Apple Q2: Mac Sales Surge, Revenue Beats Street, But Profit Guidance Weak

Updated from 4:45 pm EDT 

From Silicon Alley Insider, April 23, 2008:

Apple posted a good March quarter: Revenue beat the Street by a wide margin and Mac sales -- the crucial metric -- beat expectations. Weak spots: Profitability. March quarter EPS came in below some expectations, and June quarter EPS guidance is weak, too. After a quick 4-5% after-hours jump, shares are trading down about 4%.

March quarter revenue came in high: $7.51 billion, 8% above the Street's $6.95 billion consensus, up 43% year-over-year, and beating whispers up to $7.2 billion. EPS was a little soft at $1.16 vs. whispers near $1.25-1.30, but beat $1.07 consensus. 

Apple's all-important Mac sales were a home run. Apple sold 2.29 million Macs, way above the 2.0 million they needed.

Even iPod sales came in above Street sentiment at 10.6 million units. The downside: That's about as many as they sold last March quarter -- a measly 1% gain. The upside: iPod revenue grew 8% year-over-year.

Apple sold 1.7 million iPhones last quarter, right around consensus. Not a great quarter, but 3G (2nd half) is what matters for the future.

Q3 guidance: $7.2 billion revenue, above $7.16 billion consensus -- a rarity for Apple, which typically guides conservatively. But EPS guidance of $1.00 could be disappointing. Consensus was $1.10 and lowball whisper at $1.05. In the past, investors have reacted negatively to weak guidance, so this could potentially hurt the stock.

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 favorable.

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 favorable 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 favorable 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 recognized 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 favorable 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.