Apple FY 07 fourth quarter call - Live Coverage

Our coverage of Apple’s call with financial analysts to discuss its fourth quarter FY07 earnings has concluded. For more information, visit our home page.

On Monday, Apple reported a $904 million profit on revenue of $6.22 billion for its fiscal fourth quarter, $1.01 per diluted share. The results topped analysts’ expectations, which came in at $.86 per share.

In his preamble before taking calls from financial analysts, Apple CFO Peter Oppenheimer said that Apple reported its highest September quarter revenue earnings in its history. The company saw record Mac sales and continued strong demand for iPods.

Apple’s gross margins and revenue were both higher than the company anticipated, according to Oppenheimer. Mac products and services generated 62 percent of the company’s total quarterly earnings, and showed 34 percent growth year over year. On a worldwide basis, Apple’s growth rate was twice IDC’s most recently published growth rate for September, for the PC market.

Oppenheimer said that customers are responding very favorably to the newly redesigned aluminum-clad iMacs, with 32 percent growth in the desktop segment. Demand for MacBook and MacBook Pro laptops remains strong — resulting in 37 percent growth over the previous quarter, and 62 percent of all Macs sold.

Music

Apple sold 10.2 million iPods for the quarter, representing a 17 percent growth year-over-year. Reactions from customers have been very positive, according to Oppenheimer, who said that Apple is shipping its best lineup of iPods ever as it heads into the holiday buying season.

In other music news, the iTunes Music Store has sold more than 3 billion songs and 100 million TV shows to date. Oppenheimer noted that 17 percent of all global music sales in the first half of 2007 were digital, compared to 11 percent in all of 2006.

“We believe the popularity of iTunes has been instrumental to the growth in this area,” said Oppenheimer. “iTunes continues to be the third largest distributor of music in the U.S., passing Target and Amazon.”

Apple now counts more than 40,000 retail locations worldwide that sell the iPod. The company also added 2,000 new locations to buy Macs during the last year, to around 8,700 at the moment.

iPhones

Apple moved 1.1 million iPhones for the fourth quarter, and the device has engendered a very positive reaction from its users, with 95 percent of them saying they’d recommend the product to others.

Apple is offering $100 credits to early iPhone users who purchased the phones when they $200 more than they are now. Apple expects the majority of these redemptions to hit its finances by the end of the December quarter, although the credit is accounted for as it is redeemed.

iPhones will be released in Europe on Nov. 9, with O2 releasing the phone in the UK and T-Mobile releasing it Germany. Orange will release the phone in France starting Nov. 29.

Apple COO Tim Cook admits that Apple saw iPhone sales “accelerate” following the price drop from $599 to $399.

Oppenheimer said that Apple estimates that 250,000 iPhone buyers bought the device with the intention of unlocking it.

Retail Stores

Apple’s retail stores have once again generated record quarterly revenue and traffic, with $1.25 billion or 42 percent year over year growth. The stores generated $268 million is segment margin, compared to $156 million for the same quarter a year ago.

Apple’s dangerously close to opening 200 stores — it exited the quarter with 12 new stores, to total 197. The average revenue per store was $6.6 million, up $1 million per store for the same quarter a year ago. Stores sold 473,000 Macs, half of which went to first-time Mac owners — an average that’s stayed the same ever since Apple opened its first retail locations.

Apple anticipated that it will open forty more stores in the coming year, including new stores in New York, Boston and, for the first time, China.

Forecast

For its December quarter, Apple is targeting revenue of $9.2 billion with gross margin at 31 percent. The company is guiding gross margin down sequentially because of the full-quarter impact of product transitions and pricing, lower anticipated sales of its iLife and iWork software suites, seasonally higher component costs, and a higher mix of indirect sales.

“We’re extremely proud of our record-breaking fiscal results for FY 07,” said Oppenheimer. Apple has generated more than $24 billion in revenue and $3.5 billion in net income, selling 7 million Macs and 52 million iPods. The company has sold more than 1 million iPhones in 74 days, and Apple retail stores have seen more than 100 million visitors and $4.1 billion in revenue.

Q&A

Oppenheimer explained that Apple recognizes revenue from handset sales over a 24-month period (the duration of the contract with AT&T). That includes the amortization of handsets, accessory sales and payments from AT&T, and it totaled $118 million for this quarter.

Apple COO Tim Cook revealed that the company’s strategic efforts with big box retailer Best Buy continue: The company’s products are now in 230 stores, and Apple anticipates 270 Best Buys to be selling Apple products by the end of the calendar year.

Cook characterized Apple as “thrilled” with its performance in the European market, after an analyst asked about European segment growth. He believes that Apple’s introduction of new iPods and iMacs was enough to compensate for a typical seasonal lull Apple season in that market in late summer.

Oppenheimer said that the holiday quarter — the quarter Apple is presently operating in — is typically the strongest for iPods, and Apple is shipping “the best iPods we’ve ever made” this quarter.

Cook dodged a question on whether the iPod saw any “cannibalization” of its marketshare by the iPhone prior to the release of the iPod touch. There was no obvious cannibalization prior to the announcement of the new iPods, and Cook said Apple plans to offer more information on that point in January. He added that Apple has seen “incredible growth” in its video and audio business, driven by pro products like Final Cut Studio and Logic.

The “vast majority” of Macs shipped in the last four years can run Mac OS X v10.5 “Leopard,” according to Tim Cook — about 21 million all told. “When we announced Tiger [Mac OS X v10.4], there were 15 million units that were eligible to run Tiger, and we did $100 million of revenue on Tiger in the first quarter of launch.”

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