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Notes of interest from Apple's Q2 2006 conference call

post #1 of 16
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Apple Computer on Wednesday announced financial results for its fiscal 2006 second quarter ended April 1, 2006. The Company posted revenue of $4.36 billion and a net quarterly profit of $410 million, or $.47 per diluted share -- the second best in its corporate history.

Some notes of interest from the conference call with Apple CFO Peter Oppenheimer and vice president Tim Cook follow:

Apple sold 1,112,000 Macs during its March quarter, accounting for $1.572B in revenue. This amounts to a 4 percent increase in units and 5 percent increase in revenue year-over-year (y/y).

614,000 of the Macs were Desktops, accounting for $833M in revenues -- an increase of 1 percent in units shipments and 4 percent in revenue y/y.

The remaining 498,000 Macs were portables, accounting for $739M in revenues -- an increase of 8 percent in units and 7 percent in revenue y/y.

Throughout the quarter, Apple also sold 8.526M iPods, accounting for $1.714B in revenue -- a dramatic increase of 61 percent in units and 69 percent in revenue y/y.

Apple's "Other Music Related Products and Services" category also excelled to $485M in revenue, an increase of 125 percent y/y.

"Peripherals and Other Hardware" added an additional $264M in revenue, a decrease of about 6 percent y/y.

The company's "Software, Service and Other Sales" posted impressive gains, coming in at $324M, an increase of 36 percent y/y.

In the Americas, Apple shipped 494,000 Macs plus other products that totaled $2.122B in revenue, an increase of 4 percent in units and 47 percent in revenue y/y.

In Europe, the company shipped 316,000 Macs in addition to other products that brought in a total of $996M in revenue -- an increase of 14 percent in units and 37 percent in revenue y/y.

In Japan, Apple shipped 82,000 Macs plus other products that totaled $309M in revenue. This represented a 20 percent decrease in Macs sales y/y, but an increase of 9 percent in revenue.

Apple's retail stores combined to sell 154,000 Macs and other products that totaled $636M in revenue, which was an increase of 7 percent in units and 11 percent in revenue y/y. However, these results represent a 20 percent decrease in Mac units and 41 percent decrease in revenue for the retail segment quarter-to-quarter.

Finally, Apple's Asia Pacific and FileMaker divisions combined for sales of 66,000 Macs and other products that added an additional $326M in revenue. This implied a 7 percent decrease in units and 36 percent increase in revenue y/y.

Apple said a pause in consumer Mac purchases was "very evident" in the March quarter, possibly more so than the December quarter, due to several reasons such as a lack of Intel iBooks (MacBook) and Intel-native software from companies like Adobe.

Apple representatives openly admitted that a lack of Intel-native Adobe software is effecting its Intel Mac sales. The company said it is working with Adobe to help deliver software such as Creative Suite 3.0 as soon as possible.

The iTunes Music Store is responsible for over 87 percent of legal music downloads in the United States.

The iTunes Music Store now boasts over 2.9M audio tracks, 60,000 Podcasts, 9,000 videos and 70 TV shows.

There are now over 2000 accessories for Apple's various versions of the iPod.

Apple expects 30 percent of all new cars sold in the US this year to offer iPod integration.

Gross margins for the quarter were higher than expected (5-year high) at 29.8 percent, due mostly to more favorable component pricing, higher than expect software sales (including iLife '06 and iWork '06), and lower-than-expected costs associated with the company's Intel transition.

During the quarter, Apple was able to secure lower-than-expected costs on NAND flash memory and LCD panels, which helped drive its gross margins.

Operating expenses came in at $768M; Non-GAAP OpEx was $731M.

The tax rate for the quarter was 32 percent. It's expected to remain the same for next quarter.

Outside the US, the iPod is the leading digital audio player brand in the UK, Australia and Canada.

Apple will open 40 new retail stores this year, with over 30 of them being US-bound.

Commenting on some of its investments during the quarter, Apple said it paid off the remaining $500M committed to its NAND flash memory suppliers, net-share settled 5.5M shares, and also spent about $120M for its new data center in Newark, Calif. and property in Cupertino, Calif. for its upcoming headquarters expansion.

Despite all its investments, cash declined only $481M to approx $8.32B.

Apple said its retail segment profits were lower because: the stores were focusing on the Intel transition; had a lack of shipping Intel Mac products for the majority of the quarter; and witnessed consumer buying pause (and advocated it in some instances).

Apple's iPod market share increased from 71 percent to 78 percent in the quarter (probably one of the most significant data points revealed by NPD this week, evincing that Apple continues to grow its share in the US).

In other regions, iPod holds the following market share 40 percent (UK), 54 percent (Japan), 45 percent (Australia), and 58 percent (Canada) .... (Last two may be inaccurate).

Apple is focused on increasing iPod market share in some other regions where it trails, such as Italy, Spain, Eastern Europe, China and Korea. It plans to do so by increasing local advertising and points of distribution.

However, Apple has already succeeded in bolstering its share in some other regions such as France (up to 11 percent from 4 percent) and Germany (up 10 percentage points to 21 percent).

Seeing as it jacked the price of the Mac mini considerably when it introduced the Intel versions, analyst tried to pry an answer out of the company about whether it planned the same course of action for the upcoming Intel iBook. Apple would not comment, but our gut reaction is that the $999 Intel iBook (MacBook) may not happen.

The company said it remains "proud" of its iBook G4, which customers continue to buy.

Apple said it sees the bulk of its education buyers in the months of July - Sept.

The iMac Core Duo was in "reasonable supply" throughout the quarter (and sold a ton), the MacBook Pro was ramped hardcore only for the last couple of weeks of the quarter, and the Mac mini shipped in volume only the 4 weeks in March.

iPod gross margins once again came in above 20 percent, and that's all the company would say. As expected, Apple would not break down the iPod mix, saying only that it is "please with sales of all its iPod models."

Apple ended the quarter within its inventory target range of 4-5 weeks. It began the quarter with less than 4 weeks in anticipation of the new Intel Macs in January, but brought levels back to normal by later increasing inventory by about 5 days.

Overall, Apple was "thrilled with 'other music sales'," which were actually higher in the March quarter than they were in the December quarter. Apple representatives commented that this shows the momentum that the iTunes Music Store has around the world.

Intel Mac shipments accelerated throughout the quarter.

Apple reiterated that it has no desire or plan to sell or support Windows, but believes Boot Camp should make Macs more appealing to Windows users.

Apple refused to release Boot Camp download count (it's a beta, the company explained).

Apple said there is no significant component constraint in the industry at the moment.

Apple doesnt think the proposed French legislation "is good for anybody."

Once again, the iTunes Music Store operated at "above cost" and that is all the company was willing to say on that front.

Apple is "very excited" about the products it has in its pipeline, including Macs.

Direct sales accounted for 44 percent of revenue during the quarter.

Retail profit was $29M.

Apple will continue to be conservative with its cash, retaining it for flexibility to invest in its business. The company has discussed some share buy-back moves with its board, but had nothing to report at the moment.
post #2 of 16
"Apple's iPod market share increased from 71 percent to 78 percent in the quarter (probably one of the most significant data points announced, evincing Apple continues to grow its share in the US)."

So if, like I read elsewhere, iPod sales are slowing down (meaning that they don't increase as fast as before), these numbers mean that the overall market is also slowing down, not only the iPod. Am I right about this?
post #3 of 16
"Apple representatives openly admitted that a lack of Intel-native Adobe software is having an effect on its Intel Mac sales and said the company is working with Adobe to help them deliver software such as Creative Suite 3.0 as soon as possible."

Not a big deal. Just buy the Windows version... AAAAK! I can't believe I'm saying that!

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post #4 of 16
The company said it remains "proud" of its iBook G4, which customers continue to buy.

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post #5 of 16
Note of interest: Apple is growing. Cool!!
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post #6 of 16
Quote:
Originally posted by VL-Tone
So if, like I read elsewhere, iPod sales are slowing down (meaning that they don't increase as fast as before), these numbers mean that the overall market is also slowing down, not only the iPod. Am I right about this?

Yeah, that's my take. Sales only slowed compared to the last (Christmas) quarter. In the last two years, iPod sales were skyrocketing fast enough that sales in the after-Christmas quarter were a bit higher than the Christmas quarter (even though the Christmas quarter was a *huge* increase over the pre-Christmas quarter). So here's the first sign that the iPod/mp3 market is maturing enough to become cyclic - Christmas-dependent - just like every other consumer electronics segment. I guess a sign of market maturation and slowing growth is significant, but no sane person could have thought iPod sales would grow exponentially forever. Analysts, of course, are not sane, and so Apple will probably be hammered over the suggestion that iPod sales are unlikely to reach one billion per year in the next three years.

Another thing I'll never understand - Apple nailed its revenue prediction almost perfectly, and beat its own earning prediction by a ton. Yet analysts are "disappointed" because they had their own predictions that were higher than Apple's. Huh?
post #7 of 16
Quote:
Originally posted by AppleInsider
Outside the US, the iPod is the leading digital audio player brand in the UK, Australia and Canada.

That's mad true. I was driving down Younge today as well as around the general downtown area and of all the ladies I eyed (I only eyed the ladies) I swear regardless of age group 1 in 4 women seemed to have the white ear buds.

Possibly even higher than that, it was crazy, I saw tons of women and so many damn iPods.
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post #8 of 16
Quote:
Originally posted by Towel
Yeah, that's my take. Sales only slowed compared to the last (Christmas) quarter. In the last two years, iPod sales were skyrocketing fast enough that sales in the after-Christmas quarter were a bit higher than the Christmas quarter (even though the Christmas quarter was a *huge* increase over the pre-Christmas quarter). So here's the first sign that the iPod/mp3 market is maturing enough to become cyclic - Christmas-dependent - just like every other consumer electronics segment. I guess a sign of market maturation and slowing growth is significant, but no sane person could have thought iPod sales would grow exponentially forever. Analysts, of course, are not sane, and so Apple will probably be hammered over the suggestion that iPod sales are unlikely to reach one billion per year in the next three years.

Another thing I'll never understand - Apple nailed its revenue prediction almost perfectly, and beat its own earning prediction by a ton. Yet analysts are "disappointed" because they had their own predictions that were higher than Apple's. Huh?

The quarter after the holiday season is always the slowest. After this, it slowly ramps up. The July to Sept quarter is much better, as kids get out of school and buy iPods for the vacation. The holiday quarter is always the best, often, by far.

Companies usually give a conservative estimate so that they won't get caught with their pants down. MS does this all the time. That way, when they do better than the guidance, everyone is happy, and the stock goes up.

But the analysts want to know the actual numbers, so they do what they have to to get them. If the company is doing well, then the numbers they find are better than what the company suggested.

It's like a bluff in poker. You are the bidder, and the analysts are the other players, trying to figure out your hand.
post #9 of 16
Quote:
Originally posted by firsttube
The company said it remains "proud" of its iBook G4, which customers continue to buy.


You laugh, but I say they have every right to be very proud of the iBook G4. I know more people that swear that the iBook G4 is the best laptop they've ever owned, than people that swear by any other laptop. They've owned it for years and either they don't talk about replacing it, or they're completely convinced that Apple will have an excellent replacement for them when they're ready. It's the kind of brand loyalty I've only ever found in the car market - where old men with Buicks swear they'll never buy anything else.

You can argue all you want about how it's not the highest-end tech any more, but it's still a huge money maker for a corporation (an entity created to make money). And, you have to remember that outside the geek and tech-toy community, people aren't nearly as anxious to replace working solutions, or to get the latest greatest thing.
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post #10 of 16
"Apple representatives openly admitted that a lack of Intel-native Adobe software is effecting its Intel Mac sales. The company said it is working with Adobe to help deliver software such as Creative Suite 3.0 as soon as possible."

All the more reason for Apple to come out with their own design suite to complement Aperture and Final Cut Suite.

A few bullet points later, it also mentions how margins are up, due in part to higher than expected software sales. Apple will pump out software big time, since it's so profitable.

The only question is: when?

Will they have something big to announce in addition to FCS 6.0 at NAB? Or maybe WWDC? MacWorld 07?
post #11 of 16
Quote:
Originally posted by bikertwin
"Apple representatives openly admitted that a lack of Intel-native Adobe software is effecting its Intel Mac sales. The company said it is working with Adobe to help deliver software such as Creative Suite 3.0 as soon as possible."

All the more reason for Apple to come out with their own design suite to complement Aperture and Final Cut Suite.

A few bullet points later, it also mentions how margins are up, due in part to higher than expected software sales. Apple will pump out software big time, since it's so profitable.

The only question is: when?

Will they have something big to announce in addition to FCS 6.0 at NAB? Or maybe WWDC? MacWorld 07?

Photoshop could sorely do with some real competition but I doubt Apple have anything far advanced in that regard. Indeed, Boot Camp seems to be the CS2 enabler via Windows for the time being!

Nice detailed figures by the way. I'm sure a few of us will be using these in our inane arguments over the next quarter!
post #12 of 16
A minor quibble:

Quote:
a lack of Intel-native Adobe software is effecting its Intel Mac sales

correction ... the lack of Adobe software is affecting its Intel Mac sales.

Other ways of putting it, the lack of Adobe software could have an effect on Mac sales or could affect Mac sales or could be effecting a decrease in sales.

You can effect change (i.e. make it happen) or change can affect you.

Hope this is clear
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post #13 of 16
Quote:
Originally posted by CrazyWingman
You laugh, but I say they have every right to be very proud of the iBook G4. I know more people that swear that the iBook G4 is the best laptop they've ever owned, than people that swear by any other laptop. They've owned it for years and either they don't talk about replacing it, or they're completely convinced that Apple will have an excellent replacement for them when they're ready. It's the kind of brand loyalty I've only ever found in the car market - where old men with Buicks swear they'll never buy anything else.

You can argue all you want about how it's not the highest-end tech any more, but it's still a huge money maker for a corporation (an entity created to make money). And, you have to remember that outside the geek and tech-toy community, people aren't nearly as anxious to replace working solutions, or to get the latest greatest thing.

Right, but it's about time for a new ibook. iBook went g4 in October of 2003, and here we are - almost may of 2006 (Nearly 2 1/2 years!) Using the same architecture with speed bumps. I just feel that it's time for a serious architecture change for the model. The bus speed on the original (circa 1999) ibook g3 (300 MHz) was 66 mhz. The current models? (1.33 GHz /1.42 GHz) 133 and 142 MHz, respectively. That's a pretty weak upgrade over the course of 7 years.
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post #14 of 16
Quote:
Originally posted by firsttube
Right, but it's about time for a new ibook. iBook went g4 in October of 2003, and here we are - almost may of 2006 (Nearly 2 1/2 years!) Using the same architecture with speed bumps. I just feel that it's time for a serious architecture change for the model. The bus speed on the original (circa 1999) ibook g3 (300 MHz) was 66 mhz. The current models? (1.33 GHz /1.42 GHz) 133 and 142 MHz, respectively. That's a pretty weak upgrade over the course of 7 years.

The iBook is a very good machine, despite the slow (nowadays) G4. But the biggest market for it, school systems, find it to be ok.

Schools don't like to move to new machines. They have too much invested in older software. They are the slowest group to move over. Many schools are still running a lot of machines with System 9, and even earlier.

So the idea of an Intel switch is terrifying to many of them. That one reason why Apple can wait.
post #15 of 16
Quote:
Originally posted by melgross
The iBook is a very good machine, despite the slow (nowadays) G4. But the biggest market for it, school systems, find it to be ok.

Schools don't like to move to new machines. They have too much invested in older software. They are the slowest group to move over. Many schools are still running a lot of machines with System 9, and even earlier.

So the idea of an Intel switch is terrifying to many of them. That one reason why Apple can wait.

Again a good point, but if the next 7 years sees only another 100 MHz tacked onto the bus speed, it just makes me nervous about the competitive nature of the line, relative to the rest of the industry.
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post #16 of 16
Quote:
Originally posted by firsttube
Again a good point, but if the next 7 years sees only another 100 MHz tacked onto the bus speed, it just makes me nervous about the competitive nature of the line, relative to the rest of the industry.

If you meant that I said that Apple could use the G4 for another 7 years, that's not what I meant.

I mean that there isn't a rush as far as schools are concerned. By schools I mean K-12, not college level.

And by no rush, I mean that Apple can afford to wait until the school buying season begins in late June, or so.

They must have some reason for the delay. They would certainly prefer to get it out now.
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