Apple Inc AAPL Q1 2013 Earnings Call Transcript
Transcript Call Date 01/23/2013
Operator: Katy Huberty, Morgan Stanley.
Kathryn Huberty – Morgan Stanley: It’s clear that iPhone 5 did incredibly well in the U.S. based on the carryover report to-date, but international sell-through data points have been more mixed, how would you characterize trends outside the U.S. for iPhone and are you confident that you have all the right price points and screen sizes to fully capture the non-U.S. demand for iPhone specifically?
Tim Cook – CEO: Katy, it’s Tim. As Peter said, sequentially we increased over 70% from the September quarter, which was 3.5 times market. So we could not be happier with that. In terms of the geographic distribution, we’d saw our highest growth in China and it was into the triple-digits, which was higher than the market there and so I would characterize it as we’re extremely pleased.
Kathryn Huberty – Morgan Stanley: Then maybe a question for Peter, with a such large cash generation again this quarter and confidence in the product pipeline, you made those comments and a stock price that is off at highs, why not step up and buy back even more stock than you had originally planned at this point?
Peter Oppenheimer – SVP and CFO: Sure. This is something that we continuously assess. The opportunities to both invest in the business and return cash. We’re pleased to have started our share repurchase program this quarter and combined with our dividend, we returned about $4.5 billion of cash this quarter and we started the buyback program and expect to return about $45 billion over three years to our shareholders. We do consider increasing these programs and we’ll do what we think is in the best interest of our shareholders.
Operator: Bill Shope, Goldman Sachs.
Bill Shope – Goldman Sachs: Kathy had eluded to this many of your smartphone competitors are now focusing on differentiating themselves with larger screen sizes than that of the iPhone 5 in your predecessor products, I mean how do you think about the competitive dynamics for the market right now, in that respect do you think that’s a valid point of differentiation? Do you think there is a long-term case for a larger screen size or at least the larger variety of screen sizes for iPhones and for the smartphone category in general?
Tim Cook – CEO: Bill, its Tim. The iPhone 5 offers as you know a new 4-inch Retina display which is the most advanced display in the industry, and no one comes close to matching the level of quality as the Retina display. It also provides a larger screen size for iPhone customers without sacrificing the one-headed ease-of-use that our customers love. So, we put a lot of thinking into screen size and believe we picked the right one.
Bill Shope – Goldman Sachs: I guess, and then shifting on to the question on iPhone demand, obviously you saw healthy growth in the key categories this quarter. Then in the context of your guidance, can you give us some color about how you’re viewing in-demand trends for the iPhone coming out of the December quarter and how that compares to what you consider to be normal seasonality at this point in the product cycle? And also, did you see any meaningful deterioration in iPhone demand at the end of the December quarter or thus far in the March quarter that would lend credence to some near-term conservatism?
Tim Cook – CEO: Bill, let me take the second half of that and then I’ll hand it back to Peter for the first half. If you look at the iPhone sales across the quarter, we were very constrained for much of the quarter on iPhone 5. As we began to produce more and ship more, sales went up with the production. iPhone 4 was actually in constraint for the entire quarter, and sales remained strong, and so that’s how sales progressed across the quarter. I’ll let Peter talk about the guidance.
Peter Oppenheimer – SVP and CFO: So, Bill, for iPhone, as we told you last year, we built about 2.6 million units of channel inventory in the March quarter which allowed us at that time to get into our four-to-six-week inventory target. So, the underlying sell-through was about 32.5 million, and we would expect sell-through growth year-over-year as it has for – in the quarter, as it has for many quarters in a row.
Tim Cook – CEO: Bill, let me make one additional point on this. I know there’s been lots of rumors about order cuts and so forth, and so let me just take a moment to make a comment on this. I don’t want to comment on any particular rumor because I would – in my life doing that, but I would suggest it’s good to question the accuracy of any kind of rumor about build plans, and also stress that even if a particular data point were factual, it would be impossible to accurately interpret the data point as to what it meant for our overall business, because the supply chain is very complex and we obviously have multiple sources for things, yields might vary, supplier performance can vary, the beginning inventory positions can vary, I mean, there’s just an ordinate long list of things that would make any single data point not a great proxy for what’s going on.
Operator: Toni Sacconaghi, Sanford Bernstein
Toni Sacconaghi – Sanford Bernstein: I just wanted to make sure that I fully understand your comments about guidance, in the new guidance range that you’re providing. Are you effectively saying that when you provided guidance before, it was uniquely conservative and that level of conservatism no longer exists? We’re actually getting the real planning range for Apple and that this is fundamentally different from how you approached and provided guidance?
Peter Oppenheimer – SVP and CFO: Tony, it’s Peter. In the past we provided a single-point estimate of guidance that was conservative, that we had reasonable confidence in achieving. This quarter and going forward we’re going to provide a range of guidance that we believe that we’re likely to report within. No guarantee as forecasting is difficult, but we believe that we will report within that range.
Toni Sacconaghi – Sanford Bernstein: So, I’m just comparing the word so you think you’ll report in the range before or are you — I think on average it clips to your guidance on EPS by 35%, was the guidance before something that you felt reasonably confident in achieving or was there an implicit buffer in there because I’m trying to reconcile the fact that you said you thought it was reasonable before, but your historical president was you eclipsed it enormously on an ongoing basis and this time you’re saying there is a likelihood of falling within the range and I want to understand the distinction?
Peter Oppenheimer – SVP and CFO: I’ll go through it again. In the past, we gave you a single-point estimate of guidance that was conservative, that we had as reasonable confidence as you can that we would achieve. We’re now providing you a range of guidance that we expect to as best we can report within.
Toni Sacconaghi – Sanford Bernstein: Then if I could follow-up, Tim you started the call talking about Apple’s philosophy of really ensuring that you satisfy your customers and making great products. Against that backdrop how important is market share preservation, this quarter you held share maybe increased it fractionally on a year-over-year basis in the global smartphone market, but clearly you had an exciting new product. Is holding share in the smartphone market in 2013 a priority for Apple, yes or no, and why, and realistically, how does Apple hold share given that the market segment that – and price point that you play in is expected to grow a lot slower and you have pretty dominant share in that high-end?
Tim Cook – CEO: Toni, the most important thing to Apple is to make the best products in the world that enrich customers’ lives. That’s our high order bid. That means that we aren’t interested in revenue for revenue’s sake. We could put the Apple brand in a lot of things and sell a lot more stuff, but that’s not what we’re here for. We want to make only the best products. And so what does that mean for market share? We’ve been able to do that, and I think we’ve had a great track record here on iPod of doing different products at different price points and getting a reasonable share for doing that. And so, one doesn’t – I wouldn’t view these things as mutually exclusive as some might. But the high-order bid is making a great product that enriches customers’ lives. And so, that’s what we’re focused on.
Operator: Ben Reitzes, Barclays.
Ben Reitzes – Barclays: First question is with regard to Macs. Could you talk a little bit more about what happened? And it would seem that the shortfall there is well over $1 billion in the quarter, maybe even as much as a $1.5 billion, and how much of that was pushed into the March quarter within that new March guidance?
Tim Cook – CEO: Ben, it’s Tim. Thanks for asking that question; I wanted to talk about this. If you look – I think the best way to answer this is, if you look at the previous year, our Mac sales were about 5.2 million. This year they were 4 and so the difference is 1.1. So, let me try to bridge that. iMacs were down by 700,000 units year-over-year. As you remember, we announced the new iMacs late in October and when we announced those, we announced that they would ship the first one, the 21.5-inch would ship in November and we did ship it at the end of November. We announced that the 27-inch would ship in December and we did ship that in mid-December and so there were limited weeks of ramping on these products during the quarter. We left the quarter with significant constraints on the iMac and we believe we know that our sales would have been materially higher if those constraints would not have exist. We tried to tell people this on the conference call in October, I think I said that we would have significant constraints on iMac and so – but I recognize to some folks who may be surprised. Number two, if you look at last year as Peter went through in his opening comments we had 14-weeks in the quarter. We have 13-weeks in the quarter this year. Last year in the average week we sold 370,000 Macs. The third part of the bridge here would be that our channel inventory was down from the beginning of the quarter by over a 100,000 units and that’s because obviously we didn’t have the iMacs and channel inventory, it was in significant constrain. So if you just take these three factors they bridge more than the difference of between this year’s sales and last year’s sales. Now, in addition to these three points, I would point out two other things and these are lesser things than the total of these other three obviously. One, the market for PCs is weak. IDC’s last estimate I believe was around negative 6%. Two, we sold 23 million iPads and we obviously could have sold more than this because we could not build enough iPad mini’s to come into a demand balance. So, we’ve always said there was some cannibalization there I’m sure there were some cannibalization of Macs there. But the three large factors of the aggregated, total of the three large the iMacs the difference in seven days of the previous year having seven extra days in the channel inventory I think more than explains the difference between this year and the previous year. As a side note, if you looked at our portables alone they were in line with IDC’s projections of market growth.
Ben Reitzes – Barclays: Then just my follow-up is with regard to web services, online services there’s been a lot of publicity around Maps and can you give us an update there? Then looking forward how does the year look in terms of innovation in terms of iOS 7 and your online and web services how will that drive Apple?
Peter Oppenheimer – SVP and CFO: Let me start with the second part of this. We are working on some incredible stuff. The pipeline is (chalk) full. I don’t want to comment about a specific product, but we feel great about what we’ve got in store. In terms of Maps, we’ve made a number of improvements to map since the introduction of iOS 6 back in September and we’ll roll out even more improvements across the rest of the year and we’re going to keep working on this as I’ve said before until it lives up to our incredibly high standards. Users can already see many of these improvements because they include things like improved satellite and (flyer) imagery, with categorization in improved local information for thousands of businesses and so forth. The usage in Maps is significantly higher than it was prior to iOS 6. In terms of other services, we feel fantastic about how we’re doing. In Notification Center, we’ve now sent over 4 trillion notifications. This is mind-blowing. As Peter mentioned in his opening comments, for iMessage we’ve now sent over 450 billion and are currently sending now over 2 billion per day. With Game Center, we’ve got over 200 million registered users. We have 800,000 apps on the App Store with over 40 billion downloads. And so, I feel really, really great about it. There’s obviously more stuff we can do and you can bet we’re thinking about all of it.
Operator: Steve Milunovich, UBS.
Steven Milunovich – UBS Securities: Could you review your comments about gross margin in the quarter and also looking ahead perhaps commenting on a few areas; first of all, where you are on your product cost curve relative to where you expected to be? And then, also any comments on mix; within the iPhone line in terms of 5 versus 4S, amount of storage? And then also on the iPad; last quarter you said you really didn’t know what the proportion of Minis would be. Can you make any comments in terms of the demand for Mini relative to what you expected?
Peter Oppenheimer – SVP and CFO: Sure, Steve. It’s Peter. I’ll start. I’ll make a comment on Mini, go through gross margin, and maybe Tim can pick up on some of your iPhone questions. With the iPad mini, it’s hard to know. We could not make enough in the quarter. We were constrained every week. Customers love the Mini and we wish that we could have made more and we ended the quarter with significant backlog. For the gross margin in the December quarter, we were about 260 basis points ahead of our guidance. About half this difference was driven by lower product and transitory cost and we had reflected in our guidance, and the rest came from a higher mix of iPhones, a weaker dollar, and leverage on the higher revenue. As we look forward, we think the gross margin will be somewhere between about 10 basis points and 110 basis points lower sequentially. We believe that there are two primary factors that will benefit gross margin sequentially. First and the largest of the two, our teams have made meaningful progress in reductions in product and transitory costs from the actions that they’ve been working on to get down the cost curve, so we expect to benefit in the March quarter beyond what we saw in the December quarter. And second, we expect a more typical level of deferred revenue from device sales. We expect these factors to be more than offset by 10 to a 120 basis points by the loss of leverage coming out of the December quarter, which is very typical for us, and a different mix of our current products. Regarding mix, as an example, as we indicated the last quarter, the iPad mini gross margin is significantly below the corporate average and we expect to be able to meet demand for this product in the March quarter, which again we could not in the December quarter.
Tim Cook – CEO: Steve, I’ll make some comments on mix. If you look – your question on iPhone mix; let me bring up three points. One, the ASP for iPhone was essentially the same year-over-year in the quarter that we just finished. Underneath that if you looked at the mix of iPhone 5 to total iPhone and then in the previous year you look at 4S to total iPhones towards the top iPhone those mixes are similar. Then thirdly I think you asked about capacities in Q1 we saw similar results as we saw in Q1 of the previous year. So does that answer your question on mix?
Steven Milunovich – UBS Securities: Yes, it does. Then second question would be on CapEx, you spend almost as much as Intel does. I think you guys have said, you’re not going to become vertically integrated per se, but in a sense you are since most of that I assume is buying equipment for your partners. Could you talk about the strategy here and how much of a differentiated this gives Apple in terms of your ability to ramp new products over time and maybe a little bit more about how deep you will you go in terms of semiconductor componentry etcetera?
Peter Oppenheimer – SVP and CFO: We expect to spend about $10 billion in CapEx this fiscal year that will be up little under $2 billion year-over-year. We expect to spend a little bit under $1 billion in retail stores and the other $9 billion is spent in a variety of areas. We’re buying equipment that we will own that we will put in our partners facilities. Our primary motivation there is for a supply, but we get other benefits as well. We’re also adding to our data center capabilities to support all the services that Tim spoke about in answering Ben’s question and in facilities and in infrastructure. So, that’s where the capital is going.
Operator: Shannon Cross, Cross Research Group.
Shannon Cross – Cross Research: Tim, can you talk a bit about what happened last year in terms of the refresh cycle, where you had about 80% of your revenue refreshed in the last few months? And then how you’re thinking about this year? I mean, I know you said you ship products when they’re ready, but I mean is this a situation where you’re going to try to stagger it out a little bit this year, or will it be sort of a similar situation to 2012?
Tim Cook – CEO: It’s a question I won’t answer, Shannon, but the 80% was an unusually high percentage for us. I don’t know exactly what the historic numbers on that, but I can tell you that the number of RAMS were unprecedented in the fact that we had new products in every category – is something we have not done before. We feel great to have delivered 70 products for the holiday season though, and our customers have certainly expressed joy over it.
Shannon Cross – Cross Research: And then I guess can you talk a bit more about China? You provided which is great; you’ve broken out the Greater China revenue. But can you talk about what you’re hearing from customers and from some of your partners there; your thoughts on retail distribution and expansion, and just sort of overall what you’re seeing over – what you saw over the holiday period, and then, what you sort of expect from China going forward?
Tim Cook – CEO: Yeah, if you look at our total Greater China, which would include our retail stores that are in China, our revenues were $7.3 billion in the quarter. So, this is incredibly high, it’s up over 60% year-on-year. And again, that’s comparing 13 to 14 weeks, and so it’s really the underlying growth is higher than that. We saw exceptional growth in iPhones into the triple digits. iPad, we shipped iPad very late in the quarter in December and despite that saw a very nice growth. We are expanding in Apple retail there. In the year ago quarter, we had six stores, we now have 11. We obviously have many more to open there and our premium resellers, we went over 400, up from a little over 200 in the previous year and we increased iPhone point of sales from 7,000 to over 17,000 there. Now, this isn’t nearly what we need and it’s not the final by any means. We’re not even close to that, but we’re making – I feel that we’re making great progress. I was just over there recently and talking to a lot of different people. I am very happy with how things are going.
Peter Oppenheimer – SVP and CFO: It’s clear that China, it’s already our second largest region as you can see from the data that we’ve given you and it’s clear there’s a lot of potential there.
Operator: Gene Munster, Piper Jaffray.
Gene Munster – Piper Jaffray: Tim, you made comment in the past that Apple TV experience is (indiscernible) and Apple wants to fix that problem. If we can take a step outside of the form factor debate whether it’s a box or – can you just talk on high-level how important this market is to Apple, number one? Number two is, can you accomplish what you ultimately want to accomplish with the reality of where is content is today and how content is distributed?
Tim Cook – CEO: Gene you’re asking me all the questions that I don’t want to answer, but let me sit back and find some comments to make this productive. In terms of the product that we sell today the Apple TV we sold more last quarter than we’ve ever sold before, eclipsing 2 million during the quarter. It was up almost 60% year-on-year and so there is actually very, very good growth in that product. And what was the small niche at one time of people that loved it is a much larger number that love it. I have said in the past this is an area of intense interest for us, and it remains that and I tend to believe that there is a lot we can contribute in this space, and so we continue to pull the string and see where it leads us. But I don’t want to be more specific…
Gene Munster – Piper Jaffray: Just a housekeeping for Peter; Peter you gave gross margin guidance this quarter, but no EPS guidance, is there anything any moving parts between the gross margin and the operating line that we should be aware of that might have account that nuances in how you’re giving guidance?
Peter Oppenheimer – SVP and CFO: No, Gene. Our prior method of providing guidance was a point estimate for each line item of the P&L, including EPS and our guidance for the March quarter and how we will give guidance in the future, we’re going to give a range for revenue, for gross margin and for OpEx and therefore there are many possibilities for EPS within the range, that we’ll leave you to think through and we’ll report our actual results for March to you in April.
Operator: Keith Bachman, Bank of Montreal.
Keith Bachman – Bank of Montreal: The first one is, Tim, could you talk a little bit about the data, even if anecdotal, on how iPhone sales proceeded in terms of new customers versus upgrades and how that compared to, say, if you go to the 4S last year?
Tim Cook – CEO: I don’t have those specific numbers in front of me, but the iPhone 5, obviously with the numbers that we’re selling and selling to a lot of new customers.
Keith Bachman – Bank of Montreal: Okay, because we’d had heard feedback that there was a lot more of an upgrade cycle to existing customers, but it sounds like that’s not a statement that you would agree with?
Tim Cook – CEO: I don’t know who you were talking to, and so, again, this is one of those things I would caution on using as a proxy for the world. There are many carriers created differently.
Keith Bachman – Bank of Montreal: Well, let me turn to my next question then. Peter, as we think about the March quarter, I’m a bit confused how to think about iPads. And you mentioned that iPad mini was constrained. Any kind of comments on what seasonality would be, and more importantly, how are you thinking about the aggregate amount of inventory that’s in the channel for iPads? Will that amount increase, decrease, or stay the same as we reflect on how to model units in the March quarter?
Tim Cook – CEO: Keith, it’s Tim. Let me make a couple of comments. iPad mini was very constrained. We ended with underneath our target channel inventory range which Peter had commented earlier. We believe that we can achieve supply-demand balance on iPad mini later this quarter. That would likely mean that we would need more units in the channel than we have today. I think that would be a fair conclusion to draw.
Peter Oppenheimer – SVP and CFO: Keith, I’ll add to that. For total iPad sales, we don’t provide a sub-level forecast, but we would expect a large year-over-year increase in iPad sales, but a post-holiday sequential decline for iPad sales, which I think is typical. As Tim said, we expect to be able to meet demand for the mini.
Tim Cook – CEO: Keith, it’s probably worth pointing out just to be totally clear, for the last quarter, we had strong sales of iPad and iPad mini.
Operator: Scott Craig, Bank of America Merrill Lynch
Scott Craig – Bank of America Merrill Lynch: Tim, can you maybe discuss the tablet market a little bit in relation to Macs and other PCs and sort of how you are thinking about the cannibalization of that market for the iPad relative to the PC market? Then secondly, typically could you sort of talk about some of the component constraints and you certainly talked about iPhone 4 being constrained than the iPad mini et cetera. So as you enter into the quarter where do you see the challenges for meeting demand for the calendar first quarter?
Tim Cook – CEO: Sure, let me take the second part of that first. I think overall our team did just a fantastic job ramping out record number of new products during the quarter. We did have significant shortages due to robust demand on both iPad mini and both models of the iMac that persisted the entire quarter, and we are still short of both of those today as a matter of fact. Additionally, supply of iPhone 5 was short to demand until late in the quarter and iPhone 4 was short for the entire quarter. We believe that we can achieve supply/demand balance on iPad mini during this quarter and on iPhone 4 during this quarter. On iMac we’re confident that we’re going to significantly increase the supply, but the demand tier is very strong and we’re not certain that we will achieve a supply/demand balance during the quarter. In terms of cannibalization and how we think about this, I see cannibalization as a huge opportunity for us. One, our based philosophy to never fee cannibalization, if we do somebody else will just cannibalize it and so we never fear it. We know that iPhone has cannibalized the My Pod business it doesn’t worry that it’s done that. We know that iPhone would cannibalize through Macs, that doesn’t worry us. On iPad in particular, we have the mother of all opportunities here, because the Windows market is much, much larger than the Mac market is, and I think it is clear that it’s already cannibalizing some and I think there’s a tremendous amount of more opportunity there. As you know I’ve said for two or three – actually three years now I believe that I believe the tablet market would be larger than the PC market at some point, I still believe that and you can see by the growth in tablets and the pressure on Pcs that those lines are beginning to converge. I think the other thing for us, maybe not for others, but for us if somebody who buys an iPad mini or an iPad and it’s their first Apple product we had great experience through the years of knowing that when somebody buys their first Apple product, that a percentage of these people wind up buying another type of Apple product. And so, if you remember, what we had termed the halo effect for some time with the iPod with the Mac, we’re very confident that that will happen and we’re seeing some evidence of that on the iPad as well. And so, I see cannibalization as a huge opportunity.
Operator: Mark Moskowitz, JPMorgan.
Mark Moskowitz – JPMorgan: Question, Tim, around the iPhone. Peter gave us some transparency around the qualitative sequential and year-over-year potential increases in the iPad for the March quarter. How should we think about the iPhone family, (so I think) in terms of year-over-year and quarter-over-quarter potential increases or decreases, and are there any sort of dynamics around slower pace of LTE rollouts by the network carriers having an impact?
Tim Cook – CEO: The thing to consider on iPhone, Mark, is that in the year ago quarter we built 2.6 million units of channel inventory because we did the – one reason was that we did the China launch in the March quarter instead of in the previous quarter. And so the underlying sell-through from the year ago quarter was (32.5). The sell-in was (35) as you can probably see on a sheet in front of you. And so, in thinking through the number of iPhones to predict, we looked at the (32.5) number as a baseline, and we clearly believe that we’re going to grow year-over-year, but I don’t want to be more specific than that because Peter has already given you some top level guidance and that’s how we guide in the aggregate instead of the product level.
Mark Moskowitz – JPMorgan: Then my follow-up is just around the pace of LTE build outs across the globe, either in Europe or parts of Asia has those slower than expected rollouts from the networks perspective, has that had any sort of impact you think on your iPhone sales philosophy and could that change over the next 12 months as you see LTE capacity become more available elsewhere?
Tim Cook – CEO: It’s a good question. Today we have 24 carriers around the world that provide LTE support for iPhone 5. Those are in countries like the U.S., Korea, the U.K., Germany, Canada, Japan, Australia and a few others. Next week, we are adding 36 more carriers for LTE support. These carriers will be in countries that we’re currently not supporting LTE. So, the LTE coverage now as of next week in Italy, Denmark, Finland, Switzerland, Philippines also several Middle Eastern countries and so if you look at the total of all of these and the incremental subscribers that are in these countries it’s over 300 million. So that’s the next range of LTE rollout and I’m pleased to tell you about today. Also, as you know, iPhone 5 also supports other ultrafast networks like HSPA+ with downloads up to 42 mbs, which is three times the speed of the iPhone for us. So, we feel very good about the situation that we’re in, particularly with these adds next week.
Operator: Chris Whitmore, Deutsche Bank.
Chris Whitmore – Deutsche Bank: Just to follow-up on the iPhone question with respect to guidance just assuming there was some benefit from the Mac carryover effect in iPad release etcetera and adjusting for the inventory it seems you’re guiding to mid to high-single digit year-on-year unit growth for the iPhone business from the sell-through standpoint. Is that the right ballpark we should be thinking about and why the big deceleration from the 25% plus weekly sales rate you quoted in your intro comments?
Peter Oppenheimer – SVP and CFO: We are not going to talk about the guidance in a specific product level but let me give you some things we thought about in coming up with the range of $41 billion to $43 billion. That range is 5% to 10% year-over-year increase and there are a few factors that are impacting the year-over-year results, making the strong performance of the business a little bit harder so see. So, let me point a few of these out. First of all, as we talked about several times on the call last year in the March quarter we built 2.6 million units of iPhone channel inventory which allowed us to get into our four to six week range, that increased the revenue in the year ago quarter by $1.6 billion. As Tim talked about that was sell-in that was not sell-through, we’re thinking about the business on a sell-through basis, so don’t lose sight of the $1.6 billion. Second, the iPhone 5 roll out this year has been our fast as ever. We’re selling in 100 countries by the end of December. Last year we did not achieve this country distribution until the March quarter, which included China that we launched in January. Third, we made a very good strategic decision to introduce the iPad mini which customers love and to keep the price-reduced iPad 2 in the line. As a result of this, we saw a reduction in our iPad ASPs of about $101 year-over-year in the December quarter and you can see that our iPad units grew faster than our iPad revenue in the December quarter. We would expect iPad ASPs to be down quite a bit in the March quarter on a year-over-year basis for the same reasons. Then finally, the PC market grew 4% last year in the March quarter, and this year IDC is projecting that to decline by 3%. So, considering these factors the underlying performance of the business is much stronger than the 5% to 10% year-over-year growth implies and we remain very confident in our business and our new product pipeline.
Chris Whitmore – Deutsche Bank: For my follow-up, I wanted to come back to something Tim said earlier about not fearing cannibalization. I wanted to ask in context of your iPhone business, given the strength you’re seeing at the low-end of your product line, the iPhone 4 being stacked out during the quarter, there seems to be a lot of demand at lower price points for the iPhone. Why not get more aggressive at lower price bands and move down-market in the iPhone business?
Tim Cook – CEO: I’m not going to go into our pricing strategy, but we feel great about the opportunity of getting products to customers and a percentage of those buying other Apple products. We’ve obviously seen evidence of that through history and continue to see evidence of that today.
Nancy Paxton – IR: A replay of today’s call will be available for two weeks as a podcast on the iTunes Store, as a 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 1474555. These replays will be available by approximately 5.30 PM 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.