Apple Earnings - Live Update

2:02 PT - DM: Welcome to our liveblog coverage of Apple's Q1 financial results. I'm your host, Macworld Associate Editor Dan Moren, alongside Macworld Editorial Director Jason Snell. Right now we're enjoying a lovely piano sonata while we're on hold waiting for the call to officially start. I wish you could hear this: it's just beautiful.

Thanks, Dan, good to be back in live-update land one week later. We already know the general shape of Apple's quarter—it's record revenue, record iPod sales, and record Mac sales. Now we get the nitty gritty. -J.S.

2:04 PT - DM: Here we go. Opening introductions are on the way. We'll have CFO Peter Oppenheimer and COO Tim Cook, as per usual. We get the usual boilerplate about forward-looking statements. One would hope they aren't backward-looking, so that's good.

2:05 PT - DM: Oppenheimer in the house. Once again, Apple is reporting their best quarter ever. 35% growth of revenue to $9.6 billion. Increase over year again quarter, domestic business revenue growing 27% year over year and international grew year-over-year by 46 percent. Net income was $1.58 billion, 58% over prior December quarter results. $1.76 earnings per share.

2:06 PT - DM: 47% of total quarterly revenue was from the Mac. 2.3 million Macs. More than 2.5x the market rate of growth in December quarter. Sales of the iMac are "very robust" growing 33% year-over-year; portables grew 38% year-over year. Extremely pleased with very successful launch of Leopard. Total Leopard revenue about $170 million in quarter, a "significant increase" over the $100 million generated by Tiger in its first quarter. 19% of the installed base estimated to already be using Leopard.

That's the third straight quarter in which Apple has re-set the record for most Macs ever sold in a quarter. To put it bluntly, Apple is currently selling more Macs than it's even sold before, and the numbers continue to increase. -J.S.

2:08 PT - DM: Music segment accounted for 50% of revenue in quarter. 22 million iPods, surpassing previous year-over-year quarter. One primary goal in holiday season establishing an entirely new iPod: the iPod touch. This model is intended to grow the market with first major mobile Wi-Fi platform. Challenge for establishing entirely new iPod at the top of the line, and it's the most expensive. iPod touch increased ASP of iPods across the line. Last week introduced five new apps and the ability to watch movie rentals. iPod market share was consistent with the year-ago quarter. Internationally, gaining market share in all European and Asian countries. Customers continue to rave about iPhones. Sold over 2.3 million iPhones. Total revenue from all iPhone was $241 million. $1.44 billion in recognized revenue.

This is the quarter where Apple books the bulk of its iPod revenue. It's "the iPod quarter." And this year, it was still setting a record, though it's clear that iPod growth is slowing. How could it not? Doesn't everyone already have an iPod? However, the high ticket price of the iPod touch means that Apple's money-per-unit on iPods is getting better. -J.S.

2:10 PT - DM: Retail segment also had record results. $1.7 billion in revenue, representing year-over-year growth. Opened third store in Manhattan which devotes entire floor to Genius Bar, personal training and Pro labs. Ended with 204 stores. Witha verage of 201 stores open, $8.5 million revenue in quarter compared to $6.6 million. 64% year-over-year growth in Mac sales. Again, over 50% of customers were new to Mac. 14.7 thousand vistors per store per week. New concierge teams were exceptionally well received by customers. Over 300,000 personal training sessions during quarter: new all-time high.

2:12 PT - DM: Total company gross margin better than expected, given favorable commodity market, cheaper components, and the weaker dollar. Very strong cash generation during quarter; cash balance is over $18.4 billion. Cash flow from operations $2.76 billion.

2:12 PT - DM: Looking ahead to March quarter. Forward-looking information: hurray. Target revenue $6.8 billion; 29% growth over prior March quarter. Total quarterly cost of non-based stock compensation $135 million. Gross margin 32%. Guiding down sequentially because of two factors: expect sequential decline of software sales as Leopard and iLife enter subsequent quarters; seasonality is always a factor. Earnings per share ~$0.94.

2:14 PT - DM: Very enthusiastic about our new announcements, including MacBook Air, movie rentals, new software for iPhone and iPod touch, and Mac Pro.

2:14 PT - DM: It's time for question-and-answer! Let's hope we don't have the same technical difficulties we had last quarter.

2:15 PT - DM: Katie at Morgan Stanley gets the first question. We're talking about the predicted revenue decline in the next quarter, which is apparently higher than in previous years. Asking for a walk through of why the prediction is lower than usual.

2:16 PT - DM: Peter: Guidance is up 29% year-over-year. Provide guidance that Apple has "reasonable confidence in achieving." Apple's gudiance is usually pretty conservative, so this isn't too surprising.

As Dan points out, Apple generally is very conservative when it comes to its predictions for following quarters. Apple likes to present good surprises, both in keynotes and in financial statements. The danger, of course, is one of these days their conservatism will prove correct, which might make the financial geniuses overshoot their own guesses. But it's worked well for Apple the past few years. -J.S.

2:17 PT - DM: Morgan Stanley: Channel inventory?

Tim Cook: Ended quarter below target range.

2:17 PT - DM: Phil at STM Midwest: Looking at Pro segment now that Creative Suite and Mac Pro are around.

Tim: Macintosh business is on fire (could he have said con fuego?). Pro audio up very significantly up year over year, video business continued to perform very well.

STM: Effect of iPhone rebates during quarter?

Peter: Customers appreciated the $100 credit. Impact of that is largely behind Apple, since they saw it in Sept. and Dec. quarters.

STM: iPhone unit expectations for 2008?

Tim: Remain very confident in hitting 10 million goal for 2008.

2:19 PT - DM: David at Goldman Sachs: Little more detail on inventory targets in the channel in terms of weeks? Implied unable to meet all the demand out there: more detail? Specifically about Mac.

Tim: Target is between 4-5 weeks of inventory. Ended quarter at significantly less than the range. Mac sales much higher than anticipated and trememndous momentum (way to spin it!).

Goldman Sachs: Can you get back to target range by March?

Tim: We don't forecast that. Embedded in guidance.

Goldman Sachs: Reaching a saturation point for MP3 players, based on small iPod sale increase?

Peter: View iPod market as bigger than just market for music player—hence, the iPod touch, which they see as the first mainstream Wi-Fi mobile platform. 17% revenue growth year over year, and they don't think it's characteristic of saturated market.

That's a nice, clear statement from Apple: "We believe one of the iPod's future directions is to become the first mainstream Wi-Fi mobile platform." In other words, that's how you get around the fact that everyone's got an iPod. Well, sure, you make a pink iPod nano. But the other thing you do is bring out the iPod touch and begin the transformation of iPod from a music-and-video device to an Internet device as well.

2:21 PT - DM: JP Morgan: Any cannibalization between iPod and iPhone?

Tim: Look at the UK, France, Germany, and there's no obvious evidence of cannibalization. iPod sales were flat in US year-over-year, so it could have been a factor, but difficult to say for sure, given possible factors.

JP Morgan: iPhone inventory?

Peter: Not providing that specifically. One vendor per country.

JP Morgan: Given success of touch, will the ASP's stabilize?

Peter: iPod ASP did increase sequentially and year-over-year, due to the succcesful intro of the iPod touch.

2:23 PT - DM: Richard at Citi: Comment on the linearity of iPod sales over the quarter, vis-a-vis normal seasonality? NPD data suggested a weakening. Any sort of rise in iPod inventory in 4-6 week range in quarter?

Tim: Look at demand curve across quarter, the curve was very similar to the curve we saw last year. In the US, NPD data suggesting that in the gift-buying season there's a different curve. Made up for by very good growth internationally.

Citi: Any concern that that is evidence the economy is heading in that direction?

Peter: We'll leave the economic forecasting to others. We're focused on managing our business. Peter is reiterating the quarterly results, which all point to good results: Mac sales, retail sales, international sales. Continuing to invest in innovation and improve the buying experience.

Citi: One final question on share buyback. $18.5 billion and no debt, probably generate $1 billion in cash flow per quarter. Predictability of earnings increasing over time, thanks to iPhone income. Use of this cash and share buyback?

Peter: Cash generation in Dec. quarter was very very strong. Cash went up by over $3 billion, $2.76 billion came from operations. Stock buyback programs and other forms of returning cash discussed with board from time-to-time, but they'd rather keep the cash on hand to make acquisitions or other spending.

2:27 PT - DM: [Missed who asked this question] Guidance question again. Feel like good things are ahead? He's asking about Peter's feelings, which seems like it might be more appropriate for a different sort of call.

Peter feels great, very confident about product line. He couldn't be more proud of the Apple team. Again, they give guidance that they have reasonable confidence in achieving.

Question: MacBook Air. Incremental in Mac units, or will it cannibalize Pro or MacBook lines?

Tim: We just announced it. The customer reaction has been great, orders "very strong," but it's too early to tell the cannibalization factor.

Question: In guidance, what are you thinking about when it comes to iPods? Cannibalization of iPhones and iPods?

Peter: In terms of assessing seasonality, what drives MP3 sales are innovative launches and the holiday buying. Expecting decline in the March quarter. Shipping the best iPods they've ever made (but then again, they always say that).

Question: Elaboration on special factors? Tim mentioned that iPods were flat in the US: possibly cannibalization. What other potential factors?

Tim: Set out to achieve 3 things in Dec. quarter with iPods: 1) hold already high-share in US, continue to grow share internationally (share gains in UK, France good), 2) sell at least number of iPod units in guidance, and 22 million not only set record, but exceeded guidance, and 3) wanted to establish an entirely new type of iPod: the iPod touch. iPod touch has potential for first wireless mobile platform "running all types of applications" (that's good news for the SDK, it seems to me). In achieving all three of these, grew iPod revenue 17% year-over-year. Highest growth rate revenue in iPod for years. Touch sacrificed unit growth, but happy with execution.

There we are again—doubt no longer that iPod touch is the future of the iPod line, and over time the iPod will transmogrify into a combination of media player and wireless mobile device with rich applications. Also a nice bit of nuance there: though this is the iPod Quarter every year, Tim Cook pointed out that the 17% year-over-year growth on the iPod this quarter is actually higher than the year-over-year growth in the last three quarters.-J.S.

2:32 PT - DM: Shannon at Cross Research: Update on Mac channels, Best Buy and distribution?

Tim: Ended the quarter with 286 Best Buy stores. Added to the Mac momentum. Elected to expand further, jointly agreeing with Best Buy to around 600 over the next six months. Very very happy with how that relationship is coming out.

Shannon: Goals for iTunes rentals? Driving incremental Apple TV sales or profability standpoint?

Peter: We've just introduced it. We think customers are really going to love it. Objective: run the iTunes Store a little above break even. They think it helps sell iPods and Macs.

Shannon: MacBook Air. Any more ideas about how it fits in product roadmap, long term? Ultramobile market more of a niche product?

Tim: We create products that we hope will appeal to all types of people. MBA will appeal to travelers, professors, all types of people who want quick access to the computer wherever they are. Superior combination of size, weight, performance, and form factor while being "very competitively priced if you look at what other people are charging for these." Great segment and great new product.

Shannon: We ordered a couple!

Tim: Orders are strong, hope you got a good place in the queue.

Let the tea-leaf-readers and Kremlinologists commence their speculation. Apple's first word on how the MacBook Air is going is: "Orders are strong." And the black dog barks at midnight. -J.S.

2:35 PT - DM: Keith at Bank of Montreal: Any help on Leopard in March quarter in terms of expectations? How did Tiger do comparatively?

Peter: As indicated, Leopard is off to great start. Customer and reviewer response "off the charts" and estimating 19% of Mac installed base already enjoying Leopard. Tiger sales were 100 million in first quarter, 35 million in second quarter. Leopard sales in first quarter were 170 million.

Keith: Expect similar trajectory over March quarter? And, vis-a-vis 19%, which direction does that go?

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