1:52 PT - JS: Hi everybody, this is Jason Snell, Editorial Director of Macworld, and I'm here (virtually) with Associate Editor Dan Moren to discuss Apple's latest financial results. We'll be covering Apple's conference call with analysts here, live, beginning at 2 p.m. Pacific time today.
1:53 PT - DM: Or 5 p.m. Eastern if you happen to be joining us from the East coast, as I am. Never mind that timestamp! It's all lies.
1:53 PT - JS: You can get more information about the results themselves in detail in our news story, which will be updated regularly over the next hour or more. Keep hitting that reload button, folks!
1:54 PT - DM: But to give a quick sum-up of the results as already posted, the general perception seems to be: what failing economy? Apple's once against posting record revenue, record profits, and record sales despite the troubles facing the . Pretty impressive.
1:55 PT - JS: We can already say that this was the best Apple quarter ever -- yet again. Just when you think the iPod couldn't sell more units, this year's holiday-quarter sales once again broke the record, although it's definitely showing slowed growth (three percent more iPods were sold this holiday quarter than last), but it's a growth rate that's not far off from what we've seen the last few quarters. However, iPod revenue was down a bit, which is interesting -- and might be a sign of the troubled economy.
1:57 PT - JS: On the Mac side, it was a strong (albeit not record-breaking) quarter, but what's most interesting is that the acceleration of laptops as the main portion of the Mac product line continued. Desktop sales crashed, but laptop sales were up. A full 71 percent of the Macs sold last quarter were laptops, which is a record. For the last couple of years it's been more like 60 percent, and if you go back five years, laptops were more of a half-and-half proposition.
1:57 PT - DM: I don't think that's really that surprising; when I look around these days, I'm seeing everybody using laptops more and more. It also doesn't hurt that Apple rolled out redesigned MacBooks at the beginning of this quarter. Apple's notebook line-up is, in many ways, more fleshed-out than their desktop line-up.
2:01 PT - DM: And here we go. We're being welomed to the conference call. Here come the introductory remarks. As usual, we'll be hearing from CFO Peter Oppenheimer, COO Tim Cook, and the quiet man, Treasurer Gary Whistler. There will be the usual forward-looking statements that shouldn't be taken as gospel because, of course, the Apple executives can't see the future...yet.
2:02 PT - DM: Here's Peter. "We're extremely pleased to have record results for December quarter. Surpassing $10 bilion in quarterly revenue for first time in Apple's history. We entered the holiday season with our best product lineup ever and our customers responded." 6% growth over prior quarter's results. Operating marginw as 20.9% due to higher gross margin. Translated to earnings per share of $1.78.
2:03 PT - DM: Non-GAAP measures are being used, fully described in the press release. Adjusted sales $11.8 billion, $1.6 billion than reported revenue. Adjusted gross margin 4.5 billion; 1 billion higher than reported.
2:03 PT - JS: Non-GAAP means they're talking about how much money Apple took in during the quarter, versus how much they're officially accounting for this quarter -- this is because Apple defers some money over the life of a few products, specifically the iPhone, making it harder to gauge how good a particular quarter was if you use the official "GAAP" numbers.
2:04 PT - DM: Mac products and services first. Sold 2.5 million Macs, 9% growth over prior December quarter results. Very solid growth, partiocularly in contrast to the rest of the market. Latest update from IDC numbers estimated that the overall market for PCs contracted last quarter. Customer response to new MacBooks and MacBook Pros strong, year-over-year growth of 34 percent laptop growth. Desktop unit sales declined by 25% year-over-year. Prior December quarter, desktop sales grew at large rate due to new iMacs. Year-over-year decline is a reflection of shift towards portables and customer response to October announcement. 16% contraction in global desktop shipments during December quarter. Very pleased with overall Mac share gains and believe iLife '09 and iWork '09 will set Mac farther ahead competition. Began and ended quarter with 3-4 weeks of channel inventory.
2:06 PT - JS: So the short version is, the introduction of the new MacBook and MacBook Pro was a hit, because that's what drove the bulk of new Mac sales in the quarter.
2:06 PT - DM: 22.7 million iPods. 3% growth over year again quarter. Thrilled with customer response of new iPods: new iPod nano and iPod touch. The breadth of content on App Store has helped bolster iPod touch. Remain very pleased with iPod market share. Share is over 70% in month of December, based on NPD's numbers. Continue to gain share in international markets. iPod share of MP3 market over 70% in UK and Australia; over 60% in Japan; over 50% in Canada. Year-over-year share gains in France, Germany, Italy, and Spain. Ended quarter in target range of 4-6 weeks of channel inventory.
2:07 PT - DM: iTunes Store had good quarter as well. Biggest music quarter ever included highest sales ever for Christmas Day and Christmas week. Developer and customer excitement has been incredible for App Store. Over 15,000 application, increase of over 10,000 since last conference call. Customer downloads have topped 500 million.
2:08 PT - DM: 4.4 million iPhones sold. Cumulative iPhone sales for 2008 were 13.7 million, well ahead of 10 million target. Selling in over 70 countries by end of quarter. Recognized revenue was $1.25 billion, compared to $241 million in year ago quarter. Sales value of iPhones sold during quarter over $2.6 billion.
2:08 PT - DM: Based on 2008 customer satisfication study, J.D. Power & Associates ranked iPhone in overall customer satisifaction for business smartphone users. More than RIM, Windows, Palm combined for ad hits on the iPhone. Competitors are scrambling to try and copy success. Reiterating that software is the key ingredient for mobile experience.
2:10 PT - DM: Apple Retail store segments. 46.7 million vistitors, 14.4 thousand visitors per store per week. Revenue grew 2% year over year. Average store revenue was down, reflecting "difficult retail environment" in the U.S.Average per-store revenue was $7 million, compared to $8.5 million in the year-ago quarter, and margin was down as well. Very difficult retail market. Expanded with Best Buy this year. A lot more bundling with iPods this year. Stores performed very well during December quarter. Ended quarter with 251 stores, in 10 countries. During quarter, opened first store in Germany in Munich. Stores achieved highest ever service volumes; record numbers for Genius Bars and training. 34.7 percent gross margin. Due to more favorable component pricing market; lower transportation, warranty costs, etc. Operating expernse $1.4 billion. Total op-ex below low-end of guidance range, as a result of lower spending, particularly sales and marketing.
2:11 PT - JS: For a while now Apple has been claiming that half the Macs they sell at its retail stores were to new Mac buyers. This is the first time they've said "almost half," instead of actually half. So it's less than 50%, but still an impressive number.
2:12 PT - DM: Congressional approval of one time R&D tax credit lowered tax rate. $28.1 billion in cash and short-term investment. Compared to $24.5 billion; increase of over $3.6 billion. Changed accounting practice in December quarter. Investment priority continues to be preservation of capital. Short-dated high quality investments. Cash flow from operations over $3.9 billion.
2:13 PT - DM: Here's the outlook for next quarter. Continue providing guidance based on GAAP. Forecast is challenging and therefore providing broad range of guidance. Between $7.6-8 billion revenue; gross margin 32.5%, compared to 34.7% in December quarter. Sequential decline reflects stronger U.S. dollar, favorable supply chain situation is not recurring, and sequentially lower revenue. Tax rate to be about 31%. Earnings per share to be $0.90-$1.00.
2:15 PT - DM: "We are fortunate to have the world's best customers and employees, especially in these difficult times. We are continuing to focus on developing the industry's most innovative products. And we're very excited about our new product pipeline." And now we're going to Q&A.
2:16 PT - DM: Barclays Capitals: And he's going to ask how Steve is. It's the first question, folks. Will the company run different or the same under Tim? Is Tim the likely candidate if worst case scenario where Steve is unable to return.
2:16 PT - DM: Peter: Steve is the CEO of Apple and plans to remain in major strategic decisions; Tim is responsible for day-to-day operations.
2:17 PT - DM: Tim: Ben, I think, let me add something to that, and back up just a bit. There is an extraordinary breadth and depth and tenure among the Apple executive team. And these executives lead over 35,000 employees that I would call all 'wicked smart'. And that's in all areas of the company, from engineering, to marketing, to operations, sales, and all the rest. And the values of compay are extremely well-entrenched. You know, we believe we're on the face of the Earth to make great products, and that's not changing. We're constantly focusing on innovating. We believe in the simple not the complex. We believe that we need to own and control the primary technologies behind the products that we make, and participate only in markets where we can make a significant contribution. We believe in saying no to thousands of projects to that we can really focus on the few that are truly important and meaningful to us. We believe in deep collaboration and cross-pollinization of our groups which allows us to innovate in a way others can not. And frankly, we don't settle for anything less than excellence in every group in the company, and we have the self-honesty to admit where we're wrong, and the courage to change. And I think regardless of who is in what job, those values are so embedded in this company that Apple will do extremely well. And I would just reiterate a point Peter made in his opening comment, that I strongly believe that Apple is doing the best work in its history.
2:18 PT - DM: Barclays: Wish you all the best and Steve as well. On retail: with flat performance sequentially, are you planning on scaling down your expansion? Anything to concern about long-term if impact is slowing, given environment?
2:19 PT - DM: Peter: Plan to open about 25 stores in fiscal '09; about half internationally. Ron and his team are continuing to be very selective. Very confident in our stores and the assets that we're building.
2:20 PT - DM: Credit Suisse: Mac segment is inelastic; iPod elastic. Is iPhone elastic or inelastic? Will handset price reductions eventually make sense for spurring demand?
2:20 PT - DM: Tim: This segment is clearly elastic. The price in the U.S. market has moved from $599 to $399, tremendous jump; $399 to $199 saw another jump in the run rate. $199 level includes signing up for contract, but is compelling value and see nothing in the marketplace that's anyplace close. Still believe years ahead of competition from software point of view, and throw in the App Store, we feel very very good about competitive poistion.
2:21 PT - DM: Credit Suisse: Gross-margin line. Not still reasonable to believe gross margin will average out at 30% as previously suggested?
2:22 PT - DM: Peter: Looking forward, about 30% in second half of fiscal 2009. Guidance in March quarter of 32.5% is benefiting from favorable commodity environment. Not taken the full impact of U.S. dollar strengthening. Not going to leave any pricing umbrellas.
2:23 PT - DM: Citigroup: First, wider range than normal for guidance for March quarter, but more narrow than December quarter forecast. Base of recurring revenue for iPhone, or is there something else giving confidence for business going into March?
2:24 PT - DM: Peter: Models are not as precise as they have been; visibility isn't as good as it had been in past. Prior quarters, more of a single point estimate for top line; December quarter was billion dollar range, but it's a bigger quarter with much higher sales expected. $400 million range pretty wide for Apple, though.
2:24 PT - DM: Tim: Think back to timing of guidance, banks were going down what seemed like every other day. Does seem like economy is in bad shape, but it's not as unpredictable as it was in October perhaps.
2:25 PT - DM: Citigroup: Followup, component pricing environment update from quarter to quarter. What do you do to mitigate that on cost of goods, given prices adjusted less frequently?
2:25 PT - DM: Tim: Last quarter was incredibly favorable, key factor in reason gross margin beat guidance. DRAM, NAND flash, and LCDs did much better than expected. Further reductions from those levels are not likely. Do, however, in aggregate, expect continue favorable environment on supply and price on most commodities. Still be positive overall, but not as good as Q1.