Live Update: Apple financial conference call

2:00 PT - Dan Moren: Afternoon (or evening) to you, dear financial conference call aficionados. I'm Macworld Associate Editor Dan Moren, here to bring you the play-by-play of Apple's Q3 2008 financial results. I'm joined by Macworld.com Executive Editor Philip Michaels, playing the Tim McCarver to my Joe Buck.

2:01 PT - Philip Michaels: While we're waiting for the call to begin, let's look at the numbers Apple has already announced. The company reported a $1.07 billion profit on sales of $7.46 billion. That's the best June quarter in Apple's history. Also worth noting: Apple sold 2.496 million Macs during the quarter, which is a record number of Macs sold.

2:01 PT - P.M.: There's a lot of focus on the iPhone lately—we're as guilty of that as anyone. But this is the fourth quarter out of the last five that Apple has sold more Macs than ever before. Desktops and especially laptops remain a very important part of Apple's business, iPhone or no iPhone.

2:01 PT - D.M.: And away we go. We're getitng our introductory remarks already. They're starting remarkably promptly. Peter Oppenheimer, Tim Cook, and Gary Whistler are on hand as usual. The usual boilerplates about forward-looking statements apply (remember, Peter Oppenheimer is not the amazing Kreskin).

2:02 PT - D.M.: Peter: Highest June quarter revenue and earnings ever. These were the highest Mac shipments ever, as well as good numbers for iPod and iPhone. Higher than anticipated revenue and gross margin. Earnigns per share of $1.19. Here are a few points that demonstrate Apple's performance. Current quarter's growth (38%) is significantly above last year's June quarter (24% growth). Sales in retail stores were strong: 58% growth year over year. Store traffic 32 million, up 10 million from year-ago quarter. Apple's total revenue increased by $4.3 billion year over year for first three quarters; growth of 40%.

2:04 PT - D.M.: Mac products and services represented 61% or revenue in June quarter. Greatest number of Macs shipped ever; 41% year over year growth, and almost 3x the industry standard. Desktop sales grew 49% year over year; portables up 37% year over year. In the U.S. channels tracked by NPD, Apple's share increased to 19.5% this year from 15.4% last year. Best Mac quarter ever for education business; unit growth of 25% year over year. New all time high for quarterly Mac sales in K-12; sold more Macs in higher ed than ever in a June quarter.

2:05 PT - P.M.: Peter Oppenheimer says "We're thrilled with the momentum of the Mac business." Well, who wouldn't be? Credit the revamped iMac—introduced in April—for that 49% jump in desktop sales. Oppenheimer credits all the laptop products for the 37% rise in laptop sales, but considering this was the first full quarter that the MacBook Air was shipping, you'd have to figure that helped Apple grow its laptop business.

2:06 PT - D.M.: Music products and services account for 31% (?). iPod sales growth 10% in US, 15% internationally. iPod revenue grew 7% year over year, due to lower ASPs due to shuffle price reduction in February. Very successful in maintain high MP3 market share. (I'm getting cut out here, so unfortunately, I've got silence right now).

2:07 PT - P.M.: Let me grab the baton from Dan here. Peter Oppenheimer is recapping the quarter for the iTunes Store. Nothing you haven't heard before.

2:08 PT - D.M.: And I'm back. We're talking about iTunes and Apple's deals with the studios. 717,000 1G iPhones were sold in June quarter. $419 million in iPhone revenue realized. Reminder: did not being recognizing handset revenue for any iPhones sold on or after March 6th until iPhone 2.0 software became available. Began recognizing on July 11th, and will continue to do so for 24 months. Any handset revenue recognized in June quarter reflects prior to March 6th.

2:09 PT - D.M.: Sold 1 millionth iPhone 3G in just 3 days, in contrast to 74 days for original iPhone. Customer reaction overwhelmingly positive. Launched the App Store on July 11th with lots of fun applications. App Store currently offers more than 900; 20% free, 90% under $10. Over 25 million applications downloaded already.

2:10 PT - P.M.: Not to be a Negative Nellie here, but it's interesting that Oppenheimer did not mention either the launch problems Apple experienced on July 11 nor the widely reported shortages of iPhone 3Gs. I'm sure that might come up when the floor is opened to questions. That said, Apple has reason to crow—remember, this quarter last year covered the opening weekend of iPhone sales. (270,000 for those of you who remember your history.) Now, Apple has sold 1 million phones during an opening weekend. That's quite an improvement, even with the launch day mishaps.

2:10 PT - D.M.: Apple retail stores. $1.44 billion in revenue. 476,000 Macs sold in quarter, increase of 44% year over year, and half sold to new Mac users. Record number of trainings. Eight stores opened in quarter, including Boylston St. in Boston (represent!) and first store in Australia. $6.8 million average revenue per store in quarter. On track to end fiscal 2008 with 242 stores. First store in Beijing just opened; Swiss and German stores coming in second half of 2008.

2:12 PT - D.M.: Total gross margin exceeded expectations for several reasons that are extremely technical. Operating expenses $1.21 billion; $112 million in stock-based compensation. Tax rate was 29%, below guidance of 31%, due to higher than anticipated mix of foreign earnings. $1.33 billion in cash in the quarter. In first three quarters of fiscal 2008, generated over $5.4 billion in cash. Tremendous cash generation from iPhone sales that has not been fully reflected as earnings yet, due to subscription accounting.

2:13 PT - D.M.: Here's the forecast for next quarter. Cloudy with a chance of—oops, $7.8 billion. Under subscription accounting, iPhone sales will build signifcant revenue and earnings in future quarters. 31.5% in gross margin next quarter. Down from 34.8% in June quarter. Sequential decline expected due to full quarter impact of back to school promotion; significant product transition that can't be discussed today; and a one-time chew-up (?). Expect tax rate to be 30.5%. EPS to be about $1.00

2:14 PT - P.M.: That $7.8 billion would be 25% growth over last year's September quarter. That's significant because it's usually the forward-looking predictions that make the company's stock price rise or fall in the aftermath of this analyst call. And speaking of forward-looking predictions, what could this future product transition be? Something iPod-related? Start your speculation!

2:15 PT - D.M.: Very enthusiastic about iPhone 3G, App Store, etc. Expect revenue of fiscal 2008 to be $32.4 billion, increase of 35% year over year. Very excited about product pipeline. Now, on to questions.

2:15 PT - D.M.: STM Midwest: Future product transition effect on gross margin; is there a corresponding effect on revenue growth in Sep. quarter?

2:16 PT - D.M.: Peter: Revenue of about $7.8 billion; 25% growth over last Sep. Have included full quarter ASP impact of back-to-school promotion, future product transition that I can't discuss, and elasticity from shuffle price reduction. Very happy with our revenue growth; best Mac quarter ever, etc. etc. It's a classic Oppenhimer question dodge! (TM)

2:16 PT - P.M.: The first analyst to ask a question suggested the revenue estimate for September sounds conservative.

2:17 PT - D.M.: Followup: Apple's penetration in emerging markets? Additional color in international sales?

2:18 PT - D.M.: Tim'll take the reins. Europe revenue grew at 43%; Japan for third straight quarter has grown higher than overall company at 40%. Asia-Pacific continues to do very well: year over year in Mac area of 53%. Europe is growing about 4x market for Macs; Japan's growing about 4-5x and Asia-Pacific at 2-3x. Several developing markets growing over 50% in revenue year over year: China, Russia, Latin America, for example. Also saw some of more mature markets growing over 50% year over year: France, Germany, Australia, etc. Very strong quarter in every major geographic region. Very happy with what we see for store in Beijing so far.

2:19 PT - D.M.: Followup: Any change to store expectation in next few months? Peter says 242 stores by end of fiscal '08, up 45 from last year.

2:19 PT - D.M.: Citigroup, Richard Gardner: How many Best Buy stores were added in quarter? Followup: below target range on Mac channel inventory; is target range changing?

2:20 PT - D.M.: Tim: Added about 170 Best Buy stores across quarter, with total of 570. Plan to be about 600 by end of summer. Globally have about 10,300 storefronts for the Mac, up about 1600 year over year. Annnnd silence...then channel inventory. Did end at 3-4 weeks, still feel that 4-5 weeks is appropriate target.

2:21 PT - D.M.: Lehmann Brothers: Gross margins. Changes in commodity environment? What will components do and why?

2:21 PT - D.M.: Peter jumps in to go through factors that caused better performance in June first, before Tim steps in with commodity info. In June quarter did 180 basis points better than guidance, driven by one-time true-up(?); better commodity market than anticipated. Gross margin in September 31.5%, down from 34.8% for 3 factors: full quarter impact of back to school promotion; future product transition mentioned yet again; then one-time true-up with contract manufacturer will not repeat.

2:23 PT - D.M.: Tim: On LCDs and NAND flash, expect favorable cost environment. DRAM market is entering seasonally stronger demand market. Believe price will recover from low levels. Hard drives, optical drives, most other commodities in supply/demand balance and anticipate trends following historic norms.

2:24 PT - D.M.: Citigroup: Any change in company's philosophy in margin, volumes?

2:24 PT - D.M.: Peter: We're delivering state of the art products at price points that can't be matched...make reasonable margin, but not so high as to leave room for competitors. Release new products that cost more because they deliver entirely new value to customers; then, they drive prices down as they continue. Gross margins about 30% in fiscal 2009. Very confident in pipeline, growth opportunities, etc.

2:25 PT - D.M.: Citigroup: Asking as respectfully as possible...and it's the Steve Jobs health question! For the win! Really sorry to ask, because it's a very private matter. Apologize in advance for having asked the question.

2:26 PT - D.M.: Peter: Steve loves Apple, serves at the pleasure of the board, and has no plans of leaving Apple. Steve's health is a private matter.

2:25 PT - P.M.: Well, that was awkward. But at the risk of coming across as insensitive, it's a valid question—few companies are as publicly identified with their CEO as Apple is with Steve Jobs. Health is a private issue, certainly, but the pressure is going to always be on Apple to outline its plans for succession.

2:26 PT - D.M.: Peter: Capital expenditures in quarter, spent $113 million in retail stores; $191 million outside of retail stores (IT facilities, manufacturing, etc.). $1.2 billion in capital expenditures in the future.

2:27 PT - D.M.: Question: Apple TV? Number of video rentals, or how the launch of that service has impacted hardware sales?

2:27 PT - D.M.: Tim: Pleased with sales of Apple TV sales since February. But Apple TV remains a "hobby" because business is not nearly as large as others, and does not have potential of the iPhone business, but continued to invest in it.

2:28 PT - D.M.: Charles Wolff from Needham: Division of iPod sales between US and international?

2:28 PT - D.M.: Peter: Don't specifically break it out; but iPod sales grew 10% in US, 15% out of US.

2:28 PT - D.M.: Charles: So I should be able to solve for it [nervous laughter].

2:28 PT - D.M.: Gene Munster: iPhone's had a good launch. 2% of stores still have iPhone, but refilling channel? Braoder inventory?

2:29 PT - D.M.: Tim: Response to iPhone 3G has been stunning. Sold 1 millionth phone just three days after launch. Took 74 days to sell 1 million of first-gen iPhone and almost two years to sell 1 millionth iPod. Thrilled with what we see. There are a number of stock-outs. This is a factor of overwhelming demand. Very pleased with production ramp, trajectory of it; shipping units as fast as we can. Trying to match demand. Confident enough in production ramp, that will be launching 20 additional countries on August 22nd, bringing total to over 40, and still expect to be selling in over 70 countries by end of year.

2:30 PT - P.M.: Well, there's my inventory question—and Tim Cook seemed to answer it as definitively as one can in these things. "I like what I'm seeing in the product ramp," the COO said, which means that Apple is confident it's going to make enough phones to meet the demand for the iPhone 3G at some point. (Though Cook declined to say when.) The news that Apple plans to bring the iPhone to 20 more countries next month is also a sign that production is ramping up to Apple's satisfaction.

2:30 PT - D.M.: Tim won't predict when supply will meet demand. Been selling phone for 10 days, so can't predict with level of data.

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