Apple (AAPL) smashed its June quarter and shipped a record 2.5 million Macs. But September quarter guidance is very low and investors are crushing the stock — it’s down 11% right now to $148.64.
What’s all the fuss about? Apple guided Sept. quarter revenue to $7.8 billion — half a billion dollars below the Street’s expectations — and said gross margins would fall to 31.5% from the 34.8% Apple posted in the June quarter.
Why? Full-quarter impact of its back-to-school promotion, during which it’s giving away a free iPod touch to qualified Mac buyers; a one-time benefit Apple got from a supplier last quarter that it won’t get this quarter; and a future product transition, which management couldn’t discuss.
Apple also said gross margins would settle to around 30% next year — which suggests something else is up. We’ll explore this tomorrow.
Meanwhile, Apple needed its Mac division to lead Q3 growth, and it did — Apple shipped 2.5 million Macs last quarter, up 41% year-over-year, and beating predictions. iPod shipments — 11.0 million — also handily beat Wall Street’s expectations.
Next up: A big quarter for the iPhone. Apple expects to ship more iPhones this quarter than ever before — meaning at least 2.3 million. That shouldn’t be hard — it’s already sold 1 million. And Apple said it plans to start selling the iPhone in 20 more countries beginning August 22.
Revenue: $7.46 billion vs. $7.37 billion consensus (up 36% y/y), $7.2 billion guidance
EPS: $1.19 vs. $1.08 consensus, $1.00 guidance, $1.13 RBC
Gross Margin: 34.8% vs. 33% guidance, 33.4% RBC, 33.5% AmTech, 33.8% Morgan Keegan
Mac units: 2.5 million vs. 2.2 million consensus (up 25% y/y; upside possible — Gartner says U.S. sales up 38% y/y), 2.4 million RBC, 2.5 million AmTech
iPod units: 11.0 million vs. 10.3 million consensus, 9.5 million RBC
iPhone units: 717,000 vs. ~730,000 consensus (Apple sort-of preannounced when it said it was sold out at 6 million)
Sept. Qtr. Revenue: $7.8 billion vs. $8.32 billion consensus (up 34% y/y)
Sept. Qtr. EPS: $1.00 vs. $1.24 consensus (RBC expects $1.21-$1.25 guidance)
LIVE Conference Call Notes:
4:59 Waiting for call to begin.
5:02 Call begins. Standard disclaimers.
5:03 Oppenheimer: Happy to report highest Q3 revenue and earnings. Strong growth from highest quarterly Mac shipments ever. Operating margin better than expected at 18.6% thanks to higher than expected rev. and GM.
5:03 A few points that demonstrate how well Apple is performing. Better than 24% growth last year. Retail sales up 58% y/y and store traffic about 32 million, up 10 million y/y. First 6 months: Total rev increased 40% or $4.3 billion.
5:04 Mac represented 61% of sales. 2.5 million Macs is nearly 3x overall PC market growth. Mac desktop sales up 49% y/y driven by strong iMac, portables up 37% y/y. Thrilled with momentum of Mac business.
5:05 19.5% Mac share according to NPD, 25% growth in education. Sold more Macs to higher ed than to any previous June quarter. 3-4 weeks of Mac channel inventory.
5:06 Music accounted for 33%. Sold 11 million iPods, up 12%, driven by shuffle and iPod touch. 10% growth in U.S., 15% int’l. Revenue grew slower than units because of cheap shuffle. (Note: Sound is flaky. Quicktime stream not doing well.)
5:08 Sorry, missed a bit due to Apple’s stream crapping out.
5:09 Did not recognise any iPhone handset revenue sold after March 6 until made iPhone 2.0 software available. Began recognising handset revenue on July 11. Any iPhone handset revenue recognised during June qtr. relates to iPhones sold before March 6.
5:11 Launched App store on July 11.
5:11 iPhone and iPod touch users have downloaded more than 25 million applications.
5:12 More than half of retail Mac sales to customers who have never owned a Mac before. With an average 211 stores, $6.8 million vs. $5.1 million year ago. $297 mill compared to $184 million a year ago. On track to end Fiscal 2008 with 242 stores. Look forward to opening more in Germany and Switzerland.
5:13 GM beat guidance 70 bps one-time bonus, the rest due to better commodity environment, product mix, and better than expected revenue. Tax rate lower thanks to better than expected foreign earnings.
5:14 Outlook. Targeting revenue of about $7.8 billion or approx 25% growth. Off to a great start with iPhone 3G and expect to sell more iPhones this quarter than any quarter so far. Those sales will build significant revenue and earnings. Q4 GM expected 31.5% down from 34.8% in June quarter. Decline due to three factors: 1) Full qtr impact of back to school promotion, 2) Future product transition, which I can’t discuss, 3) One time bonus that we got in Q3. (“True-up.”)
5:17 Q&A begins
5:17 Future product transition: Corresponding on revenue growth? Rev growth looks conservative. Does that affect revenue too? Targeting revenue about $7.8 billion — 25% growth y/y. Have included the full quarter ASP impact of back-to-school impact, future product transition that I can’t discuss today.
5:18 Lot of folks talking about Apple in emerging markets. Any colour about sales outside the U.S.? Asia Pacific really good Mac up 53% y/y. Europe growing about 4x market according to IDC, Japan growing 4-5x market, Asia Pac 2-3x. Some of markets… several markets in developing areas growing over 50% y/y such as China, Russia, LatAm, but also saw some of the more markets growing at over 50% y/y such as France, Germany, Australia.
5:20 Not announced plans for 2009 but as I said in prepared remarks expect to end ’08 with 242 stores.
5:21 Mac going to get back to 4-5 weeks? 570 Best Buy, plan to be at around 600. 10,300 storefronts globally, up about 1,600 storefronts y/y. Channel inventory still feel 4-5 weeks is appropriate target.
5:22 Changes in commodity market? LCDs and NAND flash, expect favourable cost environment. DRAM entering seasonally stronger demand, increases in this area. Hard drive, optical drive in supply-demand balance, following historical norms. Sounds like you guys may rethink about how you’re pricing and you want to drive a lot of volume? Any change in philosophy about margin and volume? Beyond Sept. quarter — we’re delivering state of the art products at price points that our competitors can’t match. Plan to continue this strategy while making a reasonable margin, but not a margin so high we leave an umbrella for our competitors. One of the things we do is make products that intially cost more but offer entirely new features. We have some types of investments like that in front of us right now but can’t talk more. Margins about 30% in fiscal 2009. Very confident in decisions we’re making for the future.
5:27 We get a lot of questions about Steve’s health, but would you mind addressing the situation? Steve loves Apple, he serves as CEO at pleasure of Apple’s board and has no plans to leave. Steve’s health is a private matter.
5:28 Apple TV: Any clue or indication of video rentals? Started shipping Apple TV in February, pleased with the sales we’ve had, but Apple TV remains a hobby as we call it. This business is not nearly as big as Mac. Continue to invest in it.
5:29 Not specifically break out iPod sales in US vs. Intl.
5:30 iPhone 3G response excellent. Thrilled with what we see. A number of stockouts, this is a factor of the overwhelming demand. Very pleased with production ramp. Very pleased with trajectory. Shipping units as fast as we can, trying to serve demand. Will be launching about 20 additional countries on August 22, which would bring total to over 40. Still expect over 70 countries later this calendar year.
5:32 iPod touch revenue booked as received. Gross margins being abour 30% in fiscal 2009. Can’t get into you what we have in our new product pipeline because we don’t talk about future products.
5:34 We have some investments in front of us where we’re going to be delivering state of the art products at price points that our competitors can’t match. And that’s all he can tell us!
5:34 You always have back to school transitions and pricedowns. Still trying to understand what’s different this quarter where in fact you’re going to deliver September results that are higher than you’ve guided. We give you guidance that we have reasonable confidence in achieving. Try to figure out demand, how we can make stuff, etc.
5:39 No change in our position on cash to share with you today.
5:40 Very comfortable with our pricing.
5:41 What level of discussion with corporate IT who want to fold in iPhone and Mac into corporate environment? 1/3 of Fortune 500 in iPhone 2.0 beta program. Kraft, First American, Disney, Genentech., etc. deploying iPhone into enterprise. Oracle (ORCL) and Salesforce (CRM) building apps.
5:44 Operating margin impact from iPhone launch… what can’t be deferred. We incur opex in engineering, sales and marketing related to the iPhone currently, while recognising revenue and cost over a 2-year period of time. We do have launch expenses to the iPhone 3G that are built in to Sept. quarter, and that’s included in guidance.
5:46 iPhone app store will generate some revenue, but little profit. Think we’ll sell more iPhones and iPod touches.
5:47 Anything about health of U.S. consumer built into guidance? Anything baked into forecast for Q4 that incorporates view of health of U.S. consumer? We’re going to leave economic commentary to others, but we didn’t see any obvious impact in June quarter. Edu had best June quarter in history. Certainly aware of economic environment, and we’ve considered it into our guidance.
5:48 Any problems with iPhone 3G production and supply? Why wouldn’t you have pushed back launch so more people could get it without so much frustration? Demand has been staggering almost in every country that we’ve shipped in. Manu ramp right on schedule, very pleased with trajectory. Gives us confidence to launch in 20 additional countries in August.
5:50 Inference that you’re going to be incrementally more aggressive with pricing. Shouldn’t gross margins be up because of iPhone plus scale economies? First of all, I wouldn’t rule that in or out. Not going to make comments beyond 2009. With iPhone, we don’t discuss specific product margins. Expect to sell significantly more iPhones this quarter and in the future. Happy with margins for new model.
5:52 We think software is key ingredient for mobile experience, think we’re many years ahead of the competition. We welcome any competition as long as it doesn’t step on our IP.
6:01 Feel great about how we’re doing in Japan.
6:02 Call finished.
Most of the focus on Apple (AAPL) these days is directed at its new iPhone, which is mostly (if not totally) sold out across the country. But today Apple will remind us that it’s still a computer company at heart — its Q3 numbers, and any upside, depend largely on the performance of its red-hot Mac business.
Just as it did last quarter, Apple’s Mac business will be the most important revenue and growth driver. iPod growth has slowed to a crawl, and Apple’s Q3 iPhone numbers are already expected to be tiny — the company was sold out of phones much of the quarter while it prepped for a July launch of the new iPhone 3G. We’ll also be paying close attention to Apple’s margins — both for Q3 and its Q4 guidance — and any commentary about the economy.
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