Notes of interest from Apple's Q107 conference call

[AppleInsider]

Apple on Wednesday released results for its fiscal 2007 first quarter ended December 30, 2006, which included record revenue of $7.1 billion and record net quarterly profit of $1.0 billion, or $1.14 per diluted share.

Some notes follow from the conference call with analysts and members of the media:

Apple's Mac Business
Apple shipped a total of 1.606 million Macs during the quarter, representing 43 percent of the company's total revenue. This included sales of 969,000 notebooks and 637,000 desktop systems.
Overall, Mac sales rose 28 percent in units and 40 percent in revenue year-over-year. Sequentially, Mac unit sales were flat while Mac revenue rose by 9 percent.
Notebooks rose 65 percent in unit sales and 79 percent in revenue year-over-year. However, notebook sales declined 2 percent sequentially while rising 8 percent in terms of revenue.
Desktop units were down 4 percent year-over-year while revenue rose 5 percent. Sequentially, desktops rose 2 percent in units and 10 percent in revenue.
The quarter showed surprisingly strong MacBook Pro sales. Apple saw many customers "buying up the line," looking towards higher-end models.
The quoted figure of 1.6 million Macs shipped during the quarter was much higher than what Apple had projected internally. The company is "thrilled" with Mac shipments.
Mac sales grew at about 3 times IDC's published growth rate for the PC market during the quarter.
The Mac has outgrown the overall PC market for 8 of the last 9 quarters.
On the current progress of Leopard: "We've got a lot of people working on it."
When asked about the lack of iLife updates at Macworld, the company said only to "stay tuned."
The Pro market met internal expectations for the quarter, but those expectations were tempered by customers still waiting on the next version of Adobe Creative Suite. There was "lots" of positive feedback from the Photoshop CS3 beta released by Adobe last month.
Boot Camp downloads have exceeded 1.5 million. The Windows compatibility software continues to be "a great interest to a number of different people."
Mac inventory at the end of the quarter was just below Apple's target of 4-5 weeks.
Apple is continuing to selectivity expanding its Mac retail distribution channel and now has over 7500 worldwide distribution points. This is up 1500 points when compared to the same time last year.
As for Best Buy, the company increased its pilot project for Mac sales at the electronics retailer to over 50 stores prior to the holiday quarter and will work this quarter to evaluate those 50+ stores and determine how to proceed with future launches.
A survey of student buyers shows that their intent to buy a Mac portable has increased from 17 to 28 percent in the past year.
Apple defended its sub-par sales in Japan, noting that he PC market in Japan continues to be among weakest in world. IDC was projecting a 16 percent contraction in the home market, which is precisely where Apple is focused. In the digital media player space, Apple maintained a 53 percent share, but the market did not grow. "We are dissapointed with results even though they are consistent with the market," management said. The company plans to place an additional emphasis on Japan, which recently began with airing localized "Get a Mac" ads.

Apple's Music Business
Apple sold 21.066 million iPods during the quarter, representing a 50 percent increase in units and 18 percent increase in revenue year-over-year. Sequentially, iPods grew 141 percent in units and 120 percent in revenue.
When asked about expected sales relating to niche hardware such as the Airport Extreme, Apple said only that it sees Apple TV as the DVD player of the 21st century.
More details on the iPhone will be provided right before it begins shipping in June.
At this point Apple is "sold on" GSM/EDGE (2.5G) technology for the iPhone becase it's more widespread and better deployed in the U.S. than 3G. While the company doesn't comment on its product roadmap, it will "be where the technology is over time."
All three iPod models did exceptionally well during the quarter.
The iPod share of the US digital music player market was 72 percent in December, according to NPD.
During the quarter, the iPod gained share in every international country for which data is available.
iTunes continues to lead the legal download market, with an over 85 percent share.
The iTunes Store now contains over 4 million songs, 350 television shows, and 250 movies.
"We think the Cisco trademark lawsuit is silly," management said of the iPhone name dispute, reiterating its previous official statement. "We believe Cisco's U.S. trademark registration is tenuous at best."
Channel inventory of iPods increased by 200,000 units related to channel fill for the iPod shuffle. Apple ended within its range of 4-6 weeks.
Apple won't break down iPod gross margin (and never has), but said the players were "key" to the overall corporate gross margin.
Apple won't break out Apple TV sales next quarter and will instead lump them into its "Other Music Related Products and Services" category. We'll never know how many are actually sold unless Apple makes a separate announcement.
iPod worldwide distribution points remained at around 40,000; the company has dropped some but gained others.
Apple's goal of selling 10 million iPhones is through the 2008 calendar year.
Apple expects a higher seasonal decline in iPod sales from the December to the March quarters than it witnessed last year. Part of this has to do with the supply and demand balance achieved during the December quarter this year. Last year, demand for iPods exceeded supply during the December quarter, which resulted in some pent-up demand spilling into the March quarter.

Retail
Sales at Apple's retail stores came in at a record $1.1 billion (including sales of a record 308,000 Macs), though profit was down slightly from the previous quarter to $89 million. Apple opened 5 new retail stores during the quarter to end with 170 stores. With an average of 169 stores open during the quarter, per-store revenue was about $6.7 million.
Apple retail saw approximately 28 million visitors during the quarter, or 13,000 visitors per store, per week. The company expects to open 7 stores during the March quarter and 35-40 overall in fiscal 2007.

Other Apple business and segments
Apple Americas accounted for 625,000 Mac sales and $3.498 billion in revenues. These figures are up 21 percent and 30 percent year-over-year, respectively. Sequentially, Mac units decreased by 20 percent while revenue rose 52 percent.
Apple Europe accounted for 491,000 Mac sales and $1.711 billion in revenues. These figures are up 27 percent and 38 percent year-over-year, and 44 percent and 73 percent sequentially.
Apple Japan accounted for 70,000 Mac sales and $285 million in revenues. These figures are down 14 percent and 20 percent year-over-year. Sequentially, Mac units in Japan were up 13 percent while revenues were flat.
Apple's Asia Pacific (and FileMaker, Inc.) accounted for 112,000 Mac sales and $482 million in revenues. These figures are up 44 percent and 27 percent year-over-year. Sequentially, unit sales rose 10 percent in the Asia Pacific regions and revenues increased 46 percent.
Apple's "Other Music Related Products and Services" segment accounted for $634 million in revenue -- a 29 percent year-over-year increase and 40 percent sequential increase.
Apple's "Peripherals and Other Hardware" added $297M in revenue, representing a 2 percent yearly decline in revenue. Sequentially, revenues were flat.
Apple's "Software, Service and Other Sales" segment accounted for $347 million in revenue, an increase of 7 percent year-over-year and 10 percent sequentially.

Financial breakdowns
Gross margin for the quarter came in above guidance at 31.2 percent, due primarily to a favorable commodity environment across the board. "It was a great time to be a buyer," Apple's management said. For the March quarter, Apple sees the favorable commodity environment carrying over for LCD displays and flash memory, while DRAM should be relatively flat.
Operating margin for the quarter was extremely high at 18.6 percent, due primarily to revenue growth and affective cost management.
Operating expenses for the quarter were $898 million, including $40 million for stock-based compensation.
The tax rate was 31 percent.
Nothing new exists to share on the prospect of a stock split "at this time."
Capital expenditures for the quarter were $142 million, including $36 million for retail.
Apple increased its cash balance during the quarter by a staggering $1.75 billion to end with $11.9 billion.

Looking ahead to March
Looking ahead to the March quarter, Apple is targeting revenue of $4.8 to $4.9 billion and per share earnings between 54 cents and 56 cents. It expects gross margin to be about 29.5 percent, operating expenses to come in at $845 million, and the tax rate to be 32 percent.

[ View this article at AppleInsider.com ]

[posner]

edit - see next post

[posner]

Very roughly speaking, if we assume
Apple currently has 5% market share (new sales)
Apple continues to grow at 28% vs market growth of 7%

Then market share would be roughly 5.9% at end of 2007, 7.0% 2008, 8.3% 2009 and 9.7% 2010.

Is this realistic? too slow?

[MacTel]

The Japanese might be punishing Apple for kicking Sony's back end in the digital music space.

and/or

The Japanese might be looking for a sub-notebook. They especially like the Origami devices running Microsoft's OS.

[josa92]

cool, yo
=D

[TenoBell]

I think the Japanese are ahead of the curve. From all signs this is the general direction of the PC market. Sales are slowing, headed towards saturation and stagnation.

People are wondering why Apple gave practically the entire MacWorld Keynote to the iPhone. That's because ultra mobile computer devices are the future. Jobs showed the graph where portable device sales completely eclipsed personal computer sales.

[JeffDM]

Not only that, the Japanese PC market had contracted again, 16% if the AI article is right. If you can do everything you need to do with a phone, then a PC isn't necessary, and may be unwanted clutter.

[TenoBell]

Apple sees Apple TV as the DVD player of 21st century.

I think we can all agree as of right now we don't see TV replacing our DVD player. I think this is a sign that Apple has more plans for the device.

[ashraman]

DO NOT forget their comment about possible acquisitions re use of free cash!!!

THIS is really important in light of comments about reinventing Apple TV as the next VCR type device!!

[McDave]

Whether it's an ultra portable, notebook or desktop Apple still have the same challenge - they're not seen as running Windows. They should be able to achieve major desktop sales growth, through cannibalisation, regardless of overall PC market trends.

Apple have still failed to do what's required to make the halo effect a reality. Apple retail is good but it still assumes people have already made their choice to consider 'Apple'. The battleground is in the general consumer retails outlets and Apple need to break the specifications/$ approach that dominates.

That said, for the first time they can compete on specs like-for-like, can run Windows & compete on price (a 20" iMac + XP license is actually cheaper than a Dell Dimension 9200 here in NZ). However, unless Joe Public walks into a retailer & see's that iMac/MacBook nestled amongst the other PCs running Windows (+ showing Apple key points of difference) it ain't going to happen.

Apple needs to commoditise desktop & notebook sales to get the figures up though maybe based in capability not specs

McD

[samurai1999]

Only 21,000,000 iPods?!

Just think how many they would have sold if they'd followed my advice and made the Shuffles available in Colours!
8)

[samurai1999]

Any news on when TV Shows & Movies will be available outside the Good ol' U S of A?

Can't see many people outside the U S of A being interested in ATV without it.
- plus it would help shift more Video iPods etc

[Booga]

Originally Posted by TenoBell

I think we can all agree as of right now we don't see TV replacing our DVD player. I think this is a sign that Apple has more plans for the device.

Of course they have other plans, but this is definitely the future of the industry. I know I've watched more movies that my TiVo has recorded off cable than I've watched DVDs in the last few months. TiVo is like an iTV in which you have less control over your content... I see it as a natural progression to a post-TiVo market. If Apple starts offering subscriptions to their iTunes Video store, who needs cable or TiVo?

[ashraman]

DO NOT forget their comment about possible acquisitions re use of free cash!!!

THIS is really important in light of comments about reinventing Apple TV as the next VCR type device!!

[Bergermeister]

Ah... sales in Japan are disappointing.

Let's see. Apple Japan does not understand Macs, is not enthusiastic about them, many of their staff are actually Windows users and they don't try marketing at all. Apple Japan sucks at customer service and is incapable of repairing machines. I could go on, but I won't.

The Get a Mac ads, while funny, are actually not good in the Japanese market and may actually backfire, leading people away from the "snob" on the block. Apple has a real lofty image here that prevents them from reaching the common man. A very well-created demo on the machines sitting in computer shops would really help, but they can't be bothered. Most other makers have nice demo programs running all day, and the Macs just sit there in silence.

Saturation is a potential problem here, as is space: any people are going for the all-in-ones that include televisions and fold-away keyboards.

Cell phones. This is the big one here. There are many more cell phones than land phones in Japan, annd everything is now done over the phone (ha ha). Last year I went to an opera; as soon as the intermission started, almost every person in the audience pulled out a cell phone to check for calls and email before even chatting with the other people they were with; this is true and it was pretty amazing to see. If Apple wants in on the market, they need to get over here quick, but also clean up their image fast (the name thing with Cisco will hurt Apple's standing in the Japanese mindset; it should not have happened, they feel, for whatever reason). Tie-in won't be a problem here in the short term, but will be long term, so Apple needs to work on getting its phone free of just one company (personally I don't care, but some people do).

The Japanese want a very small, portable device that has computer power. Yep: a sub-notebook would sell like popcorn at a theater. Apple can do it, they know. Some ask why not?

[Mr. H]

Originally Posted by Bergermeister

Ah... sales in Japan are disappointing.

Let's see. Apple Japan does not understand Macs, is not enthusiastic about them, many of their staff are actually Windows users and they don't try marketing at all. Apple Japan sucks at customer service and is incapable of repairing machines. I could go on, but I won't.

It's been quite obvious for the last few years now that Apple should put you in charge of Apple Japan. Seriously. You have much more of a clue as to what's going on than they do.

[vocaro]

Originally Posted by AppleInsider

noting that he PC market in Japan

Forgot the "t"

[SpamSandwich]

Originally Posted by JeffDM

If you can do everything you need to do with a phone, then a PC isn't necessary, and may be unwanted clutter.

For the unwashed masses, this is the case. Most humans on Earth will never have a computer, but everyone and their grandmother owns a phone.... Phones are everywhere.

[SpamSandwich]

Originally Posted by TenoBell

I think we can all agree as of right now we don't see ?TV replacing our DVD player. I think this is a sign that Apple has more plans for the device.

It would behoove them to implement those other "plans" post-haste.

[FireEmblemPride]

I just came back from Japan and visited the Ginza Apple Store. Very active and busy. But looking at the computer offerings, they do seem somewhat out of sync with what Japanese people like. Apple notebooks don't have TV tuners, are big by their standards and overall, it seems that for a market Japan's size, Japan seems like an afterthought. Stuff like the Mac Pro and iPod Hi-Fi are simply too big for most Japanese homes, and most of the iPhone's features are not new to the robust Japanese cellphone market. The iPod Radio Remote doesn't even work in Japan, which shows how much Apple's really paid attention to the market there.

They clearly aren't doing enough research into the Japanese market, instead blaming it on falling market conditions. Nintendo blamed its low popularity on the declining Japanese game market, but it rejuvinated the Japanese industry because it actually did something to attract Japanese gamers rather than just sit idly by and hope the market arrives on its own.

I'd argue Microsoft's efforts with the Xbox 360 in Japan are better than Apple's with Macs. Apple's fortunate to have 53% of the music player market there. Stuff like the iPod nano and shuffle are great for the Japanese, but I doubt Apple actually had Japan in mind when designing it.

[Electric Monk]

I think a 3G iPhone, an exclusive tie-in using iTunes for music downloads with DoCoMo (or Softbank, but DoCoMo is bigger) for all their mobiles, and a sub-notebook are what Apple needs to turn things around in Japan. Oh and of course the iPhone, as long as it remains GSM, will not work on Au/KDDI.

As for a better marketing campaign check out Information Architects Japan on that one.

Of course I've been advocating a sub-notebook for years, and one of the main selling points I've used is that in Asia (and especially Japan) sub-notebooks are hugely popular. Heck they didn't buy the toilet-seat iBook because that was too big.

Anyone remember when Japan was Apple's number 2 market and got that custom PowerBook? Sigh.


I'm totally with Bergermeister on this one, let's put him in charge of Apple Japan.

[NanoAkron]

So they're focusing on GSM/EDGE because that's where the USA is?

Well USA (and Apple)...the rest of us are quite keen on 3G ya know, so why not go for the bigger market first (the rest of the world), and wait until the USA catches up for once?

[Bergermeister]

Thanks for the job offer, guys, but I will have to decline. I don't think that my Japanese skills are sufficient nor that I have the right contacts.

Such a statement will get you very far in Japan, and could actually land you a well-paying job, like it did me ten years ago. I now have two personalities: one Japanese and one American, though it is fading away, slowly.

---

Nice ad site; hadn't seen it. I have often remarked at my various offices that use windows on the pixelated appearance, but would not have thought to bring that to an ad. That is brilliant and could actually work here; a large portion of the population engages in Japanese caligraphy, not to mention being obsessed with kanji characters and their various styles. Job applications can be tossed based solely on handwriting. It is the Chinese characters which actually created the fax boom in Japan; though developed in the US, there was no market and teletype worked well with the alphabet, but the fax filled a niche that the teletype couldn't with the many, many characters found over here.

I am thinking on a basic stand-alone QT movie that runs through the capabilities of the machine and actually started a thread looking for one not long ago. At my local computer shop, there is a nice Mac display with several computers with iPods scattered all around. The computers are dark (screen saver) and only one iPod has music churning through a speaker system.

Across the aisle, there are 20 odd PCs from various makers, all with lovely demos running that draw the customers over to them, much like the first Mac ad: "Hello." The Mac needs the same thing showing how easy it is to do everything you want and need with the included apps (plus Keynote and Pages, of course). Just 2-3 minutes long with interactive buttons (Tell me more) at the bottom for when the customer interacts with the machine. It could then lead them through a short DIY and then smile and say we're waiting for your credit card.

---
Apple has several big name customers in Japan including Tokyo University (the elite of all elites in the Japanese mind) and NHK, the main national broadcaster (their Olympic coverage was done on Macs).

Off to do a little surfing...

[Bergermeister]

About cell phones in Japan.

http://en.wikipedia.org/wiki/Japanes..._phone_culture

[Electric Monk]

Originally Posted by NanoAkron

So they're focusing on GSM/EDGE because that's where the USA is?

Well USA (and Apple)...the rest of us are quite keen on 3G ya know, so why not go for the bigger market first (the rest of the world), and wait until the USA catches up for once?

Also the US uses different UMTS (3G) bands than the rest of the world. Adding the single 2100 MHz band would provide 3G support (and phone use in Japan/South Korea, given their lack of GSM) worldwide. You'd want something called HSDPA which is also backwards compatible with WDCMA (and FOMA these days, for our Japanese readers .

However the US uses two (soon 4, with T-Mobile) different bands. Therefore 3G support in the US requires either a thicker iPhone (to incorporate as many as FIVE bands if they care about T-Mobile, or three if they go with Cingular/world) or separate models for the US and the world.

Yep. The world actually got together and basically settled on UMTS and one band for 3G (versus 4 GSM bands) with an easy and backwards compatible upgrade path (so far WCDMA (3G)—>HSDPA (3.5G). We'll leave aside CDMA/EV-DO as they lost the war[1].

Until.

The US couldn't (politically that is, they wussed out) free up the same spectrum as everybody else. Sigh.

So a worldphone currently has to support 4 GSM bands, plus one UMTS band for the world, plus two to four UMTS bands for the United States. Ugh.

I suspect two models, because Apple won't want to dirty up their product line more than that:
QuadGSM/UMTS world
QuadGSM/UMTS US/Cingular

That way the you get GSM/GPRS/EDGE for voice and data everywhere, and 3G support in either the world or the US: pick one.



[1] Sure. There are prominent exceptions such as Au/KDDI in Japan, Telus & Bell in Canada, and Verizon in the United States. Nevertheless GSM/UMTS won in coverage and subscribers.

[Bergermeister]

CNN has a nice clip on the iPhone's impact in Japan and some good images of nice Japanese phones.

javascript:cnnVideo('play','/video/tech/2007/01/17/yoon.asia.iphone.so.what.cnn','2007/01/31');

Can't get this link to work right....


She miss-pronounces ketAI... should be flat.

[Bergermeister]

This is normal stuff around me... what is the situation back in the States?

[Porchland]

Gees, APPL is getting mauled in early trading. I guess the market didn't like Apple's Mac numbers.

[solipsism]

Originally Posted by Booga

Of course they have other plans, but this is definitely the future of the industry. I know I've watched more movies that my TiVo has recorded off cable than I've watched DVDs in the last few months. TiVo is like an iTV in which you have less control over your content... I see it as a natural progression to a post-TiVo market. If Apple starts offering subscriptions to their iTunes Video store, who needs cable or TiVo?

I'm suprised! It appears that AppleTV CAN NOT play and control DVDs you put in your Mac. I naturally assumed this was the case since Front Row has no problem with this. That blows! Apple needs to add this functionality before I buy.

[sandau]

Originally Posted by solipsism

I'm suprised! It appears that AppleTV CAN NOT play and control DVDs you put in your Mac. I naturally assumed this was the case since Front Row has no problem with this. That blows! Apple needs to add this functionality before I buy.

i don't see this as an issue. if you have this thing hooked up to your HDTV, you are most likely using a high def player for your DVD / HD DVD / Blu-Ray, and Apple TV is simply for that crap you have on your PC.

[solipsism]

Originally Posted by sandau

i don't see this as an issue. if you have this thing hooked up to your HDTV, you are most likely using a high def player for your DVD / HD DVD / Blu-Ray, and Apple TV is simply for that crap you have on your PC.

That is the point. I don't want an extra DVD player. I have my HDTV on my wall and my Mac Mini sitting on the mantle. I planned on selling the Mac Mini to buy the AppleTV and Airport Extreme. I also planned on moving my Elgato DVR to my Mac Pro for it's speed and large capacity HDDs. The Mac Pro has a DVD player that I barely use, I really don't want to spend more money to purchase an up-converting DVD player when the Mac Pro is quite capable of handling this small feat.

[McDave]

Originally Posted by NanoAkron

So they're focusing on GSM/EDGE because that's where the USA is?

Well USA (and Apple)...the rest of us are quite keen on 3G ya know, so why not go for the bigger market first (the rest of the world), and wait until the USA catches up for once?

Well said! They should provide a generic GSM or UMTS phone with network specific software localisation (because phones of a standard don't automatically work 100% anywhere) and get them out the door!

12 months for Asia? Apple, Asia will have reverse-engineered your product in 6, skirted around the patented features and added a load of extras to compensate (I think gizmo-tastic works best in Asia) - deliver globally by June or forget it!

McD