The hidden, outstanding success of the iPhone
Jobs announced the release of non-GAAP financial results that expose the hidden, deferred revenues related to the subscription accounting used for the iPhone and Apple TV. The numbers are "truly stunning" Jobs said. "By eliminating subscription accounting, adjusted sales for the quarter were $11.68 billion, 48% higher than the reported revenue of $7.9 billion, while adjusted income was $2.44 billion, 115% higher than the reported net income of $1.14 billion.
"Adjusted net income that is more than double our reported income," he added. "If this isn't stunning, I don't know what is. All due to the incredible success of the iPhone 3G."
Jobs also announced two milestones related to its phone business. "The first is that Apple beat RIM," Jobs said, noting that "RIM is a good company that makes good products. And so it is surprising that after only fifteen months on the market that we could outsell them in any quarter."
"But even more remarkable is this," he continued, "measured by revenues, Apple's become the world's third largest mobile phone supplier. I know this sounds crazy, but it's true. As measured in revenues, not units, Apple has become the third largest mobile phone supplier."
"Let's look at the ranking. Nokia is clearly number one with $12.7 billion. Samsung number two at 5.9 billion. Apple is number three at 4.6 billion, Sony Ericsson is number four with 4.2 billion. LG number five at 3.4 billion, Motorola number six with 3.2 billion and RIM number seven at 2.1 billion. Pretty amazing."
Lots of cash to throw around
Apple added another $3.7 billion in cash during the quarter, so it now has $24.5 billion "safely in the bank, and zero debt" Jobs noted. He spoke of "extraordinary opportunities" for companies in a time of economic downturn "with the cash to take advantage of them, like Apple does," but wouldn't clarify how that might relate to any specific strategies, including new efforts to acquire other companies.
Jobs did say the company's cash position "provides us tremendous stability and the ability to invest our way thorough this downturn. This is what we did during the last downturn. We increased R&D investments and created some of our best new products and businesses, like the Apple retail stores for one."
When asked how much more expensive the aluminum unibody was over conventional construction, and whether the 35% decline in aluminum pricing would show up in Apple's financials, Jobs answered, "We'd certainly sell our new MacBooks cheaper if we just delivered them with a block of aluminum. But we have to machine that aluminum, and it's a fairly precision operation. So the cost of aluminum matters some, but is not a dominant cost."
Netbooks, iPhones, and the troubled economy
Asked about PC prices in the current economy and the new netbook category that is "getting a lot of hype", Jobs said "well, again, this particular downturn is not creating a market of cheaper computers. That market has existed for some time. And there are parts of that market that we choose not to play in."
"I think that when people want a product of the class that we make, over and over again people have done the price comparisons and we're actually quite competitive. So we choose to be in some segments of the market and we choose not to be in certain segments of the market.
"So the question is, 'is the downturn going to drive some of our customers to those lower segments of the market place to buy lesser products.
"I will be surprised if that happens in large numbers. And I actually think that there are still a tremendous number of customers that we don't have, in the Windows world, or in the other 99% of the phone market that we don't have, who would like to and can afford to buy Apple products.
"We're not tremendously worried. As we look at the netbook category, that's a nascent category. As best as we can tell, there's not a lot of them being sold. You know, one of our entrants into that category if you will is the iPhone, for browsing the Internet, and doing email and all the other things that a netbook lets you do. And being connected via the cellular network wherever you are, an iPhone is a pretty good solution for that, and it fits in your pocket.
"But we'll wait and see how that nascent category evolves, and we have got some pretty interesting ideas if it does evolve," Jobs said.
Asked how well the iPhone will do in the troubled economy, Jobs replied, "We'll be glad to tell you how it does." Earlier in the call, Jobs said, "none of our competitors can deliver products in this class," and noted that cash strapped customers, "while they might postpone purchases, they are more likely to delay than switch."
Asked whether users will be likely to see a cheaper computer from Apple, Jobs answered, "I think what we want to do is deliver an increasing level of value to these customers."
"There are some customers which we chose not to serve," he added. "We don't know how to make a $500 computer that's not a piece of junk, and our DNA will not let us ship that. But we can continue to deliver greater and greater value to those customers that we choose to serve. And there's a lot of them."
"We've seen great success by focusing on certain segments of the market and not trying to be everything to everybody. So I think you can expect us to stick with that winning strategy and continue to try to add more and more value to those products in those customer bases we choose to serve."
Asked about the "digital living room opportunity and how it relates to Apple TV," Jobs replied, "well again I think the whole category is still a hobby right now. I don't think anybody has succeeded at it. And actually the experimentation has slowed down. A lot of the early companies that were trying things have faded away."
"So I have to say that given the economic conditions, given the venture capital outlook and stuff, I continue to believe that it will be a hobby in 2009."
Jobs was also asked about Tablet computing and touch screens and whether Apple has any products in the pipeline, to which he replied, "I think we have such creative people that are looking a lot of things, but I can't really talk about any of the future products we're working on, I'm sorry."
When asked why Apple only has one product offering in the vast smartphone market and what further opportunities for innovation or "other market opportunities within that market" Apple might have, Jobs replied, "I wasn't alive then, but from everything I've heard, Babe Ruth only had one home run. He just kept hitting it over and over again.
"I think that the traditional game in the phone market has been to produce a voice phone in a hundred different varieties. But as software starts to become the differentiating technology of this product category, I think that people are going to find that a hundred variations presented to a software developer is not very enticing. And most of the competitors in this phone business do not really have much experience in a software platform business."
"So we're extremely comfortable with our product strategy going forward, and we approach it as a software platform company, which is pretty different than most of our competitors."
Apple profits rise 26% on sales of 2.6M Macs, 6.8M iPhones
Notes of interest for Apple's Q4 2008 results call
Apple iPhone 3G sales surpass RIM's Blackberry
iPhone App Store continues to exceed iTunes song sales growth