Live Update: Apple FY07 Q2 conference call
Apple on Wednesday reported its most profitable March quarter ever — revenues of $5.26 billion and a net quarterly profit of $770 million, or $.87 per diluted share.
The company shipped 1.517 million Macs and 10.549 million iPods during the quarter — that’s 36 percent growth in Macs and 24 percent growth in iPods year over year. In a statement announcing the earnings, Apple CEO Steve Jobs said that Mac sales are growing at 36 percent, more than three times the industry growth rate according to IDC analysis.
The call started as it always does — with a disclaimer from Apple investor relations contact Nancy Paxton, and a preamble from Apple COO Peter Oppenheimer, who restated the same information in Apple’s earnings statement, which hit the news wire about half an hour before the call began.
Music products and services represented about 44 percent of Apple’s revenue, said Oppenheimer. The iTunes Store helped other music revenue grow 35 percent year over year, he said.
Apple opened seven new retail stores in the quarter. Average revenue per store was $5 million. Oppenheimer said that Apple will open a third store in Manhattan at 14th St. and 9th Ave., in New York’s Meatpacking (Mepa) district.
Oppenheimer turned his attention to the iPhone, which will ship in June and be available from AT&T (formerly Cingular). Oppenheimer said that Apple will offer free new software and features in the iPhone after it initially ships. As a result, the company plans to adopt a subscription-oriented accounting policy on a straightline basis in order to properly report the revenue derived from the iPhone.
Oppenheimer said the same goes for the Apple TV, Apple’s recently released interface that makes it possible to stream digital video from a Mac or PC to a home entertainment system. Apple will offer new features as time goes on, and account for the Apple TV similarly to the iPhone.
This doesn’t set the stage for Apple to begin offering subscription-based content, according to a clarification from Oppenheimer during the analyst Q&A. Instead, Oppenheimer intimated that it’s an accounting maneuver to enable Apple to comply with SEC regulations regarding the reporting of revenue while continuing to improve the hardware with new capabilities via software updtes.
Apple anticipates revenues of approximately $5.1 billion for the current quarter, with earnings per share of about 66 cents, according to Oppenheimer. In the Q&A session afterwards, he said that the lower revenue numbers are seen by Apple as a seasonal market issue associated with iPod sales from the March to June quarters, similar to what Apple saw last year. He said the quarterly transition “isn’t as strong from a consumer perspective.”
Apple’s first question from financial analysts came in relation to the backdating scandal that has embroiled Apple’s former CFO Fred Anderson and corporate counsel Nancy Heinen. Oppenheimer pointed to a statement published earlier this afternoon by Apple’s Board of Directors stating its support of Steve Jobs, and said that Jobs has cooperated fully with Apple’s own internal investigation and an SEC investigation.
Apple COO Tim Cook indicated that there’s “no issue” with staffing regarding Leopard’s recently announced delay. “We had always planned to use Mac OS resources to complete iPhone,” but it’s simply taken longer for Apple to finish Leopard and iPhone than expected.
Oppenheimer and Cook were careful to note to analysts that this quarter saw an unexpectedly high gross margin level, thanks to lower-than-expected prices of commodity components including NAND flash memory (used in the popular iPod nano and iPod shuffle). Oppenheimer stressed that this was an unusual phenomenon, and that analysts should not expect this to continue.
“It’s very difficult to tell what the demand for a product is before you ship it,” said Cook, when asked about whether Apple will be able to keep up with demand for the iPhone when it is released in June. “I haven’t started ramp yet,” said Cook, so he’s not willing to guess about whether Apple will be able to meet demand.
Apple’s seen a huge uptick in the sales of accessories designed to work with iPods as the devices have grown in popularity; such accessories take up a large chunk of the shelf space at Apple retail stores. Oppenheimer indicated that Apple will also offer iPhone accessories in anticipation that iPhone users will be similarly interested.
Cook noted that Apple recently announced an expansion of its relationship with nationwide electronics retailer Best Buy, expanding to 200 of Best Buy’s retail locations. He indicated that the company has some new merchandising plans with Best Buy that will be introduced in the coming months.
Cook suggested that Apple’s computers are “competitively priced,” as evidenced by the enormous year-over-year growth in Mac sales. Cook said that outside of Japan, the company is seeing hugely expanded Mac sales in every geographical operating region worldwide.
“Japan is a very challenging market for us,” said Cook. The MP3 market isn’t growing there he said. Apple is making efforts to turn things around in merchandising the Mac, he said, but he added that it’s the only major region in the world where Apple isn’t growing market share, and he called it “very frustrating.”
Macworld’s live coverage of Apple’s call with financial analysts has concluded. Visit our home page for additional news.