Apple Earnings: The World Is Going Macintosh

The Kelly Letter owns shares of Apple (AAPL), and we were very pleased with the company's results on Wednesday.

I sent the following to subscribers last weekend:

We have two reasons for owning Apple:

• The iPhone has the potential to be the world's first device that keeps people connected at all times, and third party software development will help it become the de-facto standard as the network effect cements it on top.
• With more work moving from the hard drive to the internet, fewer people will care what operating system they're using, which will provide many customers the freedom to choose Macs over PCs for the first time ever. Most will conclude that Mac is the better experience.

Last week served up evidence that the second reason is playing out well. Macs continue to gain market share against PCs, accounting for 6.5% of unit shipments in the first quarter compared with 5.2% in the year-earlier period, according to Gartner.

Amazingly, Macs even worked their way inside IBM (IBM). In the first quarter, 24 IBM researchers tested Macs and 18 concluded that the experience was better than that provided by PCs. IBM is now expanding the Mac testing to 100 of its researchers.

If IBM is slowly switching to Mac, can the rest of the world be far behind? Watch Mac market share keep growing.

We are watching it grow every quarter, as we did Wednesday. In its fiscal 2Q, Apple was expected to ship 2.1 million Macs. It shipped 2.3 million. It was expected to ship 10 million iPods. It shipped 10.6 million.

In its fiscal 2Q a year prior, Apple reported net income of $770 million or 87 cents per share. Wednesday, it reported net income of $1,050 million or $1.16 per share. One-year net income growth of 36% is fantastic, and so is unit growth of 51%.

Chief Financial Officer Peter Oppenheimer said: "We are very pleased with iPhone momentum and customer feedback continues to be outstanding. We remain confident in achieving our goal of selling 10 million iPhones in calendar 2008."

No wonder earlier this week Lehman Brothers initiated coverage of Apple with an Overweight rating and $195 price target. Analyst Ben Reitzes wrote: "Despite the economic environment, we do not believe that Apple's momentum has waned in Macs. In fact, Macs may have reached a tipping point with share on its way toward doubling over the next 3-5 years."

For an excellent summary of Apple's resurgence under Steve Jobs, see Robin Bloor's article Will Apple Keep On Keeping On? The short answer is: Yes.

Comments

[MacManMaz]

Well said Jason.
The numbers speak for themselves.

Now for the other half of the story:
MSFT has nowhere to go but down.
They do not know how to make money without being the dominant monopoly, Lording it over helpless millions. Vista is proof of that.

[Anthony Dadlani]

Go apple ! $300 on the way

[Tom B]

"MSFT has nowhere to go but down. "
Please, let it be so. Anyone who's used Windows for years would love to see MSFT receive some punishment for having held back the computer user experience for DECADES. With EU scrutiny and nobody with brains at the helm, they may well be the next Dell (Wall St. Darling to dog). I look to the day when AAPL market cap passes MSFT. They passed Dell and IBM in the past 12 months (not sure of current standing vs IBM, though....)

[buyitcheap]

I used Mac's in the 80's, left for PC's in the 90s, and am back to Macs in the 2000s. Pretty much following Jobs, I guess. the plug and play, interoperability, etc. all work in the firms favor - just wish I'd backed up the truck further in 2001/02 for more stock.
My kids take on line course work, downloading podcasts to their shuffles/iPods. They complete the coursework on their Mini's in real time online courses. The Mac experience is seamless, and while certainly the end of dell, it certainly does not bode well for Mr. Softee either.

[Max M]

Its just a matter of time before Mac becomes the corporate computer of choice. Corporate leaders will soon realize how high the cost of lost productivity is with the Windows platform. If you talk to most people who use Windows, the common word among them is that their computer is running so slowly. I made the change 2 years ago and now I get to enjoy and use my computer instead of fighting with it. Its clear with the huge growth that others are seeing it too. IBM's test run with Mac's is evidence of that. Go Apple!

[Tom B]

"With more work moving from the hard drive to the internet, fewer people will care what operating system they're using,"

Exactly one reason weak thinkers were saying the Mac was no longer relevant 10 years ago.

[jswede]

this guy knows less about finance than just about anyone I've ever read - (backtrack some of his articles in case you want to have a laugh, or waste some time). Luckily gathering some simple data and quoting some analysts falls well within his grasp - and the case for Mac marketshare growing is indisputable.

[mikeeeeeeey]

I am fairly new to using a Mac, and I have to say were it not for 2 friends that have committed to converting someone to using Mac every time they upgrade, I would not be here. I can say that I will never buy a PC again...it took getting a free 5 yr old Macbook Pro to get me there, but having a 5yr old machine with 2GB RAM and runs Leopard without a hiccup is a testament to how good the hardware is and how efficient the software is. Try doing the same with a 5yr old PC running Vista...

Convert a PC user with your old Macs...the assimilation will happen quicker!

[bryanz]

@Max M's comment "Its just a matter of time before Mac becomes the corporate computer of choice."

I really enjoy many aspects of the AAPL experience and I'm long AAPL myself but that kind of statement is seriously wishful thinking. As a former systems administrator and someone who has worked in budgeting and purchasing in IT, for a medium-sized company I really can't see how that would happen. Businesses are bottom-line driven and the vast majority of them are not likely to convert for several reasons
1) Cost - Dell, HP, IBM, etc have well recognized corporate purchasing divisions that work with companies to provide discounts for bulk corporate purchasing. Apple is still thought of as the costlier alternative that can't compete on pricing... and I haven't heard of their corporate sales aggressively pursuing new business clients.

2) Change - probably the most important consideration from an administration standpoint, no matter how easy a Mac is to use there is MUCH more to consider than the user experience when designing and developing a corporate network. Does the Mac interface well with Active Directory? What would the time cost of a rollover to a Mac-centric network vs a PC one be? Security policies and procedures, any change control processes and all those things that many businesses MUST consider that regular people do not. What would the time be to re-train users on how to access their files across the network, to navigate the UI, to print, etc? I know it's "easy" but when people are used to certain ways change is not easily accepted. What about proprietary programs that DO NOT work on OS X? You'd be amazed how many business have legacy software that must be run on Windows... and I don't mean in VMs, I mean on Windows PCs.

There are several other reasons that come to mind, but I think realistically the Mac will stay in the pro/consumer realm for the foreseeable future.

[TA]

'Corporate leaders will soon realize how high the cost of lost productivity is with the Windows platform'

Where is this? We don't have this - I'm confused or are you making it up?

[TA]

3) Active Directory - Macs do not work well in this environment which exists in the vast majority of Enterprises. XP works great - why is it important to change this? Unlike the client OS, the Server OS(SQL,Exchange,Sharep... etc) are getting better with each release.

[deaverb]

Momentum is going MAC. In the non-Jobs era, Simply software moved away from MAC compatible software because of the complexity of doing so, the demands of MAC people for exact conformity to MAC standards, and our inability to get the "code" from Apple to make everything work. Of late, MAC people have been more forgiving and we have introduced several products with MAC. We are just putting up a MAC section on our website.

Of course, Vista is a mess (listen to our users!). When XP came out, they blamed us for XP; now people blame Microsoft--that is the problem for them. Word's out. We have a new MAC at home; two iPhones (what a device; how can you say enough good things about it).

As a software provider, we KNOW they should have just renamed XP Vista--and moved on. They have inflicted such pain on the public. It is so unfair. That and $1.59 will buy me a Grande at Starbucks--but it is important that Microsoft has done an awful thing to the public--forcing this Vista mess on everyone.

Last weekend, I went to our place in the country with the old 98. What a pleasure; started; didn't crash; sweet. Like the early editions of Quicken (which, by the way, no longer makes the top 100 brands, because they too emphasize complexity v. simplicity of the folks with the magic touch--at Apple).

[tom1234]

last nov apple was $ 200.00 ---now with all that is new since nov and all that is expected in the third quarter coupled with the large increase of earnings WITH NO--- ABSLOUTELY ZERO DEBT --- $200.00 A SHARE IS JUST A NUMBER ON THE WAY TO --WELL ONLY THE WIZORD KNOWS ----GO STEVE JOBS--THE WORLD AND ALL THAT IS IN IT ---

[Zach Bass]

Apple knows how to leverage the Mac experience in every way. Look at the exposure mac Laptops get on TV, from American Idol, to cop shows, prominently displaying the Apple logo on a detective's desk. Think about it. Would you expect to see a Mac in a Police station in the real world? No, but Apple is making that experience seem real to the general public. And perception is reality.

This brand exposure onslaught through the entertainment industry will slowly change people's attitude towards Macs from a niche, really cool, super intuitive, incredibly beautiful machine, to an every day work horse, suitable for all occasions. Americans want it all. They want cool, beautiful, sexy, stylish, and practical all in one package.

-zach bass
www.zachbass.com

[jmmx]

A few observations here...

1- HOLY FLYING MACKEREL! 51% increase in Mac sales! Even the most outrageous fanboy would never have predicted this rate.

Implication of this:
a) Apple is becoming a Computer company again, and the iPod business will recede to a sideline business - a very profitable sideline, but with a much smaller percentage of bottom line.

b) Computers have higher gross profits (not margin) than iPods so growing the Mac business at 40 - 50% is much greater than growing the growing the iPod business at that rate. (Hey - sooner or later businesses will wise up to the fact that Apple's Xserve servers are more than $1,000 cheaper than Dell's.)

c) Does anyone here see a hockey stick?

2- In conference call: one reason for reduced margin was iTunes store which has very low margin. So those analysts who complain about the margin are basically saying "Hey Apple, stop selling so many songs/videos!" RIGHT! (Wouldn't Dell love to have ONLY 32% GM?? - lol)

2- iPhone

a) This delay of recording iPhone revenues is positively weird. Reason given ("People are buy because expect v2.0") is in the "My parakeet ate my homework" category. So what is going on? It must be something big.

b) Company know for conservative guidance repeatedly insists on 10M iPhone sales this year. They must be pretty dog-gone confident in that. One analyst (sorry, forgot her name) is thinking 13M.

Finally: iPhone is the only REAL internet-in-your-pocke... device out there (aside from iPod Touch, of course). They will therefore ultimately move to the 70% market share range of smartphones, like the iPods. This will also help to open up the

Anyone see hockey stick?

[TA]

@jmmx - 'Hey - sooner or later businesses will wise up to the fact that Apple's Xserve servers are more than $1,000 cheaper than Dell's'

How much is a Xserve server with 2 quad 3.0 ghz(+latest chipset), 16 gigs or RAM and 4x300 Gig SAS drives cost with the best RAID controller?
Up here in Canada we pay $8100 including a server licence and taxes/shipping from Dell. We usually pay more in Canada than the US so I'd expect this same server is ~$7300 there.

[jmmx]

@BlahBlah

That configuration is higher for the Mac. The Rack mount Xserve as you specify is $10,799 and includes only 3 drives (max in the server)

To get a Mac Pro in that configuration (including UNLIMITED licenses and 4 SAS drives) Would be $12,000

HOWEVER! When I went to Dell's site and tried to create an equivalent system - Poweredge 2900 III - with:
Windows Server® 2008, Enterprise x64 Edition, Incl 25 CALs

it was $11,811 - less than $200 difference (I do not know where you got your price.)

Mac has unlimited user licenses, and includes MySQL 5 - with no licensing necessary. Windows MS SQL licenses cost extra. (Remember Mac OSX is Unix at the core)

Finally, Mac Pro is a solid aluminum box with easy access to components. No plastic. :)

Hope that helps.

[jmmx]

Interesting article here from infoworld:

www.infoworld.com/arch...

It concludes:

"After all, as Publicis' Plavin notes, Macs -- which cost the same as equivalently configured business-class PCs -- are cheaper to support because they are easier to support. And when it comes to diverting IT resources toward competitive advantage, doesn't ease of support sound compelling?"

:)

[TA]

@jmmx - most enterprises get 25% off list at Dell - no idea what AAPL does that way but from your cost it's clear the price from AAPL is not cheaper as expected.

I work in the industry, this is what I do

[TA]

Oh and I forgot, Dell servers are all metal - no plastic on the 2950s

[TA]

Except the front bezel of course

MySQL and MSSQL are not the same thing - that may mean nothing to you but to those in the industry, they know what I'm talking about...

I could get Linux and MySQL for nothing - no AAPL required

[jmmx]

@Blah

I am aware that the 2 SQLs are different. I could never understand why cost conscious ITs spend millions on MS SQL when there is a free alternative - as you say. MySQL is also available - free - as part of every standard OSX product.

If you are suggesting that Apple start giving more support including discounts to enterprises, I would (as a shareholder) support that. I believe they do have some kind of program, though not sure what.

I was just going by the prices listed on Dell's web site, which, I assume, is what the small-medium size business will need to pay.

[eagleab]

from above "I made the change 2 years ago and now I get to enjoy and use my computer instead of fighting with it. " I don't fight with my Sony PC. And I am never going to give up my two button mouse.

I do have an iphone, internet everywhere, eliminated my laptop, cel phone, and camera in one fell swoop. I can use my iphone to buy stock in apple on etrade, and that is what I am going to do.

[TanToday]

-->>. And I am never going to give up my two button mouse.

Put it in your pocket, go to an Apple store, plug it in, and USE IT.

Sheesh. Some people are REALLY hard to convince. I actually have TWO mousies connected to my MacBook air from time to time, one hard wired into the USB the other wireless, they actually both work together just fine. And having gone back and forth between the two, the MIGHTY MOUSE with that little ball thingymajig is MUCH fast for a guy who spends upwards of 10 hours a day online.

[jmmx]

@ eagleab

Not only can you use a 2-button mouse, AND Apple's lets you scroll sideways..

BUT you can even use 2 monitors at the same time. STANDARD with most systems. This has been standard for many years.

[Partners in Grime]

Two-finger scrolling and right-clicking on Apple's laptop trackpad is pretty sweet, too.

Neil Anderson
www. cyclelogicpress.com