cross Research LLC

I just had a couple of questions. I guess the first one is how did -- can you give us some idea about sort of the methodology of how you thought about the percent that should be paid out to shareholders, how you sort of came up with the numbers that you did for today?

Peter Oppenheimer

Sure. It's Peter, Shannon. The program that we're announcing today is very significant, and we're excited about it. As we've noted, we expect to use about $45 billion during the next 3 years from our domestic cash balances to pay dividends, repurchase shares and pay the taxes to net-share-settle vesting RSUs. We opted to go with a hybrid approach after doing a lot of analysis and thinking and frankly, listening to the input that we were getting from the shareholders. So we've put most of our emphasis to begin behind our dividend. That's where the majority of the cash that we will return will go. We expect to pay, in our first year, more than $10 billion out in dividends, and it will make us one of the largest dividend payers in the United States. And then we also wanted to commence a share repurchase program with the primary objective to neutralize dilution from our future employee equity grants and employee stock purchase programs. That's something else that we thought was important that we heard about. And then, most importantly, we want to maintain sufficient U.S. cash to be able to quickly take advantage of strategic opportunities that might present themselves, and we did not want to incur the tax cost to repatriate the foreign cash at this time.

Shannon S. Cross - Cross Research LLC

Okay. Great. And then Tim, could you talk maybe philosophically a little bit about your thoughts on needing a cash cushion or having a cash cushion? I know some people talk about tech companies, given how product cycles change and how consumer behavior changes and the economy, need to have a pretty substantial one. I mean, how do you think about it? Is it more tax issues here or a real comfortable cash cushion going forward? Because clearly, you'll have a substantial amount of cash even at the end of the 3 years.

Timothy D. Cook

Yes. Shannon, the way that we looked at this was because of the tax consequences of repatriating the foreign cash, we focused on the domestic cash. And within the domestic cash, our first and foremost objective, as it will always be, will be to make the most innovative products in the world. And so we decided how much cash that we needed to do that, and of course, that's -- there is a wide range of investments that, obviously, I won't detail in here. In addition to that, we looked at other things that we might invest money in that would come out of domestic cash. And after we had done all of that and allowed for a war chest to do things that today we can't predict but opportunities that might come along in the future, we had extra cash left over. And so we concluded that we had plenty of cash to run the business, and given that, we felt it would be the right action to initiate a dividend and expand Apple's shareholder base in the process. And so it's great for current shareholders, and it's fantastic for attracting new investors. And then we felt the share buyback program was also in the best interest of Apple and its shareholders. So that's how we looked at it.

Nancy Paxton

Thanks, Shannon.

Operator

From Credit Suisse, we'll hear from Kulbinder Garcha.

Kulbinder Garcha - Crédit Suisse AG, Research Division

A couple of questions just to clarify. I guess just on the question of the cash balance on onshore, Tim, do you think you actually need like a $30 billion cash pile number domestically to offer all the strategic flexibility you want? Or could it be the case that 2 or 3 years down the road, once you've maybe executed on whatever you're going to do in terms of growth, you could actually even run at a lower level? And then the other question I have is what kind of -- how kind of widely held is your stock by employees? I'm just thinking this should be a good income generator, good for motivation for employees. Any sense of what you've done around there would be helpful.

Timothy D. Cook

Well, I think it's great for shareholders. It's great for employees, which are also shareholders. So I think it's great all the way around. And to your question about is there a magic number, there's not a magic number here that we're trying to keep in terms of cash balance. There's a judgment, and that judgment, as we've tried to articulate, will continually be looked at over time. So we'll continually -- continue to evaluate how much money should go into dividend, how much money should go into buyback, how much money we need for investments, et cetera, and that's what we're paid to do.

Peter Oppenheimer

And Kulbinder, it's Peter. Relating to your employee question, at the end of the December quarter, there were about 17.7 million RSUs outstanding that had not vested, and employees also participate in the Apple stock through our employee stock purchase programs as well.

Nancy Paxton

Thank you, Kulbinder. A replay of today's call will be available for approximately 2 weeks through the webcast on apple.com/investor and via telephone. And the numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 6274937. These replays will be available beginning at approximately 9 a.m. Pacific Time today. Members of the press with additional questions can contact Steve Dowling at (408) 974-1896, and financial analysts can contact Joan Hoover or me with additional questions. Joan is at (408) 974-4570, and I'm at (408) 974-5420. Thanks again for joining us.

Operator

Ladies and gentlemen, that does conclude today's presentation. We do thank everyone for your participation.

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