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.”

2:29 PT - DM: Citi: Latest thoughts on share repurchase? Using relatively little of cash for retail store openings and investments. Returning some to shareholders?

2:29 PT - DM: Steve: Economic downturn may present extraordianry opportunities to those that have cash. Very comfortable with our cash position in the bank and it’s not burning a hole in our pocket.

2:29 PT - PM: Or to put it as The Rutles once did: All you need is cash.

2:30 PT - DM: Citi: Gross margin outlook related to higher cost of aluminum unibody; how much more expensive than previously?

2:30 PT - DM: Peter: Sequential decline really is driven from new notebooks and iPods. Many new technologies and features in those, but unibody contributed. Products would initially have higher cost, but through volume and cost engineering, they’re going to get the cost curve down over time.

2:31 PT - DM: Citi: 35 percent decline in aluminum pricing since guidance for gross margins. How fast?

2:31 PT - DM: Steve: We’d certainly sell MacBooks cheaper if we just made them a block of aluminum, but we have to machine them.

2:32 PT - DM: [Missed the name]: Pricing of Mac line: how is it positioned in this economy; what about the netbook category?

2:32 PT - DM: Steve: “This particular downturn is not creating a market of cheaper computers, that market has existed for some time. There are parts of that market we choose not to play in.” Prices are quite competitive in the segments that they choose to be in. Will downturn drive customers to lower segments? “I will be surprised if that happens in large numbers. I actually think there are still a tremendous number of customers that we don’t have in the Windows world or the 99 percent of the phone market we don’t have who would like to and can afford to buy Apple products.” Not tremendously worried.

2:33 PT - PM: That point about Apple not losing too many customers who flee to lower-priced goods touches on Jobs’ first point about Apple’s economic outlook—that the company enjoys tremendous loyalty from customers who are more likely to delay purchases rather than switch to another manufacturer.

2:33 PT - DM: Steve: Vis-a-vis netbook category, Steve thinks that the iPhone is their entry into the netbook. “A pretty good solution, and it fits in your pocket.” They’ll wait to see how it evolves and they’ve got some “pretty interesting ideas” if it does take off.

2:34 PT - PM: The iPhone as Apple’s entry into the netbook market—well, that’s one way of looking at things. Still, I wouldn’t be surprised if Apple were to inch ever closer to that category, especially if it determines there’s money to be made.

2:34 PT - DM: Analyst: About the iPhone, how do you see it doing in this economy?

2:34 PT - DM: Steve: “We’ll be glad to tell you how it does.”

2:35 PT - DM: Cross Research: Channel inventory. iPod, iPhone, Mac, comments from retailers? How things are positioned?

2:35 PT - DM: Tim: In the Mac area, began and ended quarter between 3-4 weeks of inventory, below their target of 4-5 weeks. In iPod, began and ended betwen 4-6 weeks, which is right in target range. In iPhone, shipping to carriers in 51 countries by end of quarter, and over 30,000 points of distribution. With 44 countries launched prior to end of August, at end of quarter, less than 6 weeks of inventory. Remaining seven countries launched in Sep. and Oct. there’s not enough data. About 2 million iPhones in total channel inventory across all 51 countries, and they think that’s about right.

2:36 PT - DM: Cross Research: Mac refresh impacted Mac sales last quarter?

2:36 PT - DM: Tim: 2, maybe 3 factors. 1) US K-12 sales were down 7 percent due to state and local budget constraints. California was down 28%. Significant contraction, especially purchases of 1000 units or more. If they unit sales had grown as predicted, Mac sales would have been higher. 2) Customers were delyaing purchases because of portable transitions. Rampant rumors and lots of press reports of potential portable transition. Slowing especially toward end of Sep. and begininng of Oct. Considerable rebound since last week, and very optimistic about those results.

2:36 PT - PM: So apparently the trick to staving off those annoying questions about Steve Jobs’ health is to have him appear on the conference call. I doubt there’s too many analysts out there eager to get his or her head bitten off.

2:38 PT - DM: Cross Research: Steve, can we make this a recurring event?

2:38 PT - DM: Steve: “Peter and Tim do such a good job that I don’t think I could add much.”

2:38 PT - DM: Gene Munster from Piper Jaffray: Bigger picture for iPhone in 2009?

2:39 PT - DM: Steve: “I think we have to be the best. And I think we have to not leave a price umbrella beneath us.” Working very hard to hit those. “I think we’re way out ahead of everybody else at this point.” Very committed to making iPhone a great value for customers.

2:39 PT - DM: Piper Jaffray: US vs. international phone sales?

2:40 PT - DM: Tim: Significant percentage international, but no specifics.

2:40 PT - DM: Piper Jaffray: Help us understand margins, reconcile comments last quarters vs. what we’re seeing?

2:40 PT - DM: Peter: We’ve introduced new iPods and notebooks that cost more, and that’s why the margins declined. Was hard to make comments because they don’t talk about new products, but that was the product transition that they discussed.

2:41 PT - DM: Piper Jaffray: Did you see a deceleration towards end of quarter?

2:41 PT - DM: Tim: On the iPod side, iPod was up 8 percent in whole quarter. End of Sep. and beginning of Oct. were running flat year-over-year on a worldwide perspective. Very difficult to predict whether or not usual holiday lift will happen as usual. On the Mac, did think they saw purchasing delays due to portable transition and K-12 institutional business being down.

2:42 PT - DM: Piper Jaffray: Less economy-related, more general conservatism?

2:42 PT - DM: Tim: Difficult to separate purchase delay vs. economy. Could be all one, or both, it’s hard to know. Very excited about rebound last week. Forecasting going forward is very difficult.

2:42 PT - DM: Needham: Percentage of iPhones went to new users vs. upgraders from 1G iPhones?

2:43 PT - DM: Tim: Confidential for carrier partners. But countries jumped from 6 to 51. So lots of new customers.

2:44 PT - DM: Needham: Apple did better than it would appear given the numbers, vis-a-vis RIM.

2:44 PT - DM: Steve: “We’re happy to beat them on number to number comparisons.”

2:44 PT - DM: Sanford Bernstein: iPhone volumes for Q4? Strong seasonal growth?

2:45 PT - DM: Tim: Don’t predict unit sales at a product level. But did begin shipping from many more countries in last quarter. Did have channel build, about 2 million units as mentioned. Take that into account in predicting fiscal Q1 sales. Will expand into more countries, on target for more than 70 by end of year. But countries expanding in, but less opportunity there than in existing countries (except perhaps China?). “Our crystal ball’s not working at the moment.”

2:46 PT - DM: Sanford Bernstein: Gross margin side, 30-31 percent for Q1?

2:46 PT - DM: Peter: Anticipated quarter about 30 percent in 2009 last quarter. Continue to anticipate gross margins of about 30 percent in 2009. Not going to leave an umbrella for competitors.

2:47 PT - DM: Tim: Point out the touch price dropped from $299 to $229, and units above it from $399 to $299 and $499 to $399. Doubled memory at same price on nano along with new design. Notebooks entry price from $1099 to $999, and MacBook Pro features to MacBook price range, $700 less than what was offered before.

2:48 PT - DM: Sanford Bernstein: Clarify with Steve, extraorindary opportunities for those with cash; suggesting opportunities for Apple outside of Apple, in terms of acquiring companies?

2:49 PT - DM: Steve: “Hiring every engineer in Silicon Valley is a good idea, though.” Nyuck, nyuck, nyuck.

2:50 PT - PM: Comrade Snell weighs in from across the Atlantic with this comment on Apple’s cash situation: “That’s what you do in a downturn, you plow your cash into R&D and when the turnaround hits, you have products and your opponents don’t.”

2:49 PT - DM: SB: Should we continue to see more affordable price points across Mac and iPhone lines going forward?

2:50 PT - DM: Steve: Deliver an increasing level of value. “We don’t know how to make a $500 computer that’s not a piece of junk and our DNA will not let us ship that.” But can continue to deliver greater and greater value to the customers they do serve. They’ll stick with that winning strategy by adding more value in the customer bases they serve. Capiche?

2:51 PT - DM: STM: Steve, how are you thinking about Apple TV now? Upcoming year of 2009, how’s the digital living room market?

2:52 PT - DM: Steve: The whole category’s still a hobby right now, and nobody’s succeeded at it. Experimentation has slowed down. Given economic conditions, and venture capital outlooks, continue to believe it will be a hobby in 2009.

2:52 PT - PM: Since we’re listening in on the call and you probably aren’t, believe me when I say that Jobs’ tone of voice couldn’t have been less enthusiastic about Apple TV. That’s a hobby for Apple in the same way golf is a hobby for me. And I haven’t gone golfing in four years.

2:52 PT - DM: STM: Tablets and touchscreens? More attractive opportunity going forward?

2:52 PT - DM: Steve: Such creative people that are looking at a lot of things, but can’t talk about future products.

2:53 PT - DM: STM: Supply/demand equilibrium in 2009 or anything else affecting guidance?

2:53 PT - DM: Peter: A concerning environment from credit perspective. Treasury team has done great job with cash. It’s a tough environment and they’re being as careful as they can. Hopefully won’t have issues.

2:54 PT - DM: Tim: In iPod space, at end of quarter were still filling channel to get new products at right level in channel. iPhone, though they ended with right level of channel inventory, but difficult to predict demand for quarter, but no known issues with supply. On Mac side, have significant backlogs on new products, trying to fill those as fast as possible, but will see trajectory of demand going forward. Whether it’s enough, don’t know, but can’t forecast demand. (I love all these fog, visibility, and forecast metaphors).

2:56 PT - DM: RBC Capital: Only 1 SKU in phone business, but strive to be best, what opportunities for further innovation?

2:56 PT - DM: Steve: “From everything I heard, Babe Ruth had only one home run, he just kept hitting it over and over again.” Oh, how folksy Steve.

2:57 PT - PM: That was not a very Ruthian metaphor.

2:57 PT - DM: Steve: Software is the differentiation in this category. 100 variations on same voice phone isn’t very attractive, and most competitors don’t have experience in software platform business. Approach it as a software platform, pretty different than most competitors.

2:57 PT - DM: RBC: Question about economy, price points, upgrade cycles, and more.

2:58 PT - DM: Tim: Answer differs by products. iPod, half of sales are in December. Before then, visibility is limited. In Mac, how much was purchasing delay vs. economy, will gain knowledge on that each week, but will take a little while longer.

2:59 PT - PM: And that wraps things up for this quarterly earnings call. Thanks again to Dan Moren for his mad typing skills. If all it takes for Steve Jobs to participate in a quarterly conference call is a global economic meltdown, then I’m sure we’ll all agree that it’s a small price to pay. All kidding aside, a very strong quarter for Apple under some trying circumstances. The company seems well-positioned to weather the turbulence of the next three months, though look for its lower-than-expected guidance to have a short-term impact on the stock price of Apple shares.

2:59 PT - DM: And that’s it. Details about the replay are being made available, just in case you want to hear all of Steve’s folksy remarks. It’s been a pleasure serving you folks, as usual, and we hope that when you make your next travel plans in the future, you’ll continue to fly Macworld.

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