Apple needed its Mac business to drive growth during the March quarter, and it came through: The company sold 2.29 million Macs last quarter, up 51% year-over-year and above the 2.0 million they needed to sell to impress investors.
Overall, Apple (AAPL) reported $7.51 billion in March quarter sales, up 43% year-over-year and beating both the Street’s $6.95 billion consensus and whispers up to $7.2 billion.
Less impressive: The company’s 32.9% March quarter gross margin, down from 34.7% the prior quarter. Apple blamed most of the decline on slower software sales, the iPod shuffle price cut, and other international price cuts.
Apple also guided June quarter profit to $1.00 per share, less than the $1.10 analysts were expecting. Apple is known to guide conservatively, though, so this shouldn’t be too much of a surprise. Shares are drifting between 0-1% gains and losses in after-hours trading.
From the call: Apple confirmed that iPhone demand was outstripping supply, thanks in part to people buying multiple iPhones at U.S. Apple retail stores to unlock and sell overseas. But Apple didn’t offer an estimate as to what percentage of phones sold were being unlocked. It did, however, reaffirm its goal of selling 10 million phones this year, which we think it can reach.
Revenue: $7.51 billion, vs. $6.95 billion consensus, $7.1-7.2 billion whisper numbers
EPS: $1.16, vs. $1.07 consensus, $1.25-1.30 whispers
Mac sales: 2.29 million units vs. 2.0 million units consensus
iPod sales: 10.6 million units (up 1% y/y) vs. ~10 million consensus
iPhone sales: 1.7 million, even with consensus
Q3 guidance: $7.2 billion revenue, above $7.15 billion consensus; $1.00 EPS, below $1.10 consensus, $1.05 lowball whisper
LIVE Conference Call Notes:
4:59 Awaiting call. Muzak.
5:04 Call begins.
5:05 Standard disclaimers.
5:06 Highest March quarter revenue and earnings in Apple history.
5:07 50% of retail CPUs to customers new to Mac. Mac unit growth 35% y/y from education, highest growth rate in last 8 years.
5:08 Mac sales representing 51% growth y/y. 3.5x times March quarter PC market growth from ICD. Up from 2-3x market rate growth from prior quarters. iMac demand drove desktop sales up. Portables grew 61% thanks to MacBook, Pro.
5:09 Same iPod decline as last year. Higher ASPs due to success of iPod touch.
5:10 Share of U.S. MP3 market 73% according to NPD. Outside U.S. gained share. 4-6 weeks of iPod channel inventory.
5:11 iPhone customer momentum good. Confident of selling 10 million iPhones this year.
5:11 Developer response tremendous. 200k+ downloads of SDK. Off the charts interest in iPhone enterprise beta program. 1/3 of Fortune 500 interested.
5:12 Apple retail: 74% up y/y. 458,000 Macs sold, up 68% y/y. Opened 4 stores during quarter to end with 208. Avg rev per store $7.1 million, compared to $4.8 million a year ago. Operating profit doubled to $334 million.
5:14 Opening about 45 stores during fiscal 2008. Comfortable with investment. Total company GM 32.9%, stronger than guidance due to components, weaker dollar.
5:15 Targeting Q3 revenue of about $7.2 billion, or 33% growth over prior June. Gross margin about 33%.
5:16 Expect to generate EPS of about $1.00 in Q3.
5:17 Q&A begins.
5:17 Some negatives for gross margin? What gives you confidence of 33% next quarter? DRAM and NAND pricing hit low levels during March quarter. Expect to remain favourable.
5:19 Did lower priced shuffles cause problem? Peter: We expected gross margin to decline by about 2.7%. Exceeded by 90 bps. Better than expected results thanks to favourable commodity environment, etc. Change in Leopard in other Apple software accounted for 80% of gross margin decline. Other factors: Shuffle price change, International price reductions, higher mix of iTunes, which has lower gross margin, and sequential decline of revenue. Somewhat offset by favourable component pricing, which was ahead of guidance.
5:21 iPhone: Less availability. Widely expecting new products. Anything you could say that you could grow that sequentially? Anything you’re worried about in terms of shortages? Tim: Confident in hitting 10 million for the year. Shortages: Expected iPhone to decline more than it did, so we really beat our unit expectations. Started to experience some stock out. At this point, inventory currently low in stores and channel. Believe the reason more phones being bought in US to be unlocked, which remains a significant number. Can’t clarify how many. Very difficult to come up with very precise estimate. Continues to be significant. View continues to be that this is a proxy for the worldwide demand of the phone and our focus is very much on roling out to more geographies. More European countries, entering Asia later in the year.
5:23 Direct sales 53%, up from 49% a year ago. Ended with 400 Best Buy stores, targeting 600 in the summer. Rollout is going extremely well. Education: Can you delineate between student programs and institution? Numbers that Peter quoted — up 35% — both categories strong. This is a big K-12 quarter.
5:24 Passed Dell last year in portable edu spending. Always worried about budgets but results we’ve seen to date… we have not seen any issue today.
5:25 Why going to delay revenue recognition on iPhone 2.0? Doing this because we announced specific new features that will be included for free. Will delay revenue recognition on phones sold between March 6 and day we deliver the software.
5:27 Haven’t said anything about economy. Peter: We’re going to leave economic commentary to others.
5:29 Traffic to stores up 12 million people year over year.
5:30 Intend to deliver iPhone 2.0 in late June. Included delay of revenue recognition in 33%.
5:31 Guiding to $7.2 billion for Q3. Factor several things into thinking: Mac channel inventory increased about 60,000 thanks to Macbook Air launch and greater sales. iPhone won’t be recognised until late June. Sequential decrease in iPod expected. Full quarter impact of iPod shuffle and international price reductions.
5:32 More chatter about gross margin. International store openings will be greater this year than last. 27 of 208 were outside U.S. Increased store opening forecast to 45 stores this year.
5:35 Leopard revs in Dec quarter was $170 million, and they were just over $40 million in March quarter. By far the best selling release in history. Also iLife and iWork in third quarter… impact of sequential gross margin decline a little bigger.
5:38 Why will pricing be favourable still? Doesn’t mean will go later… envision it trading in a fairly narrow trading range and not increasing that much as we head into the quarter.
5:40 Getting a little testy!
5:43 Nope, not charging for iPhone 2.0 software.
5:44 Not going to forecast exact in-stock levels; have factored current thinking of supply/demand in guidance.
5:45 Who bears cost on iPhone price cuts in Europe? Carrier partners are free to price iPhone as low as they wish; wouldn’t comment on specific commercial agreements between Apple and carriers. 3G??? We don’t comment on new products! Where seeing strength in channel? Comments in linearity? Strength in all geos. In Americas mac up 52%, Europe 48%, Japan 47%. Consumer appears to be strong. Pro business had nice pickup. Mac Pro sold more units.
5:47 Started shipping Macbook Air late in January, a lot of shipments went out in March. By end of March were at near a supply-demand balance on it. iPhone linearity: Outstripped supply toward the end of the quarter because we sold more than we had expected. Thought there would be more of a sequential decline there than there was.
5:50 Other big reasons for gross margin decline than software? Hard to do y/y gross margin comps because different points in product cycles, commodity cycles. Will stick to sequential comments.
5:51 Comments on P.A. Semi? Nope, no comment on purpose or plans.
5:53 Really hard to estimate unlocked iPhones and we don’t want to throw a number out. Unlocking is occurring, and it’s significant. Clear interest in demand globally for the iPhone. We’re hearing reports of iPhones being used in many countries. Confidence in goal of selling 10 million in 2008.
5:54 Why more supply in Europe than U.S.? Noticeably different demand profile in U.S. versus Europe? Why couldn’t you ship phones from Europe to U.S.? Stockouts were occurring in own stores, believe that stores more succeptible to people buying multiple units, then unlocking and exporting. Currently, inventory low in both stores and channel. Also the case in European channel? Don’t want to be specific. In aggregate, Europe and U.S. are both low. Was channel also low at end of quarter? Why not better able to allocate? Once shipped and designated, ability to move them from carrier to carrier is low. Some cases with imbalance. Major point is that we sold more than we thought we would; today inventory low in Europe and US.
5:56 No comment on iPhone demand in Europe.
5:59 Any demos on Macbook Air purchasers? Appealing to all sorts of people from college profs to students to people who travel a lot. Caniballization factor very low.
6:00 Call over.
The big question: How many Macs did Apple sell? The Street expects sales of 2.0 million, but we’ve seen estimates as high as 2.2 million (RBC’s Mike Abramsky) and whisper numbers up to 2.3 million. Anything below 2.0 million would be disappointing. But anything over 2.1 million Macs would be “a significant positive,” says Piper Jaffray analyst Gene Munster. Selling 2.1 million Macs represents 38% year-over-year growth, significantly higher than the average 26% y/y Q3 growth the last three years.
Also critical: guidance. In January, when Apple demolished its Q1 numbers, the stock still tanked 11% after-hours, thanks in part to weaker-than-expected guidance. The Street expects Apple to guide to $7.15 billion of revenue and $1.10 EPS for Q3, but Apple is known for conservative guidance, often guiding below consensus. Anything below $7 billion/$1.05 could be disappointing, according to AmTech’s Shaw Wu, who downgraded the stock yesterday.
iPod and iPhone unit sales will be interesting, but not essential. Investors already know that iPod growth has slowed — and Apple could easily sell fewer iPods during Q2 2008 than it did in Q2 2007. And while the iPhone makes for great conversation, it’s still too small to make a dent in Apple’s quarterly results. It will, however, become more important later this year (when the 3G version comes out) and next year.
Revenue: $6.95 billion consensus (32% y/y growth), $7.1-7.2 billion whisper numbers (AmTech)
EPS: $1.07 consensus, $1.25-1.30 whispers (AmTech)
Mac sales: 2.0 million units consensus, 2.2-2.3 million units whispers (AmTech)
iPod sales: ~10 million (down 5% y/y) Street sentiment (Piper)
iPhone sales: 1.7 million consensus (Piper), 1.8 million bull case (RBC), above 2.0 million a surprise (Piper)
Q3 guidance: $7.15 billion revenue consensus, $7 billion lowball whisper; $1.10 EPS consensus, $1.05 lowball whisper (AmTech)
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