Apple Earnings Wrapup

“A leader is a dealer in hope” - Napoleon Bonaparte

Layoffs.  Write-offs.  Weak Guidance. Turbulent Times. Uncertainty.  Foggy Futures. Cracked crystal balls.  Caution. Concern.

In recent weeks, bad financial news has been like a mosquito you know is there but can’t swat.  It’s been a constant, inescapable drone to a market fearful and in need of reassurance; a market in need of Napoleon’s kind of leader.

Tuesday, though Steve Jobs doesn’t typically participate in earnings calls, Apple’s chief made a rare exception to try and offer just such reassurance.  About fifteen minutes in the conference call, he took the helm stating, “Against the backdrop of this global economic slowdown, it seemed a good time to make a few remarks.”

Together with CFO Peter Oppenheimer and COO, Tim Cook, Jobs helped deliver news that was at once both positive and, looking forward, prudently conservative.

Top Mobile Suppliers by Revenue ($billions)
Nokia	$12.70
Samsung	$5.90
Apple	$4.60
Sony Ericsson	$4.20
LG	$3.40
Motorola	$3.20
RIM	$2.10

Introducing a new non-GAAP accounting measure to provide greater present insight into iPhone sales than the two year “subscription method” otherwise used (GAAP subscription accounting spreads the iPhone’s contribution to Gross Margin, Sales and Net Income, over  a two year period), Jobs proclaimed Apple has become the world’s third largest mobile phone supplier (by revenue).

In just fifteen months, Jobs said, Apple climbed far enough to outsell Research in Motion’s Blackberry.  In the present quarter, Apple sold 6.9m iPhones, outpacing RIM’s 6.1m Blackberry’s. (That tracks reasonably well against prior IMEI based estimates that had guessed 7.6m iPhones).

The App Store, Jobs said, was on the verge of crossing the threshold of 200million downloaded applications.  200 million downloads in just 120 days.

Absent subscription accounting, Jobs said, adjusted iPhone sales pushed total sales to $11.68 billion, 48 percent higher than reported (GAAP) revenue… and reported revenue was already the best September quarter in the company’s history.

That’s not a bad result when looking backward on tougher times. 

Looking forward is where the caution comes into play.

While Apple is confident, as has been the case with many of this earnings season’s reports, nobody is comfortable predicting where things are going, or when they’ll get there. October, Jobs said, is a “foggy” month.  Peter Oppenheimer added that “visibility is low and our forecasting is challenging.”

Jobs' colorful characterization was to say “your next door neighbor can likely predict what is going to happen as accurately as we can.” 

In consequence, Apple was conservative (more so than usual) in setting guidance.  The tone was prudent, pragmatic.  

“We may get buffeted around by the waves a little bit, but we’ll be fine, and stronger when the waves recede in the future.” Jobs said.

Apple’s Earnings: Soundbytes and by the numbers

Revenue and EPS:
•Fourth quarter revenue was $7.9m with net profit of $1.14b or $1.26 a share.  That compares to Revenue of $6.22n and profit of $904m, or 1.01 for the same period a year ago.

•Adjusted to eliminate the impact of subscription accounting, Apple would have done $11.68b in adjusted sales and generated adjusted net income of $2.44b.

Guidance
In the interest of “prudence" Apple is predicting a wide range for revenue and EPS in the December quarter.  Revenues are set between $9b and $10b.  EPS, diluted, is forecast in the range of $1.06 to $1.35 a share.

Gross Margin
•Gross margin for the September quarter was 34.7%, better than expected.

•“[new products like the unibody Macs are] initially going to have higher costs and through volume manufacturing and cost engineering, we’re going to work down over time.” - Peter Oppenheimer

Cash
Apple generated $3.7b in cash on the quarter, ending with $24.5b.  Cash flow from operations was $4.3b

iPhone
•Apple sold 6.9m iPhones in the September quarter, a total greater than all prior quarters combined.  The phone is now on sale in 51 countries and 70 are expected by the end of the calendar year.

•Based on the “adjusted” accounting, the revenue tally was enough to make Apple the world’s third largest mobile supplier.  The phone accounted for 39% of revenues (adjusted), a massive contribution.

•“Who knows what the future results will be, given the worldwide economic slowdown, but we actually outsold RIM last quarter and ranked as the third largest mobile phone supplier in revenues. Not bad for being in the market for only 15th months.” Steve Jobs

•A "significant" amount of iPhone sales came from the International segment.

On Future phones and Competition
“ I think we have to be the best and I think we have to not leave a price umbrella underneath us, and we are working very hard to fulfill both of those goals.  And I think we are way out ahead of anybody else right now.” Steve Jobs.

App Store
•200m downloads in 102 days. 

• “We’ve never seen anything like this in our careers.”  and “Competitors are scrambling to copy our App Store but it’s not as easy as it looks and we are far along in creating the virtuous cycle of cool applications begetting more iPhone sales.”  Steve Jobs.

Apple TV
“I think the whole category is a hobby right now.  I don’t think anybody has succeeded at it and actually, the experimentation has slowed down.  A lot of the early companies that were trying things have faded away, so I’d have to say that given the economic conditions, given the venture capital outlooks and stuff, I continue to believe it will be a hobby in 2009.” Steve Jobs

Babe Ruth and Single Products
"Babe Ruth had only one homerun, he just kept hitting it over and over again.  I think the traditional game in the phone market has been to produce a voice phone in a hundred different varieties. .. We approach it as a software platform company, which is pretty different htan most of our competitors.” Steve Jobs

Retail Stores
•With the addition of Best Buy, Apple has 3,100 U.S. retail distribution points.  Globally, there are more than 30k. 

•Apple retail stores grew 37% y/y to sales of $1.72b.  596k macs were sold on the quarter through the stores.   31 New Stores were opened on the quarter, 13 outside the U.S.  

•Across an average of 226 stores open during the quarter, Apple owned stores generated an average revenue of $7.6m, a 15% y/y gain.

Macs
•2.6m Macs shipped in the September quarter, a 21% y/y improvement.  The quarter ended with three to four weeks of channel inventory.  

•K-12 educational spending, under budget pressure from local governments, was down.  If the numbers had stayed on track to prior levels, Apple would have sold around 75k more units.

•The Americas were responsible for 1,121k units out of 2,611k units sold. Europe represented 611k units. 

•Desktops accounted for 936k units, notebooks 1,675k units.

Comments

[20smoney:]

Absolutely a phenomenal buy right now. Look for my iPhone projections later today at 20smoney.com

2008 Oct 24 01:50 PM

[Turley Muller:]

The IMEI based estimates of 7.6M weren't for the quarter, but for the 2nd week of Oct when we wrote the article. My Q4 estimate was 6.8M.

2008 Oct 24 01:52 PM

[bobthenoob:]

Cramer and the rest of wallstreet continue to push RIMM, next earnings, when AAPL hits another out of the park, the rest will follow and late as usual. That's why I will not waste money subscribing to these dopes.

2008 Oct 24 03:04 PM

[Mr Bill:]

Great article Seth. The last recession, Apple was planning for the future not lamenting the past. The results of looking forward are clearly evident in the success of the most recent Apple products. One can only wonder what new and amazing products will come next.

2008 Oct 24 07:45 PM

[mollytjm:]

excellent article! i've had my iphone for 2 weeks (was on a contract with verizon before that) and i already can't bear to be away from it:)) the apps store is just incredible and i haven't even looked at everything. the battery power is great unless i do heavy gaming for a couple hours, (ok...i'm guilty) so i did buy a car charger for it.
but...and i couldn't believe this, the apps developers keep updating, free, the apps you download, so they just get better. the sudoku i'm using asks for feedback and in just 2 weeks, they've updated an already great (and free) game 3 times.
this iphone is just the best...the user experience and everything else leaves the others in the dust. they can play catch up all they want, Apple will come out with something better before the others catch their breath!
long appl

2008 Oct 25 10:52 AM

[well:]

there folks that talk about hitting a bottom saying we're gunna see 2002 lows, i really cant picture appl at 10.00 again, no way

2008 Oct 25 03:33 PM