Apple Crushes Earnings, Guidance Fine

Apple (AAPL) handily beat the Street’s sales and earnings estimates for the March quarter, and June quarter guidance looks fine — conservative as usual.

No breaking news on the company’s earnings call: As usual, COO Tim Cook says he’s bored by the netbooks on the market today, but that Apple has some ideas. Apple’s CFO Peter Oppenheimer says “we look forward to Steve [Jobs] returning to Apple at the end of June.”

Apple’s iPhone shipments were particularly impressive. Apple sold 3.8 million iPhones during the quarter, beating the Street’s 3.3 million consensus (and some of today’s revisions to 3.7 million following AT&T’s release this morning). iPod shipments beat expectations, too. Apple sold 11 million iPods last quarter, beating the Street’s estimate by 1 million, or 10%.

Mac sales are a different story. Apple reported 2.22 million Mac shipments during the March quarter, slightly beating consensus of 2.1 million, but down 3% year-over-year. That’s the first time Mac shipments dropped year-over-year since 2003.

Join us for LIVE coverage of Apple’s earnings call at 5 p.m. ET and join our LIVE DISCUSSION here in a different tab.

LIVE Conference call notes: (Refresh for the latest.)

4:59 On hold! Soothing music today.

5:01 Still waiting. BTW, Steve Jobs NOT expected to join the call today. Would be a nice surprise, but not expecting him.

5:03 Call begins. Here’s IR director. Standard disclaimers. CFO Oppenheimer, COO Tim Cook and treasurer here too.

5:04 PO: Thanks for joining us. Extremely pleased to report best non-holiday quarter in our history. Very pleased with our performance in this economy. 9% y/y revenue growth. Operating margin 20.4%, one of highest ever. Net income $1.2 billion.

5:05 Adjusted sales $9.06 billion, adjusted net income $1.66 billion. Non-GAAP provide added transparency. (Get rid of subscription accounting effects.)

5:06 Mac sales down 3%, but tough comparison because of 51% y/y growth during last year’s Q1 because of MacBook Air launch. Overall sellthrough was flat. Given tough comp and tough environment, feel very positive about Mac performance.

5:07 Excited about iWork and iLife. Now music. Sold over 11 million iPods, a new March qtr record and 3% growth. Very strong growth in iPod touch.

5:07 Over 70% market share in MP3 players says NPD.

5:08 iTunes store delivered another great quarter. DRM-free iTunes plus titles are new. As well as thousands of independent artists.

5:09 Within hours of 1 billionth iPhone app store download. Continue to believe we’re years ahead of the competition.

5:10 3.8 million iPhones. Up a lot. Very impressive.

5:10 Talking about iPhone 3.0 software — nothing new here.

5:11 Have delayed revenue recognition for iPhones from March 17 until it’s released this summer so they can provide iPhone 3.0 for free.

5:11 $1.47 billion from retail stores. 438k Macs, about 50% customers new to Mac. 252 stores. $5.9 million Avg revenue per store.

5:12 Hosted 39.1 million visitors, compared to 33.7 million year ago. Also record 644,000 personal training sessions. On track to open about 25 stores during fiscal 2009.

5:13 Why diff in GM from guidance: 1) Commodity and other component costs significantly lower than planned. 2) Sales of higher margin products, including software, better than planned. 3) Lower freight and warranty costs.

5:14 June quarter: Forecasting is challenging. Expect revs between $7.7-7.9 billion. Includes not recognising iPhones sold after March 17. Opex $1.35 billion. Targeting EPS $.95-1.00.

5:16 Very excited about other products in our pipeline.

5:16 Q&A to begin.

5:17 Update on pricing and component supply: Tim Cook: Believed most of excess inventory in supply chain was consumed. Component environment still being favourable on overall basis, some commodities like NAND will increase sequentially.

5:18 TC: I expect aggregated BOM to be within similar range as last quarter.

5:18 Cash flow was down y/y, first time going back for some time that cash flow from ops down. What was driving that? Anything on deferred balance that changed? Nothing with iPhone or deferred revenue or cost. Was actually very pleased with cash generation; was up over 700mm from end of Dec. quarter. Three things: First, as we talked about, did make pre-payment to LGD. Second, accounts payable down from Dec to March by over 700mm. Decline is very typical for us. That does play in. Third is our tax payments. About 1.3b in tax payments during March qtr.

5:21 Could you talk about Mac business? Desktop good, but ASP looks like down quite a bit. What’s going on? Saw acceleration in sales, allowed us on sellthrough basis to be approx equal to year before. After desktop launch, higher mix of desktops before the transition. Pushed overall ASP down. Within desktop themselves, top end of line Mac Pro — lower mix to Mac Pro — higher mix to Mac mini than before the transition. Pro products sold to creative pros weaker than they were in year-ago quarter. Mainly economic related.

5:23 In addition, education in the U.S. contracted by about 11% year-over-year; result of states not having tax revenues as projected. Hoping stimulus funds approved last quarters flow to the states.

5:24 Higher mix to $999 MacBook lowered laptop ASP. Consumer is holding up much better than the professional and much better than education.

5:25 Netbook is doing well. Do you have thoughts? For us, it’s about doing great products. When I look at what is being sold in the netbook space today, I see cramped keyboards, terrible software, junky hardware, veyr small screens, and just not a consumer expeirnce and not something we would put the Mac brand on. So it’s not a space — as it exists today — that we’re interested in, nor do we believe that customers in the long term would be interested in. That said, we do look at the space and are interested in how customers respond to it. People who want a small computer than does browsing and email might want to buy an iPod touch or iPhone. We play indirect basis. Then of course if we find a way where we can deliver an innovative product that really makes a contribution, then we’ll do that. We have some interesting ideas in this space. The product pipeline is fantastic for the Mac. As we look over the last 4+ years, 17 of the 18 quarters we’ve exceeded the market rate of growth. To exceed in this economy is an accomplishment, especially when you look at these very low-priced netbooks that are really propping up the unit numbers from an industry as a whole. Pipeline looks fantastic.

5:28 Mix on paid and free apps? We don’t disclose the free vs. paid. We are just hours away from our billionth download and couldn’t be happier with the store’s results. TC: One of the keys behind the keys of the growth of iPod this quarter was that the iPod touch more than doubled year-over-year. Sum of iPhone plus iPod touch now about 37 million units.

5:30 How should we think about long-term 30% GM target? Given guidance for June quarter at about 33%. For Sept think about 30%. Not going to make comments on fiscal 2010. We are very very focused on delivery extraordinary products. Provide ever-increasing value, not going to count on GMs that you’ve recently seen.

5:34 AT&T exclusive #1 reason why people don’t buy an iPhone. Why still exclusive? Steve Jobs update? On AT&T, we view them as a very good partner, we believe they’re the best wireless provider in the U.S., and we’re very happy to be doing business with them. They put full force and weight of company behind iPhone, very happy with relationship we have, do not have a plan to change it. We chose from beginning to focus on one phone for the whole world. When you do that, you really go down the GSM route. CDMA doesn’t really have a life to it after a point in time.

5:35 Now have Brazil Russia India, have 8000 storefronts in those 3. China we are not in yet, we would like to be in China within the next year and are clearly working on that. Nothing specific.

5:36 Look forward to Steve returning to Apple at the end of June.

5:40 iPhone price elasticity? Very good quarter, small sequential decline from holiday quarter. Very pleased with how we did.

5:44 per cent of customers who have upgraded to iTunes plus? Too soon to tell. Very strong quarter for us on iTunes.

5:46 Started with Walmart, how much of an impact? Channel inventory? Walmart key partner relative to iPod, did expand through for iPhone. We believe they do provide us extended reach in areas they weren’t hitting before. Early going. Pleased with results. In terms of total distribution 50,000 storefronts, sizeable channel in this space. If you remember last quarter I told you we had about 1.75 mm units in inventory. To remind you, we are very conservative of how we count inventory. We count demos (100k) as inventory. Units in transit. Last quarter that was 100k units. To put some context and perspective. Also in many times count inventory all the way to storefront. Some count units as sellthrough. We don’t. Not going to talk about weeks, because frankly don’t have the experience with seasonality, we saw the channel inventory in the countries we were in at the beginning of Dec. quarter fall by the end of the quarter, but countries we added, added a new of about 80k. 1.83 million units. Net-net very comfortable and we have people wanting more of it.

5:52 Competitive landscape? Difficult to comment on products that aren’t shipping, there’s nothing intelligent I can say on the Pre. iPhone now over 21 million.

5:55 Why low revenue guidance for June quarter? Last year down 1% in better economy. Dominated by K-12 education, expect things to be competitive. Expect some reductions in ASPs sequentially. We will not begin recording revenue on new iPhones sold on March 17 event and will start that when releasing iPhone 3.0 this summer. And currency impact too.

5:58 Call over.

Key stats:

  • March qtr. revenue: $8.16 billion vs. $7.69 billion consensus (6% y/y growth)
  • March qtr. EPS: $1.33 vs. $1.09 consensus
  • March qtr. GM: 36.4% vs. 32.5% guidance, 33.6% RBC estimate
  • March qtr. Mac shipments: 2.2 million vs. 2.1 million consensus
  • March qtr. iPod shipments: 11.0 million vs. 10.0 million consensus
  • March qtr. iPhone shipments: 3.79 million vs. 3.3 million consensus (some analysts at 3.7 million)
  • June qtr. revenue: $7.7-7.9 billion vs. $8.28 billion consensus (11% y/y growth), guidance could be $7.8-8.1 billion
  • June qtr. EPS: $0.95-1.00 vs. $1.12 consensus, guidance could be $0.92-1.02
  • June qtr. GM: 33% consensus, guidance could be 30.5-31.5%


Apple (AAPL) reports March quarter earnings today after the bell. Join us for LIVE analysis here beginning at 4 p.m. ET, including live coverage of Apple’s earnings call at 5 p.m.

Investors have low expectations for Apple’s March quarter, with Mac and iPod sales expected flat-to-down year-over-year. But the rest of the year looks good: Apple just released new Macs and iPods, will likely unveil new iPhones in June, and could start selling a tablet/netbook-like device later this year.

So a strong forecast for the June quarter — especially gross margins — could send shares skyward. Likewise, any significant weakness could tank the stock. Apple shares are up 40% this year, while the Nasdaq is up about 5%.

Apple is known for giving conservative guidance, but in January, it guided March quarter guidance above what some investors feared they might, sending shares up 9%.

The company got positive news this morning: AT&T revealed that it had activated 1.6 million iPhones during the March quarter, down only 16% from 1.9 million activations in the Christmas-fuelled December quarter. But that doesn’t necessarily correspond to the iPhone shipments Apple will report this afternoon: Those depend on several additional factors, such as international sales, how many iPhones carriers are keeping in stock, etc.

We’re also interested in what management may say about Steve Jobs — is he still coming back in June? — or the netbook market, a high-growth area in the PC market where Apple isn’t (yet) participating.

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