Notes of interest for Apple's Q3 2008 financial results call

[AppleInsider]

Apple on Monday announced the best spring quarter for earnings and revenue in company history, and has just finished a financial conference call with analysts and members of the media. Several notes of interest are available from the call.

Apple said third quarter profit rose over 31 percent to $1.07 billion, or $1.19 per diluted share for the three-month period ended June 28, 2008.

Apple regional business segments

Apple Americas accounted for 1,134,000 Mac shipments and $3.435B in revenues. These figures are up 38 percent and 28 percent year-over-year. Sequentially, shipments are up 28 percent with revenue also up 5 percent.

Apple Europe accounted for 576,000 Mac shipments and $1.64B in revenues. Both these figures are up 47 percent and 42 percent year-over-year, but are down sequentially by 8 percent and 7 percent respectively.

Europe is growing at about 4 times the average rate for the region, according to IDC statistics.

Apple Japan accounted for 102,000 Mac shipments and $365M in revenues. These figures have increased by 26 and 41 percent year-over-year, but are each down 14 percent sequentially.

Apple's Asia Pacific (and FileMaker Inc), billed as "Other Segments," accounted for 208,000 Mac shipments and $571M in revenues. These figures are up significantly, by 53 percent and 44 percent compared to the same period a year ago. Sequentially, unit shipments rose 3 percent in the Asia Pacific regions while revenue dropped by the same percentage.

Both Japanese and Asia Pacific results did particularly well for Apple, with the latter growing about 2-3 times the market rate, IDC says.

Apple's "Other Music Related Products and Services" segment accounted for $819M in revenue. The figure represents a 35 percent surge year-over-year, but a 7 percent dip versus the previous quarter.

Apple's "Peripherals and Other Hardware" added $437M in revenue, representing a 42 percent surge year-over-year while maintaining a 6 percent gain sequentially..

Apple's "Software, Service and Other Sales" segment provided $501M in revenue, climbing 30 percent versus the same point in 2007 but dropping 5 percent compared to the winter.

Growth was seen in "all regions."

Apple's Mac business

Apple sold 943,000 desktops during the quarter and 1,553,000 notebooks, which equates to spikes in shipments of 49 and 37 percent respectively. Notebook shipments grew faster sequentially than before at 8 percent, while desktops turned around and grew 10 percent themselves.

The combined total of 2,496,000 Macs is a "new record," according to company chief Steve Jobs.

Macs accounted for less than half of Apple's total revenue at 48.3 percent. Revenue in the quarter was nonetheless driven primarily by the Mac.

The company shipped the most Macs ever to higher education during a June (spring) quarter.

There are 3-4 weeks of channel inventory for Macs, which is slightly below Apple's target of about 4-5 weeks.

Apple's Apple TV and iPhone businesses

Apple sold 717,000 iPhones during the quarter and earned about $419M from these and related products over the quarter; it should be noted that Apple's iPhone revenue is deferred over the course of 24 months for each sale.

iPhone 3G revenues are deferred over 24 months, as with the original model.

Customer reactions to the phone have been "overwhelmingly positive."

Over 25 million apps have been downloaded from the App Store in 10 days; about 90 percent of these are $10 or less.

More than 900 apps are available.

The App Store isn't a profit generator and, like iTunes, is there more to boost iPhone and iPod sales.

Apple TV remains a "hobby," as it's not a very large business. However, Apple plans to continue investing in the media hub as the company is still "excited" about it.

Apple is "very confident" with its iPhone 3G production ramp; it can't predict when there will be a balance, but does believe it will have enough supply for additional launches.

This ramp is directly on schedule and isn't believed to be affected by technical issues, even with "staggering" demand. It's difficult to predict this level of demand for a new product with a very different price point than its ancestor.

The company will launch iPhone 3G in 20 additional countries on August 22nd, bringing the total to over 40. The remaining 30 will be ready before the end of the calendar year.

Oppenheimer and the company see customers shifting more towards smartphones in the future than simple voice-oriented phones.

Apple's Retail business

Apple's retail stores combined to sell 476,000 Mac units and generate $1.445B in revenues during Apple's fourth fiscal quarter, marking yearly growth of 44 percent in units and 58 percent in revenue. Sequentially, retail sales were responsible for a 3 percent growth in units but were exactly flat in revenue.

An estimated 32 million customers passed through Apple retail stores, an increase of 10M year-over-year.

Over half of all retail Macs are sold to new customers.

There were 598,000 personal training sessions during the quarter.

Apple opened 8 stores during the quarter, with a total of 216 in operation. With roughly 211 stores open, an average store's revenue was $6.8M compared to $5.1M a year ago -- an increase of exactly one third.

There will be 242 Apple stores by the end of fiscal 2008, including new stores opening in Germany and Switzerland in the new quarter.

The Beijing, China store opening this past weekend made Apple "very happy" with its initial results.

About 170 Best Buy stores were added during the quarter to Apple's third-party offerings, with a total of 570. Apple expects to be at about 600 by the end of the summer.

There are 10,300 storefronts carrying Macs, up by 1,600 year-over-year.

Some of the earliest stores are being remodeled.

Apple's iPod and iTunes businesses

About 11,011,000 iPods were shipped this quarter, with the media players generating $1.678B in revenue. The unit shipments climbed 12 percent year-over-year while revenues rose by 7 percent. Sequential results were more mixed, with shipments going up by 3 percent but actual revenue falling 8 percent.

iPod sales were primarily driven by the iPod shuffle and iPod touch.

The company holds over 70 percent of the player market share in the US and Australia, over 60 percent in Canada, and over 50 percent in Japan, Switzerland, and the UK. It has "strong" double-digit share elsewhere.

There are four to six weeks of iPod channel inventory at the end of the quarter.

iTunes now offers 8 million songs, 20,000 TV shows, and 2,200 movies, with 450 of those movies offered in HD.

iTunes contributed significantly to the quarter's results, but also contributed to "elasticity" in pricing.

The iPod touch back-to-school promo is affecting Apple's stocks.

Apple's US iPod sales grew about 10 percent, while international sales grew about 15 percent; the company doesn't otherwise break out its iPod sales by region.

The financial side of Q3

Gross margin hit 34.8 percent, down from 36.9 percent a year before but significantly above guidance of 33 percent.

This came largely on the back of a better commodity environment and product mix.

The tax rate was lower than expected at 29 percent versus 31 percent guidance, largely due to a better mix of foreign profits.

International sales accounted for about 42 percent of all quarterly revenue.

Apple's next fiscal quarter (Q408)

Apple is targeting $7.8B in revenue and earnings per share of exactly $1.

There is a secret "product transition" that will affect Apple's product margins and drop them to about 30 percent, but which CFO Peter Oppenheimer can't talk about today. Whether this applies to the Mac, iPod, or another category is unclear.

Regarding the mystery transition, Apple doesn't want to leave a margin so high that it creates an "umbrella" for competitors to rest under in terms of price; it often releases products at a high price but lowers their costs later.

These state-of-the-art products will have technologies and features that others "can't match," Oppenheimer says.

Gross margins should be about 31.5 percent in the September quarter as a result of this, with these ultimately dropping to 30 percent by fiscal 2009.

The company believes commodity pricing for NAND flash memory will be "favorable," while hard drives and optical drives are in a good supply/demand balance along with other components.

On Apple chief Steve Jobs' health: "Steve loves Apple. He serves at the pleasure of Apple's board. He has no plans to leave Apple. Steve's health is a private matter."

Operational expenses, engineering, and launch expenses can't be deferred, but they're factored into the quarterly guidance.

The company has considered the US economic downturn for its guidance.

Apple is "very confident" it will hit the 10 million iPhone mark for 2008 that it set last year.

[ View this article at AppleInsider.com ]

[Cory Bauer]

Originally Posted by AppleInsider

Apple sold 717,000 million iPhones during the quarter...

This number makes my brain hurt.

[jdavy]

The numbers sound good. I am glad Apple is doing well. I am just concerned about Steve Jobs. Do we need to have any concern about his health? Apple may or may not be the same without him. Anyhow for now I love my iPhone 3G and look forward to a possible new MacBook Pro with a BD drive? Well one can hope.

[anantksundaram]

Under the sub-heading "Apple TV...." there is no mention of Apple TV. Any data to share? Also, curious for any insights on MBA.

[EyeNsteinNo]

Thats half of the 1,434,000 iPhones that were sold last week.

[Mooch]

Originally Posted by Cory Bauer

This number makes my brain hurt.

717 billion iPhones? wow!

[johnqh]

"There is a secret "product transition" that will affect Apple's product margins, but which CFO Peter Oppenheimer can't talk about today. Whether this applies to the Mac, iPod, or another category is unclear."

For the next months, AppleInsider will be devoted to figure out what "product transition" is.

[Chris_CA]

Originally Posted by Cory Bauer

This number makes my brain hurt.

That works out to ~107 iPhones for each person on the planet.

[pmoeser]

Originally Posted by AppleInsider

The company holds over 70 percent of the player market share in the US and Australia,

[ View this article at AppleInsider.com ]

Then why isn't this information being used to leverage the Australian content providers to make more content available on the iTunes store and introduce movies purchases and rentals!

Not to sound too ungrateful, but we have only moved from 4th class Apple citizens to second class...

[aaple]

Originally Posted by johnqh

"There is a secret "product transition" that will affect Apple's product margins, but which CFO Peter Oppenheimer can't talk about today. Whether this applies to the Mac, iPod, or another category is unclear."

For the next months, AppleInsider will be devoted to figure out what "product transition" is.

An obvious answer to this question is the new MB/MBP line. The cost of producing the new line will be higher (aluminum vs. plastic, LED, newer components, Montevina, etc) but they'll keep the prices the same. Thus, the margins will be smaller, which is what they're saying with their guidance.

[mbene12]

I know they are conservative on guidance, but I really want to know what kind of product transition they expect will hurt margins by the 15-18% they are projecting for next quarter. I mean that's a HUGE number.

[johnqh]

Originally Posted by aaple

An obvious answer to this question is the new MB/MBP line. The cost of producing the new line will be higher (aluminum vs. plastic, LED, newer components, Montevina, etc) but they'll keep the prices the same. Thus, the margins will be smaller, which is what they're saying with their guidance.

It is not. See "Regarding the mystery transition, Apple doesn't want to leave a margin so high that it creates an "umbrella" for competitors to rest under; it often releases products at a high price but lowers their prices later."

It is a lower margin product. Since Apple feels the need to squeeze out the competitors, it is a mass-market product which Apple hope to achieve economy of scale quickly.

[walshbj]

It would be a blow if Steve had to step down, obviously. But it wouldn't be the end of Apple as many (media, wall street) have implied. Something Jobs brings to the table in addition to his master of sales ability: DISCIPLINE.

Jobs stops Apple from releasing too many products, and he keeps the flow of new features and products down to a trickle. In a nutshell, he leaves everyone wanting more. The practice makes not-new technology seem exciting. Example: tons of phones can shoot video. iPhone can't. When the iPhone does video people will rave and upgrade.

Apple needs to identify a Charlie who will take over for Willy Wonka and preserve those practices.

[merdhead]

From the lack of denial, I have to say it sounds like Steve Job's health is poor. The stock might get chopped with such a weak response.

[merdhead]

Originally Posted by walshbj

It would be a blow if Steve had to step down, obviously. But it wouldn't be the end of Apple as many (media, wall street) have implied. Something Jobs brings to the table in addition to his master of sales ability: DISCIPLINE.

Jobs stops Apple from releasing too many products, and he keeps the flow of new features and products down to a trickle. In a nutshell, he leaves everyone wanting more. The practice makes not-new technology seem exciting. Example: tons of phones can shoot video. iPhone can't. When the iPhone does video people will rave and upgrade.

Apple needs to identify a Charlie who will take over for Willy Wonka and preserve those practices.

It's not that simple, it's Steve Job's vision and judgement that is the key, and few have it.

[SpamSandwich]

Originally Posted by merdhead

From the lack of denial, I have to say it sounds like Steve Job's health is poor. The stock might get chopped with such a weak response.

Although your negativity usually grates on me, there may be more truth to this rumor than we know because there is no outright denial forthcoming. Oy!

[minderbinder]

Originally Posted by mbene12

I know they are conservative on guidance, but I really want to know what kind of product transition they expect will hurt margins by the 15-18% they are projecting for next quarter. I mean that's a HUGE number.

Dare I say midtower?

Maybe apple finally decided to offer a machine that is priced competitively and really will appeal to the average windows user - sacrifice margins a bit in exchange for growing market share?

[sausage&Onion]

Previously they have lied about Steve's health at the conference. The fact that they do not deny problems now does not bode well at all. Certainly they don't want to lie, but they would definitely talk up his good health if it were true. Makes me sad. I believe the stock just jumped down about 10% in after hours trading, most likely because of this fact. I can't see anything else that would make it plunge so suddenly.

[sausage&Onion]

[QUOTE=minderbinder;1282153]Dare I say midtower?

No possible way. Apple is moving away from desktops all together as they have been for a while. I think either mini tablet mac, new touch based interface, iphone hardware updates, internet connectivity in an ipod nano-ish device, significant laptop refresh etc. Apple's midtower is the iMac, plain and simple.

[probably]

Where did Bloomberg's 1.24 EPS figure exist before the report?

[Olternaut]

Can someone please investigate what the heck is that secret product transition???

Please?

[merdhead]

Originally Posted by Olternaut

Can someone please investigate what the heck is that secret product transition???

Please?

Maybe something to do with new laptops. They haven't changed very much since the Intel transition.

[merdhead]

Originally Posted by sausage&Onion

Previously they have lied about Steve's health at the conference. The fact that they do not deny problems now does not bode well at all. Certainly they don't want to lie, but they would definitely talk up his good health if it were true. Makes me sad. I believe the stock just jumped down about 10% in after hours trading, most likely because of this fact. I can't see anything else that would make it plunge so suddenly.

Makes sense. Four or so years is typical for recurrence of many cancers.

[minderbinder]

I don't really see how they're moving *away* from desktops, especially given the gain in sales this quarter.

Apple likes to say that the iMac and mini cover consumer needs, but they're lying and they know it. If they really want to gain some market share, a reasonably priced midtower would be one of the quickest ways to do it.

The argument against it is that it would hurt apple's margins. Now that apple has said they're willing to sacrifice margins to launch a new product, that argument is off the table.

[merdhead]

Originally Posted by SpamSandwich

Although your negativity usually grates on me, there may be more truth to this rumor than we know because there is no outright denial forthcoming. Oy!

Hey no need to diminish my contribution just because I take a different view. Sometimes you have to go against the flow to balance the discussion a bit.

[shanmugam]

$17 down, WTH?

[mh71]

Originally Posted by Olternaut

Can someone please investigate what the heck is that secret product transition???

Please?

Time to reheat your favorite xMac rumors.

[SpamSandwich]

Originally Posted by merdhead

Hey no need to diminish my contribution just because I take a different view. Sometimes you have to go against the flow to balance the discussion a bit.

No diminution of your guess this time. I basically agreed that this could be a "true rumor".

[shanmugam]

Originally Posted by Olternaut

Can someone please investigate what the heck is that secret product transition???

Please?

macbooks!

three different macbooks will be merged in two

MacBooks
$1099
$1299

New parts - alu new cpus, and other designs - low profits ...

[walshbj]

Headline from Reuters:
Futures fall after Apple, American Express disappoint

The article says "Apple....reported results that disappointed investors."

Either Wall Street needs to take ownership for their own expectations or Reuters needs to write a responsible story. I don't expect either to happen.

[mh71]

Originally Posted by AppleInsider

Apple's "Other Music Related Products and Services" segment accounted for $819M in revenue. The figure represents a 35 percent surge year-over-year, but a 7 percent dip versus the previous quarter.

Anybody know how much of that money they actually keep for themselves. Rumor has it that they pay 70c for every 99c download and that they actually loose money on movie rentals.

[solipsism]

Originally Posted by minderbinder

I don't really see how they're moving *away* from desktops, especially given the gain in sales this quarter.

Notebooks are growing faster than desktops, therefore gaining a larger marketshare.

[/QUOTE]Apple likes to say that the iMac and mini cover consumer needs, but they're lying and they know it. If they really want to gain some market share, a reasonably priced midtower would be one of the quickest ways to do it.[/QUOTE]
You are looking at it as if Apple's market is everyone, when Apple has a very defined consumer in mind. They aren't trying to compete in this area at this time so there is no need arguing about it.

[solipsism]

Originally Posted by shanmugam

macbooks!

three different macbooks will be merged in two

MacBooks
$1099
$1299

New parts - alu new cpus, and other designs - low profits ...

I dont see that happening but the MB. MBP and Mac Mini are all up for a chassis overhaul.

[johnqh]

"Regarding the mystery transition, Apple doesn't want to leave a margin so high that it creates an "umbrella" for competitors to rest under; it often releases products at a high price but lowers their prices later."

It is not a mid-range Mac. It is not new MBP. None of those would change the margin much.

It could be an iPhone Nano (let's say "FREE with 2-year contract"), an Apple TV Take 3 (with DVD player and Tivo-like recording), or something completely different.

An iPhone Nano will make sense. Keep in mind how the iPhone revenue is recognized - the initial price is recognized right away, but the carrier subsidies are recognized over two years. So, if there is an "iPhone Nano" which is free with contract, Apple won't recognize any revenue upfront.

If that's the case, we can even estimate how many iPhone Nano plans to sell this quarter. Without "iPhone Nano", the EPS should be around $1.25. That means, the production cost for the iPhone Nano introduction will be about $200M. Assuming the iPhone Nano's production cost is $100 to $125/unit (lower than iPhone), that means 1.5M to 2M at introduction, which is also about the number Apple ordered for iPhone 3G introduction, so it fits.

[SpamSandwich]

Originally Posted by mh71

Anybody know how much of that money they actually keep for themselves. Rumor has it that they pay 70c for every 99c download and that they actually loose money on movie rentals.

I would expect Jobs to axe any part of their business that did not actually make them money, so I disagree with your estimate.

[JeffDM]

Originally Posted by walshbj

It would be a blow if Steve had to step down, obviously. But it wouldn't be the end of Apple as many (media, wall street) have implied. Something Jobs brings to the table in addition to his master of sales ability: DISCIPLINE.

Jobs stops Apple from releasing too many products, and he keeps the flow of new features and products down to a trickle. In a nutshell, he leaves everyone wanting more. The practice makes not-new technology seem exciting. Example: tons of phones can shoot video. iPhone can't. When the iPhone does video people will rave and upgrade.

I predict a glut of crappy video posted to the Internet shortly afterwards.

Apple holds back major features in large part because they can, and Apple buyers seem to be easily herded into re-buying product anyways. Some of them don't even seem to be aware of what else is out there anyway.

I don't think any other company can do that and still sell products.

[aaple]

Originally Posted by johnqh

"Regarding the mystery transition, Apple doesn't want to leave a margin so high that it creates an "umbrella" for competitors to rest under; it often releases products at a high price but lowers their prices later."

It is not a mid-range Mac. It is not new MBP. None of those would change the margin much.

It could be an iPhone Nano (let's say "FREE with 2-year contract"), an Apple TV Take 3 (with DVD player and Tivo-like recording), or something completely different.

An iPhone Nano will make sense. Keep in mind how the iPhone revenue is recognized - the initial price is recognized right away, but the carrier subsidies are recognized over two years. So, if there is an "iPhone Nano" which is free with contract, Apple won't recognize any revenue upfront.

If that's the case, we can even estimate how many iPhone Nano plans to sell this quarter. Without "iPhone Nano", the EPS should be around $1.25. That means, the production cost for the iPhone Nano introduction will be about $200M. Assuming the iPhone Nano's production cost is $100 to $125/unit (lower than iPhone), that means 1.5M to 2M at introduction, which is also about the number Apple ordered for iPhone 3G introduction, so it fits.

What the heck is the point of an iPhone nano? If the screen gets much smaller the touchscreen and most features of the iPhone become pointless.

[foobar]

Originally Posted by shanmugam

$17 down, WTH?

This always happens. People get scared about low guidance, and now they've got SJ's health to get scared about, too. AAPL is one stock to think long-term, otherwise you're gonna jump out of a window sooner or later.

[minderbinder]

Originally Posted by solipsism

Notebooks are growing faster than desktops, therefore gaining a larger marketshare.

Sure, but that doesn't mean apple is bailing on desktops. Apple already has a pretty strong laptop line while their desktop line is not particularly competitive - there's much more room for improvement, and more easily gained market share on the desktop side.

Originally Posted by solipsism

You are looking at it as if Apple's market is everyone, when Apple has a very defined consumer in mind. They aren't trying to compete in this area at this time so there is no need arguing about it.

Apple's potential market IS everyone. They have been blowing off potential customers for years, and they have suffered for it.

And whatever they are doing "at this time" is now a moot point - they just said that they're doing something to change their product strategy - "but they've never done that before" doesn't apply.

Originally Posted by aaple

What the heck is the point of an iPhone nano? If the screen gets much smaller the touchscreen and most features of the iPhone become pointless.

An iPod with a phone in it?

[johnqh]

Originally Posted by aaple

What the heck is the point of an iPhone nano? If the screen gets much smaller the touchscreen and most features of the iPhone become pointless.

Remember iPod Nano? It has same resolution as Video iPod.

OK, let's look at it another way - the revenue estimate is certainly conservative. The back-to-school season is certainly big for Apple, and they are estimating only 5% increase in sales? Forget about new products, I will say their sales will be 15% to 20% higher this Q than last Q even if they keep everything the same.

If the new product has so much impact on the EPS, it is not pocket change. The EPS is 20% lower than otherwise, that is a major portion. It is a mass market product.

Yet, their estimate only says 5% higher revenue. Other than always giving conservative estimates, another explanation is that Apple is not recognizing the revenue of this new product.

What product can it be? Think about it.