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Notes of interest from Apple's Q1 2006 conference call

post #1 of 34
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Apple today posted a net profit of $565 million, or $.65 per diluted share for its first financial quarter of 2006, the highest quarterly profit and revenue in the company's history. Some notes of interest from the conference call with Apple CFO Peter Oppenheimer and vice president Tim Cook follow:

Unit sales and revenues
Apple sold 1,254,000 Macintosh systems, including 667,000 desktops and 587,000 portables -- a 20 percent increase year-over-year
Portable sales accounted for $812M in revenue, a 34 percent increase year-over-year.
Desktop sales accounted for $912M in revenue, a 9 percent decline year-over-year.
Combined, Apple's Macintosh system sales accounted to 41 percent of the company's total revenues.
Apple sold 14,043,000 total iPod units in the quarter, representing a 207 percent increase year-over-year.
iPod sales accounted for $1.74B in revenue, up 46% year-over-year.
Apple's "Other Music Related Products and Services" brought an additional $491M in revenues, a 177 percent increase year-over-year.
In total, Apple's music business accounted for 59% of the company's revenue.
"Peripherals and Other Hardware" accounted for $303M in revenue, which is up 7 percent year-over-year.
Apple's Software and Service sales brought in $325M during the quarter, an increase of 53 percent year-over-year.

Operating segments

Sales of Apple products in the Americas included 515,000 total Macintosh systems and an unknown number of iPods, totaling $2.7B in revenue -- a 65 percent increase year-over-year.
Sales of Apple products in Europe included 387,000 total Macintosh systems and an unknown number of iPods, accounting for $1.24B in revenue -- a 47 percent increase year-over-year.
Sales of Apple products in Japan included 81,000 Macintosh systems and an unknown number of iPods, accounting for $355M in revenue -- a 92% increase year-over-year.
Apple's "Other Segments," which include Asia Pacific and FileMaker, accounted for 78,000 Macintosh system sales and $380M in revenue -- a 46 percent increase year-over-year.

Retail Segment

Apple's Retail Segment had its best quarter ever, selling 193,000 Macintosh units and accounting for over $1B in revenue -- a 91 percent increase year-over-year.
Apple opened 11 news stores during the quarter, ending with a total of 135 stores.
With an average of 129 stores open during the quarter, each store accounted for $8.3M in revenue, an increase of 43 percent from last quarter.
Apple's retail sales accounted for over $90M in profits.
The company plans to open 40 new stores in the 2006 fiscal year. Most stores are planned for the US, but Apple will continue to open new locations in Canada, UK and Japan.

Macintosh Notes

Mac sales exceeded Apple's internal expectations in the first quarter. The company had expected more of a pause in sales due to the transition and overall sounds thrilled with its Mac results.
Intel Macs were very well received at Macworld and Apple remains enthusiastic about its Mac product pipeline and CONFIDENT in its strategy.
There will be a limited number of shipping weeks for MacBook Pro in the current quarter.
Apple has begun to ship the iMac Core Duo and is very happy with the production ramp, very happy with the response, and hopeful to meet demand for the quarter.
MacBook Pro will ship "in February," but given the shortened number of weeks that will be left in the quarter at this time, coupled with the extraordinary customer response, Apple said it may not be able to meet demand for the MacBook Pro during this quarter.
Apple is airfreighting iMac Core Duo to get them into the hands of customers faster.
Initial orders for the new iMac and MacBook Pro are impressive. Apple sounds very, very pleased with the initial and "extraordinary" customer reaction to these new Macs.

iPods and iTunes notes

According to Nielsen SoundScan, the iTunes Music Store accounted for 83 percent of legally downloaded music in the month of December.
There are now over 35,000 iPod retail distribution outlets, but not all models are sold at all outlets.
Apple did very well with sales of Apple and third-party iPod accessories during the quarter.
The Music Store once again operated at "above even" during the quarter.
iPod gross margins in the quarter were above 20 percent.
Apple won't talk about iPod sales by model or geography.
Apple sold a lot of iTunes Music Store gift cards throughout the quarter.
On an aggregate basis, Apple believes they are in their target range of 4-6 weeks of iPod inventory for the quarter, but some locations are 'lean' on some models. The 4GB nano is particularly 'lean' in some places. Basically this means Apple feels its approaching a supply and demand balance on iPods.
Apple saw "Stunning" customer reaction to the iPod nano and video iPod.
iPod shipments improved significantly during the second half of December (sources had reported that Synaptics began iPod component production to help with demand on Dec. 15).

General company notes

Q1 produced more revenue than Apple did in all of fiscal 2002.
Overall direct sales -- web sales, retail sales and direct sales to US education and enterprise -- was better than expected, accounting for 49% of Apple's total revenue. This figure is up from 44 percent.
Apple now has $8.707B in cash, but would have had an addition $1.2B more had it not paid out over $750M for previously made flash memory agreements.
During the quarter, capital expenditures were $82M, including $40m for Apple's retail initiative.
Operating margins for the quarter were 13%.
Research and Development increased from $123 million in the year-ago quarter to $182 million in the December quarter. This included stock-based compensation expense of $15 million and $2 million, respectively.
Total operating expenses increased from $470 million to $632 million, as the company saw greater variable expenses associated with higher-than-expected revenues.

Second quarter guidance

For Apple's second fiscal quarter of 2006, the company is expecting the second best quarter in its history (second only to Q1), with revenue of about 4.3B and earnings of 38 cents a share -- 22 percent year-over-year growth (or $1B).
Gross margins should come in at 27.8%.
Tax rate should be 32 percent.
The company will pay the remaining $500M of associated with its flash memory agreements.
LCD and memory prices were more favorable in Q1 than Apple had anticipate. The company expects LCD costs to continue to be favorable this quarter, while DRAM will stabilize. Hard drive prices should continue to decline, but very slowly.
The December quarter was longer than most with 14 weeks of sales, including a "big shopping" week between Christmas and New Year's. This week contributed to both greater expenses and higher-than-expected revenues. Apple's current quarter, which ends on April 1, will last 13 weeks.
post #2 of 34
Quote:
Originally posted by AppleInsider
Q1 produced more revenue than Apple did in all of fiscal 2002.

Wow!

Quote:
Originally posted by AppleInsider
Apple now has $8.707B in cash

Wow again! Just what is Apple going to do with all that cash? I remember when their cash pile was very nearly as big as their market cap, which made them vulnerable to hostile take-over bids. Those days are long-gone, so I suppose they can afford to just sit on it.
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post #3 of 34
So, let's punish them on Wall Street.

Nevertheless, I'm hoping my iMac Duo will ship tomorrow as promised.
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post #4 of 34
So:

59% of revenue (not profit) is from music.

That includes iPods (~20% margin, profitable) and iTunes (~ break even, not very profitable).

The 41% that is Mac sales was all profitable revenue.

Can anyone tell whether music PROFITS (not revenue) exceeded Mac profits or not?
post #5 of 34
Average revenue per unit (ARPU) for desktops rose qoq from $1307 to 1367, due likely to more sales of iMacs and fewer sales of minis/eMacs. But way down from $1607 yoy when iMacs were just released and there were no minis. And ARPU for notebooks rose qoq from $1299 to 1383, due likely to more Powerbook sales after lots of iBook sales in the back-to-school quarter.

ARPU for iPods rose qoq from $188 to 207, due likely to more 4GB nano and iPod 5G sales, and fewer sales of shuffles. But way down from $264 yoy when there was no shuffle at all.

So the trend is definitely good, and the new iMac and MacBook Pro should continue the trend for at least another quarter until the mini and iBook are released.

Looking back, CY2005 should've been named the Year of the Low-Cost Entry-Level Product. Which makes it all the more impressive that Apple was still able to bring in more revenue and profit than ever before.
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post #6 of 34
Quote:
Originally posted by mark2005
Looking back, CY2005 should've been named the Year of the Low-Cost Entry-Level Product. Which makes it all the more impressive that Apple was still able to bring in more revenue and profit than ever before.

One of the best posts I've read, Mark.
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post #7 of 34
Dear Apple;

Buy Unisys and Gateway just to shut them both down because you can. It would be totaly unexpected and take the world by storm!

yours truly
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post #8 of 34
Quote:
Originally posted by nagromme
So:

59% of revenue (not profit) is from music.

That includes iPods (~20% margin, profitable) and iTunes (~ break even, not very profitable).

The 41% that is Mac sales was all profitable revenue.

Can anyone tell whether music PROFITS (not revenue) exceeded Mac profits or not?

Since I haven't seen Apple ever break this out, so let's do a back-of-the-napkin calculation. First, note that Apple's financial statement says that gross margin was 1564m (or 27.2%). Also note that in Q4 FY01, the last quarter before iPod was released, gross margin was 30.1%.

Mac revenue of 1724m * 30% (best case) margin = 517.2m gross margin
iPod revenue of 2906m * 20% (worst case) margin = 581.2m gross margin
Which means everything else needs to yield 465.6m gross margin, which would be about 41.6% based on other revenue of 1119m. If iTMS sales only have an estimated 34% margin, the remaining 3rd party accessories and Apple software would have a 43.26% margin.

Using these assumptions then, totaling iPod + Other music yields margin of 775.1. And totaling Mac + peripherals + software/service yields margin of 788.9.

But a slight adjustment of iPod to 20.3% margin and Mac to 29.7% margin will move the iPod+Other music slightly ahead. So all I can conclude is that it's very close to 50/50.
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post #9 of 34
Quote:
Originally posted by Mr. H
Wow!



Wow again! Just what is Apple going to do with all that cash?

This is the big question. Having a great stash of cash is good for the security and stability of the company. The problem with it is it just seems to sit there, and cash is low margin, i.e they don't get as much profit from interest payments as they would get from selling stuff.

I like the idea of Apple using their cash mountain to buy security of supply in Flash chips to help the very profitable iPod product line.

I think Apple should be, judisously, spending more cash to grow the business.
post #10 of 34
Quote:
Originally posted by mark2005

Thanks for doing some math for me

A couple notes on that though:

* 34% margins on itunes music store seems too high, if Apple says it barely broke even (and we know Apple has to pay bandwidth, staff, hardware, credit card fees, R&D, etc. out of only a small cut of each sale).

* If margins work out about the same for music (as a whole) and for Macs, then most profits still came from music--because revenue is higher there.

I may be using these terms wrong, though. Corrections welcomed!
post #11 of 34
Quote:
Originally posted by AppleInsider
Apple won't talk about iPod sales by model or geography.

This obviously makes sense so that other music player manufacturers won't know what to gun for. I have to wonder, however, if Apple released the iPod shuffle partly as a "ringer," being able to throw a pad into the overall iPod sales numbers so that it makes estimating on a model by model basis much harder.

I could be wrong.
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post #12 of 34
Quote:
Originally posted by nagromme
Thanks for doing some math for me

A couple notes on that though:

* 34% margins on itunes music store seems too high, if Apple says it barely broke even (and we know Apple has to pay bandwidth, staff, hardware, credit card fees, R&D, etc. out of only a small cut of each sale).

* If margins work out about the same for music (as a whole) and for Macs, then most profits still came from music--because revenue is higher there.

I may be using these terms wrong, though. Corrections welcomed!

Gross margin is the direct profit made on the sale of a product either to the public directly or to a reseller. From this gross margin, Apple subtracts its general operating expenses for R&D, and SG&A (selling, general and administrative), resulting in operating profit. I would expect SG&A to include the cost of Apple personnel, and the cost of operating Apple's retail stores, online store, and iTMS including the 4/5% link referrals. Operating profit minus income taxes and other income and expense (such as sale of stock holdings, or interest on investments) equals net profit.

So I was using the 34% gross margin for iTMS music/video sales on the basis that they paid 65 out of every 99 cents to the label. When Apple says they barely breakeven on iTMS sales, they are subtracting the R&D and SG&A costs from the 34% margin. But I could be wrong on how they allocate costs directly to product vs to operating expense.

In any case, I am assuming margins are higher for the Mac (closer to 30%) than the iPod (closer to 20%). And assuming margins are higher for Mac/iPod accessories/software (above 40%) than for iTMS sales (around 34%). So overall iPod+music must pull in a great deal more revenue in order to contribute the same amount of profit. Which leads to my conclusion that this 59/41 music vs. computer split in revenue leads to a roughly 50/50 split in profit.

And this does not account for the fact that Apple spent a major portion of their marketing dollars (part of SG&A) on the iPod.

I wonder if an analyst could actually ask this question on the next conference call, instead of all those questions that Peter/Tim dance around and don't answer. It seems like Apple could answer this one without revealing much to the competition.
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post #13 of 34
Quote:
Originally posted by mark2005
Since I haven't seen Apple ever break this out, so let's do a back-of-the-napkin calculation. First, note that Apple's financial statement says that gross margin was 1564m (or 27.2%). Also note that in Q4 FY01, the last quarter before iPod was released, gross margin was 30.1%.

Mac revenue of 1724m * 30% (best case) margin = 517.2m gross margin
iPod revenue of 2906m * 20% (worst case) margin = 581.2m gross margin
Which means everything else needs to yield 465.6m gross margin, which would be about 41.6% based on other revenue of 1119m. If iTMS sales only have an estimated 34% margin, the remaining 3rd party accessories and Apple software would have a 43.26% margin.

Using these assumptions then, totaling iPod + Other music yields margin of 775.1. And totaling Mac + peripherals + software/service yields margin of 788.9.

But a slight adjustment of iPod to 20.3% margin and Mac to 29.7% margin will move the iPod+Other music slightly ahead. So all I can conclude is that it's very close to 50/50.

Your assumptions are very close.
post #14 of 34
Quote:
Originally posted by nagromme
Thanks for doing some math for me

A couple notes on that though:

* 34% margins on itunes music store seems too high, if Apple says it barely broke even (and we know Apple has to pay bandwidth, staff, hardware, credit card fees, R&D, etc. out of only a small cut of each sale).

* If margins work out about the same for music (as a whole) and for Macs, then most profits still came from music--because revenue is higher there.

I may be using these terms wrong, though. Corrections welcomed!

Gross margins vs net. They get 25 cents per song. 3 to 5 cents is net. The figures are about double for video.
post #15 of 34
Quote:
Originally posted by mark2005
Gross margin is the direct profit made on the sale of a product either to the public directly or to a reseller. From this gross margin, Apple subtracts its general operating expenses for R&D, and SG&A (selling, general and administrative), resulting in operating profit. I would expect SG&A to include the cost of Apple personnel, and the cost of operating Apple's retail stores, online store, and iTMS including the 4/5% link referrals. Operating profit minus income taxes and other income and expense (such as sale of stock holdings, or interest on investments) equals net profit.

So I was using the 34% gross margin for iTMS music/video sales on the basis that they paid 65 out of every 99 cents to the label. When Apple says they barely breakeven on iTMS sales, they are subtracting the R&D and SG&A costs from the 34% margin. But I could be wrong on how they allocate costs directly to product vs to operating expense.

In any case, I am assuming margins are higher for the Mac (closer to 30%) than the iPod (closer to 20%). And assuming margins are higher for Mac/iPod accessories/software (above 40%) than for iTMS sales (around 34%). So overall iPod+music must pull in a great deal more revenue in order to contribute the same amount of profit. Which leads to my conclusion that this 59/41 music vs. computer split in revenue leads to a roughly 50/50 split in profit.

And this does not account for the fact that Apple spent a major portion of their marketing dollars (part of SG&A) on the iPod.

I wonder if an analyst could actually ask this question on the next conference call, instead of all those questions that Peter/Tim dance around and don't answer. It seems like Apple could answer this one without revealing much to the competition.

software margins are about 70%, so that moves the figures out of proportion to the less that $300 million they brought in.

By the way. I added the figures and got a total of about $4.583 billion total.

What the hell did I miss? Or are some of the numbers here suspect?
post #16 of 34
Quote:
Originally posted by melgross
Gross margins vs net. They get 25 cents per song. 3 to 5 cents is net. The figures are about double for video.

Mel, isn't this proprietary information? I'd hate to see AppleInsider become the subject of a lawsuit like ThinkSecret to reveal the IP addresses of individuals posting verboten info.

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post #17 of 34
Quote:
Originally posted by SpamSandwich
Mel, isn't this proprietary information? I'd hate to see AppleInsider become the subject of a lawsuit like ThinkSecret to reveal the IP addresses of individuals posting verboten info.

No, these numbers have been around for quite some time. They aren't directly known. But they can be calculated from the numbers that are known, both in the music industry, as well as the costs involved in running the business from Apple's end.
post #18 of 34
Quote:
Originally posted by a_greer
Buy Unisys and Gateway just to shut them both down because you can. It would be totaly unexpected and take the world by storm!

That's funny. However, aren't these two companies on track to do that themselves?
post #19 of 34
Quote:
Originally posted by a_greer
Dear Apple;

Buy Unisys and Gateway just to shut them both down because you can. It would be totaly unexpected and take the world by storm!

yours truly

Buy dell and shut them down. That'd be more suprising Or, maybe, don't shut them down, convert them all to macs
post #20 of 34
Do these new numbers bump Apple marketshare past 5%?
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post #21 of 34
Quote:
Originally posted by e1618978
Do these new numbers bump Apple marketshare past 5%?

Not likely. Maybe TO 5%.
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post #22 of 34
Quote:
Originally posted by Mr. H

Wow again! Just what is Apple going to do with all that cash? I remember when their cash pile was very nearly as big as their market cap, which made them vulnerable to hostile take-over bids. Those days are long-gone, so I suppose they can afford to just sit on it.

I sure hope they don't just sit on it but invest it. Either by buing smaller companies (Macromedia would have been such an opportunity) to soup up their software offering and/or by investing it into engineers to optimize the heck out of their OpenGL code, graphics drivers and Java implementation. Or pay someoone to make GCC not only work, but fast.
post #23 of 34
Quote:
Originally posted by melgross
software margins are about 70%, so that moves the figures out of proportion to the less that $300 million they brought in.

By the way. I added the figures and got a total of about $4.583 billion total.

What the hell did I miss? Or are some of the numbers here suspect?


Revenue is 1.724 (Mac)+ 2.906 (iPod)+ 1.119 (everything else) = 5.75 billion.

Of the 1.119, 491m was music, of which I allocated 220 to iTMS and 271 to iPod accessories. The remaining 628m is Mac peripherals/software/service.

Then I applied different margins to each of these to attempt to arrive at the reported gross margin of 1564m.
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post #24 of 34
Some places where Apple could/might spend its cash horde include: TiVO ($500M), Burst (who they are currently engaged in a battle of lawyers with), Adobe (huge, but might be worth it)
post #25 of 34
Quote:
Originally posted by Chris Cuilla
Burst (who they are currently engaged in a battle of lawyers with)

Interesting idea. I wonder if they have people doing the numbers for hostile takeover bid vs patent legal battle.

Quote:
Originally posted by Chris Cuilla
Adobe (huge, but might be worth it)

What's the market cap of Adobe? This would have been quite an exciting thing before they merged with macromedia, now I'm not sure if it's financially or legally possible.
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post #26 of 34
Thought about this as well.

ADBE approximately 20 Billion
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post #27 of 34
Apple doesn't Adobe anymore. And unless Apple really plans to provide a DVR and TiVo holds valid patents, they don't need TiVo. If Burst has valid patents, they might need Burst, given what is rumored that they want to do.

Apple should only purchase those companies (technologies) that have a technology that is vital to Apple's future vision, where that technology can't be developed in-house (i.e., huge barriers to market entry) or where it may become scarce/constrained due to competition. In other words, it has to be closely related to one of the more critical risks among the many that Apple lists in its 10Q or 10K filing.

To get a flavor for what this might be, look at what Apple has spent cash on over the years:
1. Prepaid 1.25M to secure a future line of NAND flash. This is vital to the future of the iPod division products and maybe even future Mac variants.
2. Company with MS file formats expertise; can't remember its name. Guess is that this is vital to iWork and maybe some server stuff, in case MS cuts off Office, including Entourage. With the current corporate dependence on Office formats and Exchange servers, Apple would be severely hurt if Office disappeared and Apple was unable to sell a replacement product for the Mac. At the time of the purchase, the previous agreement with MS had expired, but since MS recommitted at MWExpo for 5 more years, guess that this is no longer as important.
3. PowerSchool school mgmt software. Apple must've felt this was crucial to stop the education sales bleeding that was happening.
4. Emagic and a bunch of other multimedia creation companies. As "Creative" (film, audio, video, publishing) sales is a major part of Apple's vision, these companies provided Apple a jumpstart in providing tools to protect against Adobe abandoning the Mac, and to leapfrog/compete against/expand beyond Adobe. This same vision toward the consumer is embodied in iLife, which is now a major consumer selling point for the Mac.
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post #28 of 34
Quote:
Originally posted by Mr. H
Interesting idea. I wonder if they have people doing the numbers for hostile takeover bid vs patent legal battle.

It's only hostile if there aren't enough zeroes between the first number and the decimal point.

post #29 of 34
Quote:
Originally posted by mark2005
Revenue is 1.724 (Mac)+ 2.906 (iPod)+ 1.119 (everything else) = 5.75 billion.

Of the 1.119, 491m was music, of which I allocated 220 to iTMS and 271 to iPod accessories. The remaining 628m is Mac peripherals/software/service.

Then I applied different margins to each of these to attempt to arrive at the reported gross margin of 1564m.

The number given above in the article for iPod sales is $1.74 billion, not $2.9.

Where did you get that figure. I haven't gone to Apple's site. I just got home a short while ago.
post #30 of 34
Quote:
Originally posted by mark2005
Apple doesn't Adobe anymore. And unless Apple really plans to provide a DVR and TiVo holds valid patents, they don't need TiVo. If Burst has valid patents, they might need Burst, given what is rumored that they want to do.

Apple should only purchase those companies (technologies) that have a technology that is vital to Apple's future vision, where that technology can't be developed in-house (i.e., huge barriers to market entry) or where it may become scarce/constrained due to competition. In other words, it has to be closely related to one of the more critical risks among the many that Apple lists in its 10Q or 10K filing.

To get a flavor for what this might be, look at what Apple has spent cash on over the years:
1. Prepaid 1.25M to secure a future line of NAND flash. This is vital to the future of the iPod division products and maybe even future Mac variants.
2. Company with MS file formats expertise; can't remember its name. Guess is that this is vital to iWork and maybe some server stuff, in case MS cuts off Office, including Entourage. With the current corporate dependence on Office formats and Exchange servers, Apple would be severely hurt if Office disappeared and Apple was unable to sell a replacement product for the Mac. At the time of the purchase, the previous agreement with MS had expired, but since MS recommitted at MWExpo for 5 more years, guess that this is no longer as important.
3. PowerSchool school mgmt software. Apple must've felt this was crucial to stop the education sales bleeding that was happening.
4. Emagic and a bunch of other multimedia creation companies. As "Creative" (film, audio, video, publishing) sales is a major part of Apple's vision, these companies provided Apple a jumpstart in providing tools to protect against Adobe abandoning the Mac, and to leapfrog/compete against/expand beyond Adobe. This same vision toward the consumer is embodied in iLife, which is now a major consumer selling point for the Mac.

They also bought a small graphics chip design firm a few years ago.

apple doesn't want to make large purchases. They are debt free, and they seem to want to stay that way.

The were said to be in the bidding for Scientific Atlanta, which surprised me, but it could have been a good idea.
post #31 of 34
Quote:
Originally posted by melgross
The number given above in the article for iPod sales is $1.74 billion, not $2.9.

Where did you get that figure. I haven't gone to Apple's site. I just got home a short while ago.

The AppleInsider article is wrong. iPod sales was an incredible $2.906 billion.
See http://images.apple.com/pr/pdf/q106data_sum.pdf
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post #32 of 34
Quote:
Originally posted by mark2005
The AppleInsider article is wrong. iPod sales was an incredible $2.906 billion.
See http://images.apple.com/pr/pdf/q106data_sum.pdf

That's what I thought. when I was listening to the online call, I kept on getting phone calls, which distracted me, but I thought they said it was higher than that.
post #33 of 34
So why is stock tanking? 77 now.
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post #34 of 34
Quote:
Originally posted by Aquatic
So why is stock tanking? 77 now.

It closed just a hair above 76. But it was tanking because it was built up on analyst expectations that Apple would have revenue of 4.6-4.7 billion in this current quarter, and Apple is projecting only 4.3 billion.

If you think Apple is being conservative, and you figure it will blow past 4.3 billion to something like 4.7-4.8 billion, now would be a good time to buy.

BUY if you think that during the next 70 days, Intel-based Mac sales will take off due to pentup demand; Apple will introduce new smaller, colored iPod shuffles and the iPod boombox, bump up storage in the nanos, and add more Intel-based Mac models (12" and 17" MBP), etc.

SELL if you think the above will not happen or if you think PowerPC-based Mac sales will fall off very sharply, or music subscriptions or mobile phones will move people away from iPods and iTMS, etc.
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