LIVE: Apple Q3 Earnings Analysis

From Silicon Alley Insider, July 21, 2008:

Apple (AAPL) smashed its June quarter but September quarter guidance is very low. Why? No clues in Apple's release, but we'll pay close attention to Apple's conference call, which we'll cover here live at 5 p.m. ET.

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. Even iPod shipments -- 11.0 million -- beat Wall Street's expectations.

But Apple's September quarter guidance is really light -- $7.8 billion of revenue and $1.00 of EPS, way below the Street's already muffled expectations. That will likely be the biggest topic during this afternoon's earnings call -- as well as any updates on iPhone sales/availability. Click here for more coverage.

Key Metrics:

Revenue: $7.37 billion consensus (up 36% y/y), $7.2 billion guidance
EPS: $1.08 consensus, $1.00 guidance, $1.13 RBC
Gross Margin: 33% guidance, 33.4% RBC, 33.5% AmTech, 33.8% Morgan Keegan
Mac units: 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: 10.3 million consensus, 9.5 million RBC
iPhone units: 730,000 consensus (Apple sort-of preannounced when it said it was sold out at 6 million)

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 recognize any iPhone handset revenue sold after March 6 until made iPhone 2.0 software available. Began recognizing handset revenue on July 11. Any iPhone handset revenue recognized 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 color 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 favorable 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.

Preview:

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.