Apple Earnings Call - Live Update

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2:29 PT - DM: Goldman Sachs: Did you give a date for 2.0 iPhone software? Impact on gross margin, if any?

2:29 PT - DM: Oppenheimer: Intend to deliver iPhone 2.0 software in *late* June. Included delay in revenue of recognition in 33% gross margin for quarter. Affects iPhone handset sales only between March 6th and when we deliver software. Does not impact phones prior to March 6th or payments for carrier.

2:30 PT - DM: Godlman Sachs: Negative impact for gross margin in that period?

2:30 PT - DM: Oppenheimer: Not recognize revenue, so that will have an impact.

2:30 PT - DM: Goldman Sachs: Sequentially down revenue guidance? Any reasons?

2:31 PT - DM: Oppenheimer: Factored several things. Mac channel inventory grew 60,000 in past quarter b/c of MacBook Air launch and increased sales velocity. Also, the iPhone revenue delay. iPod sales decline sequentially. Plus shuffle price change and overseas price changes. Strong guidance and a growth rate faster than year ago quarter.

2:31 PT - JS: Here’s the explanation for the lower than expected revenue target. Mac inventory grew last quarter, they expect a seasonal decrease in iPhone sales, and the iPhone revenue won’t begin being accrued until iPhone 2.0 software ships. We shall see. Apple is generally very conservative in its estimates. This shows you how they arrive at that conservative approach.

2:32 PT - DM: Morgan Stanley: Back to margin question. Gross and operating margins both down since 2006. Reinvest margin upside to address growth opportunities internationally and in new product categories? Will decline be normal going forward, or something specific for this quarter?

2:33 PT - DM: Oppenheimer: We gave guidance for 32% gross margin, and we had 32.9%; better than expected. Continuing to come out with new and innovative products. Thinking about continuing to gain market shares in all three categories.

2:33 PT - DM: Morgan Stanley: Stil half of stores opening internationally?

2:33 PT - DM: Not exactly, but probably more internationally stores than previous. 45 new stores for the year.

2:34 PT - DM: Citi Group: More about gross margin! Looked like Leopard revenue down $100 million sequentially. Should we expect to see benefit on NAND and DRAM pricing?

2:34 PT - JS: I love—and by love I mean hate—the endless questions in these calls that try to get Apple to give little tidbits of information about their business that the company’s executives generally don’t want to provide. There are lots of circuitous questions that are asked specifically to glean tiny shards of data out of this normally secretive company. Of course, this entire call is mandated by federal regulations involving public companies disclosing financial information. Essentially, Apple is doing this because it has to. But it only discloses what it absolutely needs to, and beyond that it’s a black box, by choice. Hearing the push and pull is fascinating, especially when I’m not the one doing the pushing (for once).

2:35 PT - DM: Oppenheimer: Leopard revenue was $170 million in January. Just over $40 million in March quarter. Together: $210 million in first half. Leopard is best selling release in our history. Sequential decline in Leopard and iLife/iWork were bit greater than thought, so impact of sequential decline a bit bigger. Also, lower sequential revenue, and iTunes was a bigger mix of quarter this business than last, and it has lower gross margin as well. Number of factors played into gross margin coming down.

2:36 PT - DM: Cook: Component advantages were large during quarter and those offset most of the points Peter talked about: shuffle price cut, international price cuts, higher mix of iTunes, and lower overall revenue and effect on the structure. Did receive significant benefit in DRAM and NAND.

2:37 PT - DM: Citi Group: What gives you confidence that NAND and DRAM will continue to be favorable going into next quarter?

2:38 PT - DM: Cook: Favorable does not mean it goes lower than where it was; we envision it trading in a fairly narrow trading range, and thus not *increasing* that much heading into the quarter. Probably won’t get lower, though.

2:38 PT - DM: Bear Stearns (hey, they still exist!): Give us a sense of what delay in iPhone recognition meant to current quarter? Tax rate down this quarter? Any impact from consumer behavior?

2:39 PT - DM: Oppenheimer: In terms of the consumer, we had a very good Dec. quarter and amazing March quarter. Revenues in US grew 40% year over year, Mac shipments were up 51% in US. 34 million people in 208 retail stores, most of which are in the US. Business performed exceptionally well, across all customer segments, including retail stores.

2:40 PT - DM: Opp: In terms of tax rate, forecasting 32% for year, with higher mix of foreign earnings from Marc. quarter and lower interest income (b/c rate environment), tax rate for the year looks to be 31%, so that’s what they’re forecasting for next two quarters.

2:41 PT - DM: Bear Stearns: iPhone revenue?

2:41 PT - DM: Opp: 1.7 million phones sold during quarter. Recognized revenue over 24 months. (He’s about to let Gary answer a question!)

2:42 PT - DM: Gary: You asked if anything in OI&E other than lower effective yields, but the short answer is “No.” The yield on portfolio has dropped slightly. No material write offs in portfolio—holy cow, I don’t know what he’s saying. But I <3 Gary Wipfler!

2:42 PT - DM: Bear Stearns: What are you going to do with all that cash?

2:43 PT - DM: Opp: No change.

2:43 PT - DM: Piper Jaffray: And we’re back to the iPhone revenue recognition delay.

2:43 PT - DM: Opp: Delay recognition of revenue and product cost of iPhone, but will continue to expense operating expenses on advertising, engineering, period costs, etc.

2:43 PT - DM: PJ: Charging for iPhone 2.0 for those who bought before March 6th?

2:44 PT - DM: Opp says it’s free.

2:44 PT - DM: PJ: Why deferring after March 6th if everybody gets it for free?

2:44 PT - DM: Opp: Customers presuming when they bought it that they’d get it for free. Proper accounting.

2:44 PT - DM: PJ: Will iPhone availability creep back up for quarter?

2:44 PT - DM: Cook: Shipping product everyday, but won’t forecast exact in stock figures. Factored into guidance.

2:45 PT - DM: Cross Research: Pricing of European carrier partners? Any commentary?

2:45 PT - DM: Cook: Carrier partners are free to price iPhone as low as they wish, but won’t comment on specific arrangement b/c it’s confidential (snap!).

2:45 PT - DM: Cross: Maintaining 2.5G iPhone when 3G is out?

2:46 PT - DM: Cook: Won’t comment on new products.

2:46 PT - DM: Cross: Had to try! (That gets a laugh from Tim). Any comments about linearity during quarter and geopgrahy?

2:46 PT - DM: Cook: Strength in all geopgrahies, up in Europe, Japan, US, Asia/Pacific. All multiples compared to market growth. Consumer very strong. Pro had a nice pickup last quarter; Mac Pro sold more units since its debut with Intel processor. Overall, strength everywhere.

2:47 PT - DM: Cook: only unusual thing on linearity, MacBook Air started shipping late. End of March, near supply/demand balance on it. iPhone, outstripped supply towards end of quarter, because sold more than expected. Thought there would be more sequential decline (we call this spinning bad news into good!), but demand remained strong.

2:48 PT - DM: Cross: MacBook Air, gross margins. Any comment?

2:48 PT - DM: Cook: The customers love it! (That gets a laugh from Cross).

2:48 PT - DM: Banc of Montreal: When you ship SDK, is there a catch up point for phones that were shipped?

2:49 PT - DM: Oppenheimer: Begin to recognize revenue and product cost once we ship 2.0 software over the remaining lives for the phone. “Ratably” from that point for the remaining port.

2:49 PT - DM: BoM: Gross margins. Again. Other large drivers of change on year over year basis. Mix of CPUs vs. iPod favorable or unfavorable?

2:50 PT - DM: Opp: Hard to do year over year margin comparisons. Traditionally talked about it on sequential level.

2:50 PT - DM: BoM: Is there deviation in operating segments in amount of gross margin reported by geography? Variance in terms of geography materially different from company as a whole?

2:51 PT - DM: Opp: We’ll put out 10-Q in next week or so, segment reporting will be there. Look at prior 10-Qs to see gross margins in segments. Little bit of variability, but happy with all segments.

2:51 PT - DM: Shaw Wu! Shaw! Everybody loves Shaw Wu!: Any color on acquisition of PA Semi?

2:51 PT - DM: Opp: We occasionally buy smaller technology companies from time-to-time, so we don’t comment on our purpose or plan, so I can’t.

2:52 PT - DM: Merill Lynch: On Mac side. PC growth usually down quarter-over-quarter, given strength accelerated to 3x market growth, any seasonality for June quarter?

2:52 PT - DM: Opp: Generally see in June sequential increase in Mac shipments as educational buying season begins. June quarter tends to be weighted towards K-12, at lower ASPs, and Sep quarter more weighted towards higher education.

2:53 PT - DM: ML: Re unlocking, seen any late activations of iPhone from holiday quarter? Vis-a-vis unlocking.

2:53 PT - DM: Opp: As Tim said, it’s hard to estimate. Unlocking is occurring and it’s significant. Our view is that it’s clear interest of demand globally. Hearing reports of iPhones being used in many countries, so it gives us confidence for shipping 10 million in 2008.

2:54 PT - DM: Sanford Bernstein: Can you reconcile US shortages with European price cuts? No undersupply in Europe? Noticeably different demand profile in US vs. Europe, and why not ship phones from Europe to US to meet demand?

2:55 PT - DM: Cook: Believe American stores more succeptable due to people in US buying many, unlocking, and exporting.

2:54 PT - JS: I love that Apple uses the fact that people are buying iPhones and shipping them to foreign countries to be unlocked as a positive. It’s true, it shows great demand, and Apple’s still making a profit on those phones, even without the carrier stuff. It’s true—the iPhone is a big hit overseas, even without deals in many countries. Imagine how well it might do once there’s a more straightforward path to buying it in those countries.

2:55 PT - DM: Cook: In aggregate both Europe and US are low.

2:55 PT - DM: SB: Channel inventory also low during stock outs? Why couldn’t you better balance allocation of units?

2:56 PT - DM: Cook: Once units ship, ability to move them from carrier to carrier is very low. Short term cases of some imbalance. Major point (let’s get back on message): we sold more than we thought we would.

2:56 PT - DM: SB: Sold more Europe than you thought you would?

2:56 PT - DM: Cook: In total, sold more than we thought we would. Expected sharper season decline. First Q1 to Q2 in phone business, so we’ve learned something.

2:57 PT - DM: SB: Last quarter, said not comfortable discussing unlock percentages. Better read on that now? Why the reticence now discussing the number?

2:57 PT - DM: Cook: Don’t feel that we can quantify with precision, so we don’t want to put out a number we can’t stand behind. Go out of our way to classify number as “significant.” Don’t know how we can be more clear than that.

2:58 PT - DM: SB: In Macs, ASPs declined. How to we reconcile that?

2:58 PT - DM: Opp: ASP decline was slight both sequentially and year over year. Largely driven by the transition in quarter and some mix shifts within MacBook/MacBook Pro lines. Small, though.

2:58 PT - DM: Needham and Company: Any color on demographic of MacBook Air purchasers? Numbers suggest selling better than just for Road Warriors. Any sense of how many Windows users purchased Air?

2:59 PT - JS: And let me just say, the voice of Charlie from Needham and company is awesome. He sounds like Johnny Cash. What a great final questioner to go out on!

2:59 PT - DM: Cook: Appealing to all sorts of people. Seems to have universal appeal. Cannibalization factor extremely low for other portables. Part of the reason for a minor sequnetial decline. But can’t offer info on Windows users.

3:00 PT - DM: And that’s it! We’re getting the details about telephone replay, podcast, webcast, etc. We’ll see you in three months!

3:00 PT - JS: Thanks for being here, everybody, and thanks to Dan Moren for doing all the fast fancy fingerwork. We liveblog the financial conference calls so you don’t have to!

The event has ended.

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