iPods "R" Us: Apple's CEO Discusses F3Q12 Results - Earnings Call Transcript

Executives

Nancy Paxton â€" Investor Relations

Peter Oppenheimer â€" Senior Vice President and Chief Financial Officer

Timothy D. Cook â€" Chief Executive Officer

Analysts

Kathryn Huberty â€" Morgan Stanley

Bill C. Shope â€" Goldman Sachs & Co.

Ben Alexander Reitzes â€" Barclays Capital, Inc.

Shannon Cross â€" Cross Research

Toni M. Sacconaghi â€" Sanford C. Bernstein & Co. LLC

Andy Hargreaves â€" Pacific Crest Securities

Gene A. Munster â€" Piper Jaffray, Inc.

Mark A. Moskowitz â€" JPMorgan Securities LLC

Chris Whitmore â€" Deutsche Bank Securities

Shaw Wu â€" Sterne, Agee & Leach Group, Inc.

Brian Marshall â€" ISI Group

Apple Inc. (AAPL) F3Q12 Earnings Call July 24, 2012 5:00 PM ET

Operator

Good day, everyone, and welcome to this Apple Incorporated Third Quarter Fiscal Year 2012 Earnings Release Call. Todayâ€™s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Nancy Paxton, Senior Director of Investor Relations. Please go ahead.

Nancy Paxton

Thank you. Good afternoon, and thanks to everyone for joining us. Speaking today is Appleâ€™s CFO, Peter Oppenheimer; and heâ€™ll be joined by Appleâ€™s CEO, Tim Cook; and Treasurer, Gary Wipfler for the Q&A session with analysts.

Please note that some of the information youâ€™ll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, stock-based compensation expense, taxes, earnings per share and future products. Actual results or trends could differ materially from our forecast.

For more information, please refer to the risk factors discussed in Appleâ€™s Form 10-K for 2011, the Form 10-Q for the first and second quarters of fiscal 2012 and the Form 8-K filed with the SEC today along with the attached press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

Iâ€™d now like to turn the call over to Peter Oppenheimer for introductory remarks.

Peter Oppenheimer

Thank you, Nancy. Weâ€™re pleased to report the results of our third fiscal quarter. We established new all-time quarterly record for iPad unit sales and new June quarterly records for iPhone and Mac unit sales, leading to our highest June quarter revenue and earnings ever.

Revenue for the quarter was $35 billion, representing year-over-year growth of 23%. The $6.5 million increase over the prior June quarterâ€™s result was driven primarily by strong growth in iPad and iPhone sales.

Operating margin was $11.6 billion, representing 33% of revenue. Net income was $8.8 billion, increasing 21% over the prior June quarterâ€™s results. The quarterâ€™s net income translated to diluted earnings per share of $9.32.

Turning to the details of the quarter, Iâ€™d like to begin with our Mac products and services. We sold 4 million Macâ€™s establishing a new June quarter record. This represents 2% growth year-over-year, compared to [IBCs] latest published estimate of 1% contraction of the global personal computer market in the June quarter.

Last month, we updated the entire MacBook lines with faster processors, graphics, memory, flash storage and USB 3.0 connectivity. We also introduced the all-new 15 inch MacBook Pro with Retina Display, all flash architecture and quad core processors and customer response has been excellent.

While receiving tremendous momentum for the iPad in education, which Iâ€™ll discuss later, we also experienced our best quarter ever for U.S. education institution Mac sales with Portables representing nearly three quarters of total Mac sales. Notable large education transaction closed during the June quarter, include Rutherford County, North Carolina, which has purchased 6,000 MacBook Airâ€™s to support its 21 century digital learning environment in Pueblo, Colorado School District 70 were all high school students and (inaudible) staff in the 22 school district will convert to MacBook Air. We began in end of the quarter with between three and four weeks of Mac channel inventory, which is below our target range of four to five weeks.

Tomorrow, we will release Mountain Lion, the ninth major release of OS 10. Mountain Lion introduces more than 200 features including all new messages app, notification center, system wide sharing, and Facebook integration. We built iCloud into the foundation of Mountain Lion, making it easier than ever for customers to keep content up-to-date across all their devices.

Moving to our music products, we sold 6.8 million iPods compared to 7.5 million in the year ago quarter. Total iPod sales were ahead of our expectation and iPod touch continue to account for over half of all iPod sold. iPod share of the U.S. market for MP3 players remained at over 70% based on the latest monthly data published by MPD and iPod continue to be the cross selling MP3 player in most countries we track based on the latest data published by GFK.

We ended the quarter within our target range of four to six weeks of iPod channel inventory. The iTunes Store generated very strong results in the quarter with revenue of over 1.8 billion, thanks to continued strong sales of music, apps and other content. We are pleased to launch the iTunes Store in 12 countries including Hong Kong, Singapore, and Taiwan last month. Customers can choose from over 20 million songs to purchase and download from iTunes.

Weâ€™re continuing to see great interest in iTunes view, since rolling it out in January, they have been over 40 million downloads of the iTunes U app. Over 700 located 12 schools and districts and over 125 colleges and universities have enrolled in the iTunes U program, while over 750 new courses have been published.

I would now like to turn to iPhone. We sold 26 million iPhones compared to 20.3 million in the previous June quarter; that represents 28% year-over-year growth and was ahead of the amount we factored into our guidance following very strong sales in channel inventory build we achieved in the March quarter. We added several small regional carriers during the quarter and now have iPhone distribution through over 250 carriers in over 100 countries. We ended the quarter with about 8.3 million iPhones in channel inventory, a sequential decline of about 300,000 iPhones, and we remained within our target range of four to six weeks of iPhone channel inventory. Recognized revenue from iPhone handset and accessory sales was $16.2 billion during the quarter compared to $13.3 billion in the year ago quarter, an increase of 22%.

Enterprises across the globe continue to choose iPhone as the standard device for their employees. We estimate that the number of iPhones in the Fortune 500 has more than doubled in the past year. iPhone is helping businesses and employees being more productive wherever they are.

PepsiCo has deployed thousands of iPhones within in-house app build specifically for their field merchandisers. This app has eliminated paper reports and provides real-time information to managers, sales teams and delivery drivers.

And German insurance provider ERGO has built an in-house app for iPhone that thousands of agents use to process insurance claims, which has significantly reduced paper work and improve processing time and customer satisfaction.

Turning to iPad, we were thrilled with sales of over 17 million iPads during the June quarter compared to 9.2 million in the year ago quarter, an increase of 84%. We saw very strong year-over-year growth in iPad sales around the world and are pleased to be selling iPad in 97 countries.

Recognized revenue from sales of iPad and iPad accessories during the quarter was $9.2 billion compared to $6.0 billion in the year ago quarter, an increase of 52%. We ended the quarter with about 3.2 million iPads in channel inventory, a sequential increase of about 1.2 million units, which left us just within our target range of four to six weeks of iPad channel inventory.

The iPad continues to be a great success in the U.S. education market, with sales setting a new quarterly record and nearly doubling year-over-year to just under 1 million iPads. While interest in the new iPad was high, sales of the reduced price iPad 2 in the K to 12 markets were particularly strong, and even though as I mentioned earlier, we achieved all-time record Mac sales to U.S. education institutions during the quarter. We sold more than twice as many iPads as Macs to U.S. education institutions. We are extremely pleased with these results.

One great example of iPad adoption in education is the Mansfield, Texas Independent School District, which has purchased 11,000 iPads. This fall every Mansfield High School student and teacher will receive an iPad under the districts power of initiative. Some teachers will use a flipped classroom concept, putting their lessons and resources online where students can access them any time with their iPads. As a result, students take responsibility for their own learning and teachers are able to increase their interaction and personalized content time. iPad continues its rapid adoption within the enterprise. We estimate that the number of iPads in the Fortune 500 is more than tripled in the past year.

iPad has become an indispensable tool worldwide to help employees across industries, do their jobs more effectively. British Airways has incorporated thousands of iPads across their business from customer support at check-in to cabin service directors replacing paper printout of the detailed customer preferences and provide real-time updates.

In homebuilder Dialogue House in Japan is actively building smart homes, they will be controlled by iPads. And their sales reps are using iPads to show work plans and upgrade options. Combining iPhones, iPad and iPod touch, we surpassed $410 million cumulative iOS device sale, selling more than $45 million in the June quarter. With App Stores in a 155 countries, the iOS ecosystem continues to grow. The App Store now offers more than 650,000 apps including over 225,000 apps specifically for iPad. We are extremely pleased to report that we have surpassed $5.5 billion in payments to developers and customers are loving iCloud since its launch in October, more than 150 people are using iCloud services.

In June, we previewed many of the exciting new features of iOS 6 at our Developer's Conference, including our fabulous New Maps App, new functionality and broader language support for Siri, direct Facebook integration, shared photo streams via iCloud and Passbook, the simplest way to get all your passes in one place. We believe iOS 6 will significantly enhance the experience of one even iPhone, iPad or iPod touch and we canâ€™t wait to get it into the hands of customers this fall.

Iâ€™d now like to turn to the Apple retail stores. Revenue was $4.1 billion, an increase of 17% over the year-ago quarter with growth yield primarily by all-time record iPad sales and strong growth in iPhone sales. the stores of 791,000 Macs compared to 768,000 in the year-ago quarter in almost half of the Macs sold in our stores during the quarter, while the customers would never own the Mac before. We opened a total of nine new stores in the quarter and exited the quarter with 372 stores including 123 stores outside the United States.

With an average of 367 stores open, average revenue per store was $11.1 million compared to $10.8 million in the year-ago quarter. Segment margin was $868 million compared to $802 million in the year ago quarter. We welcomed 83 million visitors to our stores during the quarter compared to 74 million visitors in the year ago quarter, an increase of 12%. That translates to an average of 17,000 visitors per store per week.

Total company gross margin was 42.8%, which was a 130 basis points higher than our guidance. We experienced upside from better-than-expected commodity, warranty and other costs. These factors will partially offset by a stronger mix of iPad sales, a higher mix of lower priced iPhones and a strong U.S. dollar relative to our expectations. Operating expenses were $3.4 billion and included $378 million in stock-based compensation expense. OI&E was $288 million and the tax rate was 25.6%.

Turning to cash, our cash for short-term and long-term marketable securities totaled $117.2 billion at the end of the June quarter compared to $110 billion at the end of the March quarter, a sequential increase of $7 billion. And about $81 billion of the cash was offshore at the end of the June quarter. Cash flow from operations was $10.2 billion.

Today, we are announcing that our Board of Directors has declared a dividend of $2.55 per common share payable on August 16, 2012, the stockholders of record after the close of business on August 13, 2012. Going forward, subject to declaration by our Board, we expect to announce record and payment days for future dividends concurrently with our quarterly earnings announcements.

Also as we previously announced our Board has authorized a three-year $10 billion share repurchase program starting in our fiscal 2013, which begins on September 30, 2012.

As we move ahead into the September quarter, Iâ€™d like to review our outlook, which includes the types of forward-looking information that Nancy referred to at the beginning of the call. We expect revenue to be about $34 billion, compared to $28.3 billion in the September quarter last year. We expect gross margins to be about 38.5% reflecting approximately $70 million related to stock based compensation expense.

We expect OpEx to be about $3.5 billion, including about $390 million related to stock based compensation. We expect OI&E to be about $175 million and we expect the tax rate to be about 25.5%. We are targeting EPS of about $7.65.

In closing, weâ€™re pleased with our record June quarter results including sales of over 17 million iPads. We established new June quarter records for unit sales of iPhone and Macs and posted our best quarter ever for U.S. education. We remain extremely confident in our strategy and the investments weâ€™re making in our business. We are very excited to be launching Mountain Lion tomorrow and iOS 6 in the fall, and we have some more amazing new products in our pipeline that we look forward to discussing with your later.

With that Iâ€™d like to open the call to questions.

Question-and-Answer Session

Nancy Paxton

Weâ€™d like to ask that you limit yourself to one question and one follow-up. May we have the first question, please?

Operator

(Operator Instructions) Your first question will come from Kathy Huberty with Morgan Stanley.

Kathryn Huberty â€" Morgan Stanley

Yes, thank you. Peter, I want to better understand the gross margin guidance for September given that itâ€™s been nearly two years and youâ€™ve operated at a some 40% gross margin, I understand mix may go against you a little bit in the near-term, but it should be structurally higher than two years ago. You have NAND pricing moving in your favor and the products that youâ€™re selling in the market are relatively mature, so manufacturing cost should be favorable. Can you just talk about the dynamics that are pushing gross margins down again in September and then I have a follow-up?

Timothy D. Cook

We expect gross margin as I said to be about 38.5%, which is down about 430 basis points sequentially. We expect most of this decline to be primarily driven by a fall transition and to a much lesser extent the impact of the stronger U.S. dollar. The warranty benefit that we saw in the June quarter, not repeating, and a full quarter of the back to school promotion, so thatâ€™s what we see during (inaudible).

Kathryn Huberty â€" Morgan Stanley

Okay, and then as a follow-up, Tim, youâ€™ve obviously seen spectacular growth in China over the last several years, but there are some macro concerns in the market and your Asia-Pacific growth rate to decelerate some over 100% to I think 25% this quarter. So can you talk about what youâ€™re seeing in China as it relates to overall demand? Thank you.

Timothy D. Cook

Yes, Katy, hi, itâ€™s Tim. The growth in Asia-Pacific was 25% as you indicated and the vast majority of the difference in our sequential growth rate was a result of Greater China which represents about two-thirds of our revenue of that region. As we reported for Q2, our Greater China revenue was $7.9 billion and in Q3 our revenue was $5.7 billion, now the $5.7 billion is a 48% year-over-year increase and so still its growing at incredible rates. Virtually, all of the $2.2 billion sequential revenue decline was due to iPhone sales in Greater China and about half of that $2.2 billion is attributable to changes in the channel inventory not the underlying sell through of the iPhone. As a reminder, in the previous quarter in our fiscal Q2. We launched the iPhone 4S in China in January, we added China Telecom as the second carrier in March, and as we proceed across the quarter we increased the channel inventory to accommodate the sales, and to reach our target inventory of four weeks to six weeks.

The remainder of the sequential revenue decline is mainly attributable to normal seasonality after the very successful iPhone 4S launch. We did not see an obvious impact in Q3 that we would associate with the economy in mainland China. We â€" look at the economic reports as all of you do and see the [press], but again we did not see something that we would attribute to the economy in China.

In terms of iPhones in general in mainland China, we were incredibly pleased with our results. We were up over a 100% year-over-year. And as you probably know, just last Friday so in Q4, we lunched our new iPad in China after we resolved the iPad trademark issue, and so our sales did not benefit from the new iPad in the June quarter in mainland China.

Also, our new portable that we announced at the Worldwide Developers Conference began to ship in mainland China last week, after we received the routine regulatory approval, and once again the June quarter sales did not benefit from these products.

So net, we remain really confident about our plans and are very excited about our opportunity in China, and are very much looking forward to incorporating more local services as you probably saw in the Worldwide Developers Conference announcement of iOS 6, which will be coming in the fall.

Nancy Paxton

Thank you, Kathy. Could we have the next question, please?

Operator

From Goldman Sachs, we will hear from Bill Shope.

Bill C. Shope â€" Goldman Sachs & Co.

Okay. Great, thanks. Can you talk about your thoughts on the individual segment trends, when looking at your guidance. I know last quarter youâ€™ve given us some thoughts on that, could you walk through how youâ€™re thinking about it now coming off of the sequential declines this quarter particular on the iPhone segment?

Peter Oppenheimer

Sure, Bill, itâ€™s Peter. Let me start off and Tim wants to add something that he can. I will first talk about the products and then a little bit about how we are thinking of revenue. For iPhone, we would expect to have a year-over-year increase in sales in the September quarter. For iPad, we would also expect to have a year-over-year increase, but we would point out that we increased channel inventory in the June quarter by 1.2 million units. And in the year ago quarter, we also increased the iPad inventory at that time by 1.5 million units. And for Mac, we would expect a sequential increase.

As we think about revenue, weâ€™re providing revenue guidance that is up by 20% year-over-year. Weâ€™ve included several things on our â€" by thinking, but first, we are not expecting the economies in Europe or the natural resource based countries including Australia, Brazil and Canada to improve from what we saw in the June quarter. As Tim said, we saw no obvious evidence of the economy impacting our sales in China in the June quarter or in the U.S., but we are reading the same things that you all are about these economies. So we will have to see.

Our weekly iPhone sales continue to be impacted by rumors and speculation regarding new products. We exited the June quarter in supply and demand balance and we were within our four to six week inventory target. We also donâ€™t expect to add any significant new country or carrier additions in the September quarter.

Regarding iPad, as I said, weâ€™re able to increase our iPad channel inventory in the June quarter by 1.2 million units and we ended the June quarter just within our four to six week channel inventory target and we increased last year by 1.5 million units in the September quarter, which also put us in our four to six week inventory target. These increases in channel inventory will impact both the year-over-year and sequential compares for iPad. The current iPad lineup that we're selling includes the very successful 399 price point, which we do not have in the year-ago quarter. So this along with mix and the line will impact the ASPs in the September quarter.

And finally, the U.S. dollar has strengthened against most currencies around the world including the euro, Brazilian Reis, the Chinese RMB, British Pound, Australian Dollar, Canadian Dollar, Mexican Peso and Swiss Franc. We expect this to have an adverse impact on revenue in these countries in excess of 400 million sequentially net of our hedges. All that being said, we very much look forward to introducing iOS 6 in the fall, and we remain very confident in our business and our new product pipeline.

Bill C. Shope â€" Goldman Sachs & Co.

Okay. And just a follow-up if I could on sequential iPhone decline. you gave us a pretty good outline of what was going on in China, but can you walk us through some of the trends that you saw for iPhone demand sequentially in the other international regions?

Timothy D. Cook

Yeah, Bill, itâ€™s Tim. First of all, at a global level, I think itâ€™s important to understand as you compare our Q2 iPhone sales to Q3. there's a fairly large channel inventory difference that is embedded in that. As you recall, in January, we completed the iPhone 4S rollout in all the major countries including China. It was our fastest iPhone rollout ever. We were also able to get the channel at a â€" within our target inventory range of four to six weeks by the end of March. And so what that did was, it increased sell in over sell through by 2.6 million units. In the quarter that we just finished, our sell in was less than sell through by 300,000 units. And so the net change in channel inventory across the quarter is about 3 million units. And so, I think itâ€™s important to understand that to look at the underlying sell through trends.

In terms of what we see happening in the different geographies, the U.S. was very strong, running at 47%, Japan was strong at 45%. Iâ€™ve already mentioned Greater China was up 66%, but Mainland China was over double as I said before, itâ€™s over 100% up. The geography that did not perform well was Europe. Europe was essentially flat, slightly positive year-on-year and that really hampered our total results.

We begin Europe, now Iâ€™ll switch from iPhone to talking about more of the gross revenue level. We see a margin difference between the countries. The U.K. was relatively solid at 30% growth, but France and Greece and Italy were particularly poor, and Germany was ultimately a single-digit positive growth for the quarter. Eastern Europe was strong, materially stronger than Western Europe, but obviously, the Western European countries drive the preponderance of the revenue in that segment. And so, weâ€™re certainly seeing a slow down in business in that area. Fortunately, the U.S. and China, although I realized itâ€™s getting a lot of press, weâ€™re not seeing anything that we would classify as an obvious economic issue.

Bill Shope â€" Goldman Sachs

Okay, very helpful. Thank you.

Nancy Paxton

Thanks, Bill. Could we have the next question, please?

Operator

Next weâ€™ll go to Ben Reitzes with Barclays.

Ben Alexander Reitzes â€" Barclays Capital, Inc.

Yeah, thanks a lot. My first question, I wanted to ask about the fall transition you mentioned Peter, when you are talking about gross margin. Can you talk a little bit about that, what is the sequential impact on margins and revenue that youâ€™re baking in and then qualitatively how much would you get back in the December quarter or how much of itâ€™s short-term?

Peter Oppenheimer

Okay. Ben, I donâ€™t want to frustrate you or others, but the fall transition that I spoke about is driving most of the decline that we see sequentially in gross margin. Itâ€™s not something that weâ€™re going to talk about in any level of detail today and we could not be more confident in our new product pipeline.

Ben Alexander Reitzes â€" Barclays Capital, Inc.

Okay. Just with regard to the iPhone in general, you mentioned there were speculation about new products and rumors, but do you have any quantification of how much that hurts sales in the quarter either from you or Tim, and how much that maybe channel inventory reduction youâ€™ll need to do in the next quarter maybe resulting from that type of speculation?

Timothy D. Cook

That I think there is a lot of speculation out there, itâ€™s difficult to sort out, but Iâ€™m fairly convinced based on what Iâ€™ve seen that there is an incredible anticipation out there or for future products and as you would expect given what weâ€™ve been able to deliver in the past and so I think itâ€™s reasonable amount. In terms of channel inventory in the current quarter we put our current thinking in the guidance that Peter provided you.

Ben Alexander Reitzes â€" Barclays Capital, Inc.

Okay, thank you very much.

Timothy D. Cook

Yeah.

Nancy Paxton

Thanks Ben. Could we have next question please.

Operator

Next weâ€™ll go to Shannon Cross with Cross Research.

Shannon Cross â€" Cross Research

Thank you very much. Can you talk a bit about the Mac business, I mean it was up 2% year-over-year, clearly still outperforming the market, but can you talk about what youâ€™re seeing how much of the slower growth was from say the product transition versus weak economy and then any thoughts on cannibalization of Mac by the iPad.

Timothy D. Cook

Shannon itâ€™s Tim. Itâ€™s clear the PC market is way best on latest IDC data, but frankly we believe the primary factor for our lower growth rate in the Mac area is the timing of our portable announcement within last quarter. As you know we announced an entirely new portable line up thatâ€™s been incredibly well received that was done with three weeks or less than three weeks remaining in the quarter. The year ago compare we made the transition in the portable area in February and so we were selling our new line up for the entire Q3 period. And so, if you look at the data underneath that it further illustrate this. Prior to the Developers Conference, our weekly Mac sales were running below the prior year. After the Developers Conference, the MacBook Pros and the MacBook Air has drove year-over-year increases in weekly sell through. And they were to the levels that got us back to an overall positive territory for the quarter and our 25 consecutive quarter of growing faster than market. The MacBook Pro with the Retina display was incredibly well received, we ended the quarter in backlog, and we still have not caught up with demand yet, but anticipate doing so next month.

Also to further illustrate portable point for this month of June, the MPD data that just came out for United States showed our portable share at 25.5% and the record 47% of revenue share in the month of June. And so, I would attribute a large amount to what has happened in terms of the timing of our portable announcement.

Shannon Cross â€" Cross Research

Okay, great. And then could you talk a little bit Tim, about what your conversations are like with the carriers in terms of pricing, subsidies there's been a lot of talk about that over the last few months. So just how are your discussions with the carriers going clearly into the product transition thatâ€™s coming?

Timothy D. Cook

Let me avoid talking that product transition, which youâ€™re very smart to ask that. I don't want to get into specific topics about with different carriers, but generally I would just say that our role is to make the very best smartphone in the world and that has an incredible user experience far superior than anything else that customers want to use everyday. And I think at the end of the day, the carriers want to buy or want to provide their customers with â€" what their customers want to buy. And so the most important thing for Apple by far is to continue making the best products in the world and we are very deeply committed to doing this and weâ€™re maniacally focused on it.

From the carrierâ€™s perspective, I think itâ€™s also important to remember that the total subsidy that they pay is fairly small relative to the monthly payments they collect over a 24-month contract period. And I think many would tell you, they certainly told to me, that iPhone has several advantages for them over other smartphones, the churn rates are much less, you see carriers now focusing on shared data plans and I think an iPhone customer is likely more â€" is more likely to have a tablet or an iPad, and so I think â€" they really value these customers quite a bit.

Also our engineering teams are very sensitive to working with carriers to find the most efficient way to deal with data. And we think that we are most efficient smartphone on the market for smartphone that are in an app rich ecosystem. And so we are going to continue to focus â€" focusing on making the best product and I think that the carriers will be very motivated to make sure that they provide that [to the] customers.

Shannon Cross â€" Cross Research

Thank you.

Timothy D. Cook

Yeah.

Nancy Paxton

Thank you, Shannon. You have the next question (inaudible)â€¦

Operator

Next weâ€™ll hear from Tony Sacconaghi with Sanford Bernstein.

Toni M. Sacconaghi â€" Sanford C. Bernstein & Co. LLC

Yes, thank you. I have one for Peter and one for Tim, please. Peter you talked about how you were above expectations relative to your guidance on iPhone, you also mentioned youâ€™re above expectations on iPad, and you said you were thrilled iPad, yet your EPS I think came in 5% or 6% above your guidance. So perhaps you can help us illustrate where you were disappointed to relative to your original guidance because I think the commentary would certainly point to a much larger?

Peter Oppenheimer

Tony, look, given whatâ€™s going on around as weâ€™re happy with our quarter. Sales of each of our products did exceed what we had factored into the guidance, that was especially true of the iPad, which set a new record at 17 million units. And the $35 billion of revenue that we reported grew by $6.5 billion year-over-year. We do think some things did impact within the quarter, so let me comment on that. The economy in Europe is not doing well, we think this impacted our results. We also saw some economic impact in the natural resource based economies including Australia, Brazil and Canada.

As Tim discussed regarding iPhone, weâ€™re reading the same rumors and speculation that you are about the new iPhone, and we think this has caused some pause in customers purchasing. The timing of availability of Intelâ€™s Ivy Bridge and resulted rumors about the new portables impacted our sales in April and May. Tim talked about how after WWDC we saw a large increase in sales both in terms of weekly sales before the WDC and on a year-over-year basis, and customers are loving the new MacBook Pro. and we did not get the benefit of launching the new iPad in China or the new portables as we are pursuing routine regulatory approval.

and finally, the dollar strengthened against most currencies around the world, which reduced our revenue growth sequentially by over $200 million net of our hedges. So we think these things impacted the quarter, weâ€™re happy very with how the business is performing and are excited about our new product pipeline.

Toni M. Sacconaghi â€" Sanford C. Bernstein & Co. LLC

Thank you for that. Tim, the question that I had for you is, whether you could talk a little bit about smartphone growth in emerging markets, China is obviously the biggest one. Some of the data that Iâ€™ve seen suggest that about 70% of the smartphones that are being purchased in places like China and other emerging countries are under $300, and in many cases under $200. Do you agree with that market characterization and at some point, does that become a limit â€" does that limit your ability to gain share in a marketplace where its 70% of the units are at a price point that you correctly donâ€™t play, and at what point does that Mac prevent you from gaming share, and what are your strategies for ensuring continued share going forward, if in deed thatâ€™s an objective?

Timothy D. Cook

Toni, the specific data that youâ€™ve quoted to 70%, does that Macs or what Iâ€™ve seen, but let me try to answer your general question without that specific. Weâ€™ve been very focused, as you know on China, because we have â€" we see it as an enormous opportunity for us. And Iâ€™m very pleased that we were able to grow our iPhone sales over a 100% last quarter. And so I feel very, very good about that, and I firmly believe that people in the emerging markets want great products like they do in developed markets and so forth. And so weâ€™re going to stick to our knitting and make the best products. And we think that if we do that, weâ€™ve got a very, very good business ahead of us. Thatâ€™s what we are doing.

Toni M. Sacconaghi â€" Sanford C. Bernstein & Co. LLC

And the share objected in and of itself is not an explicit one Tim, thatâ€™s a consequence of making good products that either happens or it doesnâ€™t or is that an explicit objective for the iPhone business on a global basis and on an emerging markets basis?

Timothy D. Cook

I wouldnâ€™t go historic for the company in total, so not just iPhone, but across everything that we make is to make the very best product. And thatâ€™s more important, and overshadows all other things. But we do believe by doing that that we will have a great business, and I think that our results today really show that.

Toni M. Sacconaghi â€" Sanford C. Bernstein & Co. LLC

Thank you.

Timothy D. Cook

Yeah.

Nancy Paxton

Thanks, Toni. Could we have our next question, please?

Operator

From Pacific Crest, weâ€™ll go to Andy Hargreaves.