Live Update: Apple financials

1:42 PT - PM:: Good afternoon, and welcome to Macworld’s coverage of Apple’s fourth-quarter earnings conference call. I’m Philip Michaels and I’ll be joined shortly by Dan Moren who will be providing his usual sterling play-by-play account of this telephone conference between Apple executives and the Wall Street analysts who track the company.

1:45 PT - PM: There will be plenty for Apple and the analysts to discuss. As our news coverage of the earnings announcement notes, Apple turned a $1.14 billion profit for the quarter on sales of $7.9 billion. The company reported earnings per share of $1.26. Those earnings were ahead of the $1.11 per share that analysts were expecting, but the revenue was slightly off target—analysts were looking for $8.05 billion there. Then again, as I mentioned in Monday's earnings preview article, the real question could be what kind of guidance Apple gives for its performance in the next quarter. That’s what we’ll be watching for when the conference call begins at 2 p.m. PT.

1:52 PT - PM: While we’re waiting, here’s how Apple’s numbers compare to last year’s fourth quarter results: revenue is up 27 percent, profits were up 26 percent, and earnings per share rose 25 percent.

1:53 PT - DM: As usual, we’re being serenaded on hold with classical music, no doubt provided by the trained trio of Oppenheimer, Cook, and treasurer Gary Whistler. I don’t know where they find the time to be classical impresarios, but it’s impressive.

1:54 PT - PM: I believe that’s “Fugue for a Tanking Economy” by Bach, Dan.

1:55 PT - DM: It’s surprisingly upbeat for that. I feel cheered somehow. Then again, maybe that’s just Apple’s numbers, which seem pretty solid.

2:00 PT - DM: We continue to hold patiently. In an almost zen-like fashion.

2:02 PT - DM: And here we go, we’re getting under way. Nancy Paxton will give us the usual boilerplate about forward-looking statements. No limitations are placed on rearward-looking statements, thankfully.

2:03 PT - DM: Heeeeeere’s Peter with introductory remarks. September quarter results record-breaking on a number of fronts. More Macs sold in history, more iPhones sold than in all quarters combined, sold more iPods than any non-holiday quarter, and their revenue and profits was higher than any September quarter ever. Net income was $1.14 billion, $1.26 per share. Oppenheimer’s reminding us that in accordance with GAAP, subscription accounting was used for iPhones and the Apple TV. Results include deferral in revenue and sales of those products. Generally recognize revenue and cost of sales for other products at times of sale.

2:04 PT - PM: If the fourth quarter numbers are any indication, Apple seems to be weathering the turbulent global economy just fine, thanks. It sold a record number of Macs, which marks the fifth time in six quarters that it’s set such a mark, if my recollection holds. It also sold a record number of iPods for a non-holiday quarter -- the December quarter, of course, is not like other quarters since that’s when everyone grabs up iPods for holiday presents. And iPhone sales were more than any other quarter... more than any other quarter combined if I heard Peter Oppenheimer correctly. That’s not the sound of a company feeling the pinch from tightening consumer spending... at least not this quarter.

2:05 PT - DM: Deferred revenue from iPhone and Apple TV renuve grew to $5.8 billion by the end of the quarter. If iPhone revenue was not deferred, it would have been 39 percent of revenue in September quarter. Plan to provide internal non-GAAP measures every quarter, detailed in the press release. Oppenheimer’s going to lay it out:

2:06 PT - DM: Adjusted sales provides more information about underlying sales trends. Calculate by backing out September quarter’s deferrred amoritization. Adjusted sales totaled $11.7 billion about $3.8 billion higher than reported revenue of $7.9 billion.

2:07 PT - DM: For the September quarter, adjusted gross margin was $4.6 billion. Adjusted net income was $2.4 billion. Non-GAAP measures provide added transparency to the business.

2:08 PT - PM: I am not too proud to admit that this explanation of accounting methods is above my tiny brain. As I’m led to believe, though, Apple is making an effort to make it easier to understand what the company actually sold during the quarter... demystifying that subscription-based accounting the company has been using to recognize iPhone sales, for example. But feel free to correct my ignorance in the forums.

2:08 PT - DM: The iPhone had a breakout quarter, thanks to iPhone 3G launch. 6.9 million iPhones shipped, exceeding 6.1 million total sales of original iPhone. And they have officially topped the goal of 10 million iPhones sold in calendar year 2008.

2:09 PT - DM: Dramatically increased number of countries in last quarter, and expect to be in over 70 by the end of September quarter. Additiion of Best Buy means over 3100 points of distribution in US and over 30,000 points of distribution around the world.

2:09 PT - DM: Over 2.6 million Macs, which was new company record for any quarter. 21 percent year over year growth, and higher than comparable PC market growth. Mac growth was impacted by speculation about new portables, and education budget cutbacks. Unsure about economic impacts. Very enthusiastic about new MacBook lines. Between 3-4 weeks of Mac channel inventory by end of quarter.

2:10 PT - PM: Note that Apple says its quarterly Mac sales may have been impacted by people putting off purchases in anticipation of upcoming product announcements (namely, last week’s MacBook family update) as well as constrained spending from the education market. (School districts, it seems, have less money to drop on new hardware these days.) Oppenheimer says the company doesn’t know whether the current economic climate had any impact on Mac sales.

2:11 PT - DM: Sold over 11 million iPods, a new record for non-holiday quarter. New lineup of iPods including 4G iPod nano, new 2G iPod touch with lower price. Both iPods incorporate iTunes Genius functionality. Remain very pleased with iPod market share, which is over 70 percent for September based on NPD’s numbers. Continue to gain share year over year in most international markets. Began and ended quarter within target range of 4-6 weeks of channel inventory.

2:11 PT - PM: There continues to be speculation on just how many iPods Apple can sell—doesn’t everyone have one already?—and yet, Apple continues to push that number ever upward.

2:12 PT - DM: iTunes Store had very good sales. Over 65 million iTunes customer accounts, and over 8 million tracks. TV sales now include HD content for all four major networks.

2:12 PT - DM: Apple Store revenues grew 37 percent year over year. Over half Macs sold to retail stores were to those new to the Mac. Over 31 new stores opened in quarter, with 247 quarters. With average of 226 open during quarter, average revenue was $7.6 million. Stores hosted new all time of 42.7 million quarters during quarter, 14.5 thousand visitors per store per week. Recently launched the fastest way to buy an iPhone: start process online, then complete activations in store in about a minute longer than takes to buy an iPod.

2:13 PT - PM: Apple wanted to open 242 stores by the end of its 2008 fiscal year. It wound up with 247. Repeating a comment I made in Monday’s article, it will be interesting to see if Peter Oppenheimer offers any guidance about retail expansion plans into the first quarter of fiscal 2009.

2:14 PT - DM: Better than anticipated gross margin due mainly to well-priced component markets. Benefited from lower cost from iPod product transition and carrier payments from original iPhones. Operating expense was higher than expected. Tax rate was 28.2%, below guidance, due to higher than anticipated mix of foreign earnings. $3.7 billion in cash, ending with $24.5 billion.

2:15 PT - DM: Looking ahead to Dec. quarter, here’s the outlook. Continue our practice of providing guidance based on GAAP, with non-GAAP measures coming in January at Q1 results. “We are going to be prudent in predicting December quarter.” Targeting revenue between $9-10 billion; gross margin between 30-31%. Seqeuntial decline in gross margin is recent introduction of new iPods and notebooks. Tax rate to be about 30.5%. EPS is forecasted between $1.06 and $1.35

2:16 PT - PM: It’s telling that Oppenheimer stressed how “prudent” Apple’s guidance is, because it’s well below what analysts have been expecting. Analysts were looking for $10.57 billion in revenue in the December quarter and earnings per share of $1.65. Expect the market to react without prudence.

2:17 PT - DM: $32.5 billion in revenue and $9.1 billion in cash for the fiscal year. And there’s a special guest, it’s Steve!

2:18 PT - PM: How special is a Steve Jobs’ appearance during the quarterly earnings call? I think he’s only been on one or two other calls since I’ve been employed by Macworld, and I’ve been working here since 1999.

2:18 PT - DM: “Some remarkable things are happening at Apple, but everything is now set against the backdrop against this economic slowdown.” He’s going to talk about the non-GAAP financial results. “Today we are also introducing non-GAAP financial results which eliminate impact of subscription accounting.” Subscription accounting spreads impact of iPhone’s contribution over two years, it makes it more difficult for average investor to evaluate overall business. “This past quarter, our iPhone business has grown to about $4.6 billion, clearly too big for Apple managers or investors to ignore.” The figures are substantially higher with subscription accounting ignored. “If this isn’t stunning, I don’t know what is. All due to the incredible success of the iPhone 3G.” Two milestones: 1) Apple beat RIM. RIM sold 6.1 million devices in last quarter vs. 6.9 million iPhones. Surprising to outsell them after 15 months in the market. 2) Measured by revenuves, Apple has become third largest mobile phone supplier.

2:22 PT - DM: Now, Steve will talk about the App Store. 200 millionth application from App Store will be downloaded tomorrow. “We’ve never seen anything like this in our careers.” 5,550 applications available. Rate of new applications submitted increasing every week. Competitors scrambling to copy the App Store. Steve thinks they’ve got the cool cycle under way, where more sales lead to more apps, leading to more sales.

2:23 PT - PM: “Competitors are scrambling to copy our App Store, but it’s not as easy as it looks,” Steve Jobs says. You hear that, Google? All snark aside, it is fascinating to see how the App Store has become a central part of Apple’s iPhone promotional efforts -- iPhone TV commercials now focus entirely on third-party applications.

2:23 PT - DM: Now Steve will touch on the notebooks just introduced. Laptops two-thirds or more of the Macs sold. A very strong launch. “The level of quality these products deliver to customers is mind-blowing.” The introduction of LED-backlit displays, over 90 percent of notebooks Apple sells use LED-backlit displays. New notebooks are greenest products Apple has ever offered. “you’ll hear more and more about this in the future.”

2:25 PT - DM: And now Steve turns to the economy. “We are not economists. Your next door neighbor can likely predict what’s going to happen as well as we can.” Steve says we are the best customers in the world. “Smartest, most product-aware customers in the market.” While they may postpone purchases, they’re unlikely to abandon Apple. More likely to delay than switch. While Apple still has a minority market share of both PCs and mobile phones, the percentage of prospective customers needed to increase market share isn’t that many.

2:26 PT - DM: Best product line in Apple’s history. New notebooks should trigger upgrade cycle in installed base. Most talented and creative employees in the world. “None of our competitors can deliver products in this class.” Almost $25 billion safely in the bank and zero debt. The ability to invest our way through the downturn. Increased R&D during last downturn. This downturn presents opportunitues for companies that have the cash to take advantage, such as Apple.

2:27 PT - PM: And there you have Apple’s five-point plan for weathering an economic downturn. That point about having the cash on hand is probably the most salient at this particular time, but Jobs’ history lesson on how Apple handled the last economic downturn in the early part of this decade—increased R&D and retail expansion—gives you a pretty good idea of how forward-looking this company is.

2:27 PT - DM: Steve thinks Apple will be stronger than ever when downturn is over. Here’s the Q&A, which Steve’s sticking around for. Any bets on how long before somebody asks about Steve’s successor?

2:27 PT - DM: Credit-Suisse: Results and guidance paint very different pictures from the economy.

2:28 PT - DM: Steve: A lot of prudence, but it’s also October, which is a difficult month for them. Sales don’t often take off until November. October and April are foggy months for us in terms of predictions. “We’re not economists and we read the same newspapers you do.”

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