What exactly did Jobs say during the earnings call?

Thanks to the transcribers at Seeking Alpha, we have the entire transcript of the call which sent to stock up over 10% in after hours trading.  Most interesting is what dear leader Steve Jobs said.  Here are some bits:

Hi, everyone. Some remarkable things are happening at Apple but everything is now set against the backdrop of this global economic slowdown, so it seemed like a good time for me to make a few remarks and help answer some of your questions.

I would like to go back and talk about the non-GAAP financial results because I think this is a pretty big deal. In addition to reporting an outstanding quarter, today we are also introducing non-GAAP financial results which eliminate the impact of subscription accounting. As you know, subscription accounting is the solution we adopted to let us provide free software updates to iPhone users under GAAP accounting rules. In accordance with the subscription accounting treatment required by GAAP, Apple recognizes the revenue and the cost of goods sold for the iPhone over its economic life of two years rather than upon sale as we do for Macs and iPods.

Because by its nature subscription accounting spreads the impact of iPhone’s contribution to Apple’s overall sales, gross margin, and net income over two years, it can make it more difficult for the average Apple manager or the average investor to evaluate the company’s overall performance. As long as our iPhone business was small relative to our Mac and music businesses, this didn’t really matter much. But this past quarter, as you heard, our iPhone business has grown to about $4.6 billion, or 39% of Apple’s total business, clearly too big for Apple management or investors to ignore. Hence our introduction today of non-GAAP financial results alongside our reported GAAP results.

As you can see, the non-GAAP financial results are truly stunning. By eliminating subscription accounting, adjusted sales for the quarter were $11.68 billion, 48% higher than the reported revenue of $7.9 billion, while adjusted income was $2.44 billion, 115% higher than the reported net income of $1.14 billion. Adjusted net income that is more than double our reported income — if this isn’t stunning, I don’t know what is, all due to the incredible success of the iPhone 3G.

I would like to now highlight two remarkable milestones resulting from iPhone’s outstanding performance last quarter. The first is that Apple beat RIM. In their most recent quarter, Research in Motion, or RIM, reported selling 6.1 million BlackBerry devices. Compared to our most recent quarter sales of 6.9 million iPhones, Apple outsold RIM last quarter and this is a milestone for us. RIM is a good company that makes good products and so it is surprising that after only 15 months in the market, we could outsell them in any quarter.

But even more remarkable is this — measured by revenues, Apple has become the world’s third-largest mobile phone supplier. I know this sounds crazy, but it’s true — as measured in revenues, not units, Apple has become the third largest mobile phone supplier. Let’s look at the ranking — Nokia is clearly number one at 12.7 billion; Samsung number two at 5.9 billion; Apple is number three at 4.6 billion; Sony Ericsson, number four at 4.2; LG, number five at 3.4 billion; Motorola, number six at 3.2; and RIM number seven at 2.1. Pretty amazing.

Now, both of these things, beating RIM in units and becoming the third largest mobile supplier in revenues are amazing feats but part of this was the result of expanding into over 50 countries and there’s no guarantee that sustained sales will equal initial sales. And who knows what the future results will be, given the worldwide economic slowdown but we actually outsold RIM last quarter and ranked as the third largest mobile phone supplier in revenues. Not bad for being in the market for only 15 months.

I would now like to talk about the App Store for a few minutes. One area that where we have completely changed the value proposition for mobile devices is the App Store. Customers will download the 200 millionth application from the App Store tomorrow, only 102 days since its launch on July 11th — the 200 millionth app. We’ve never seen anything like this in our careers. There are now over 5,500 applications offered on the App Store in 62 countries around the world and the rate of new applications being submitted is increasing every week. Competitors are scrambling to copy our App Store but it’s not as easy as it looks and we are far along in creating the virtuous cycle of cool applications begetting more iPhone sales, thereby creating an even larger market which will attract even more iPhone software development. It is clear that customers are now attracted to iPhone not only for its amazing functionality and revolutionary multi-touch user interface but also for its unique ability to let users easily purchase, download, and use thousands of different applications, ranging from free games to financial planning and health management — all of this in only 102 days.

And now I’d like to touch on the notebooks that we just introduced. Last week we introduced our new MacBook and MacBook Pro line. These products are very important since notebooks comprise two-thirds or more of the Macs we sell. These new MacBooks are some of the best products we’ve ever created and it’s already clear that our customers love them. We’ve had a very, very strong launch and we are anxiously awaiting to see the demand trajectory that will unfold during the quarter. The level of quality these products deliver to customers is mind-blowing for their price points. The unibody precision aluminum enclosures would normally cost hundreds of dollars by themselves. The electronics, especially the graphics, are state-of-the-art in mobile computing and features like the glass track pad are unique in the industry. With the introduction of LED backlit displays on these mainstream notebooks, over 90% of the notebooks Apple sells now use LED backlit displays.

Another thing worth noting is that these new notebooks are the greenest products Apple has ever offered. You will hear more and more about that from us in the future.

So now let’s turn to the economy, to the broader market conditions resulting from the global economic slowdown and credit crisis. First, let me say that we are not economists. Your next-door neighbor can likely predict what is going to happen as accurately as we can, but we do know a few things.

First, we have the best customers in the world. I wouldn’t trade our customers for any other company’s customers in the entire world. They are some of the smartest, most product aware customers in the market and they have chosen Apple’s quality, hardware and software products. While they may postpone purchases in tough times, they are unlikely to abandon the quality and seamless integration which they have personally experienced and become accustomed to with Apple’s products. So if the economic downturn does affect the

m, they are more likely to delay than switch.

Two, we still have a minority market share of the PC market and a miniscule market share of the mobile phone market. While we may not appeal to every prospective customer, the percentage of prospective customers we need to attract in order to significantly increase our market share isn’t that many and we have 250 Apple retail stores that already sell half their Macs to new-to-Mac customers.

Three, we have the best product lineup in Apple’s history. The new MacBooks in particular should trigger a serious upgrade cycle in our installed base. We’ll see. I feel very good about our product lineup as we head into the holidays and beyond.

Four, we have the most talented and creative employees in the world — just look at their results — the new MacBooks, the iMac, the iPhone, the iPod Nano and Touch, Leopard, iLife, and on and on. None of our competitors can deliver products in this class.

And five, we have almost $25 billion safely in the bank and zero debt. This provides us tremendous stability and the ability to invest our way through this downturn. This is what we did during the last downturn — we increased R&D investments and created some of our best new products and businesses, like the Apple retail stores, for one. This downturn may also present some extraordinary opportunities for companies that have the cash to take advantage of them, like Apple does.

In summary, we have the strongest product lineup in Apple’s history, the most talented employees, and the best customers and $25 billion in the bank. We may get buffeted around by the waves a little bit but we will be fine and stronger than ever when the water is calm in the future.

With that, I’d like to open it up for questions for Peter, Tim, or myself.

Q&A

*in response to a question

Well, again this particular downturn is not creating a market of cheaper computers. That market has existed for some time and there are parts of that market that we choose not to play in.

I think when people want a product of the class that we make, over and over again people have done the price comparisons and we’re actually quite competitive. So we choose to be in certain segments of the market and we choose not to be in certain segments of the market. And the question is is the downturn going to drive some of our customers to those lower segments of the marketplace and get to buy lesser products? And I will be surprised if that happens in large numbers and I actually think that there are still a tremendous number of customers that we don’t have in the Windows world or in the other 99% of the phone market we don’t have who would like to and can afford to buy Apple products. So we’ll see what the ratio of those two things are but we’re not tremendously worried.

As we look at the NetBook category, that’s a nascent category. There’s as best as we can tell not a lot of them getting sold. You know, one of our entrants into that category, if you will, is the iPhone for browsing the Internet and doing e-mail and all the other things that a NetBook lets you do, and being connected via the cellular net wherever you are, an iPhone is a pretty good solution for that, and it fits in your pocket. But we’ll wait and see how that nascent category evolves and we’ve got some pretty interesting ideas if it does evolve.

Another question:

Well, I think what we want to do is deliver a lot, an increasing level of value to these customers. There are some customers which we choose not to serve. We don’t know how to make a $500 computer that’s not a piece of junk, and our DNA will not let us ship that. But we can continue to deliver greater and greater value to those customers that we choose to serve and there’s a lot of them. And we’ve seen great success by focusing on certain segments of the market and not trying to be everything to everybody. So I think you can expect us to stick with that winning strategy and continuing to try to add more and more value to those products in those customer bases we choose to serve. Does that make sense to you?

On Apple TV:

Well again, I think the whole category is still a hobby right now. I don’t think anybody has succeeded at it and actually the experimentation has slowed down. A lot of the early companies that were trying things have faded away, so I’d have to say that given the economic conditions, given the venture capital outlooks and stuff, I continue to believe it will be a hobby in 2009.

Bill Fearnley – FTN Midwest

And if I could switch quickly to tablet computing and touch screens, you’ve made some comments about those in the past but when you look at tablet computing and you look at the new form factor for the Macs and those types of things, does that get to be a more attractive opportunity for you going forward here, now that the new Macs are out?

Steven P. Jobs

I think we have such creative people that are looking at a lot of things but I really can’t talk about any of the future products we are working on, I’m sorry.

Mike Abramsky – RBC Capital Markets

Thanks very much. Steve, you only have really one SKU in the phone biz, and the phone market is 10 times the size of the PC market, so I think you clearly as you said strive to be the best. At the same time, what might be the opportunities for further innovation or market opportunities within that market?

Steven P. Jobs

Well, I wasn’t alive then but from everything I heard, Babe Ruth had only one homerun, he just kept hitting it over and over again. So I don’t think that — I think the traditional game in the phone market has been to produce a voice phone in a hundred different varieties. But as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing and most of the competitors in this phone business do not really have much experience in a software platform business. So we are extremely comfortable with our strategy, our product strategy going forward and we approach it as a software platform company, which is pretty different than most of our competitors