The numbers game: liveblogging Apple’s Q2 2007 earnings

Posted Apr. 25, ’07, 2:09 PM PT by Dan Moren

Category | Business

To some it makes the world goes round; to others it’s the root of all evil. But I think the O’Jays put it best: money money money money money monnnnney. Like it or not, it’s the lifeblood of so many companies, including the one on which we focus so many of our waking moments.

We’re tapped into Apple’s financial results conference call, which has yet to begin, but we can give you some numbers already. Revenue for the quarter was $5.26 billion, with a net profit of $770 million, or the ever important $0.87 per diluted share. Last year’s Q2 saw a revenue of $4.36 billion, with profit of $410 million ($0.47 per diluted share), which marks a pretty hefty improvement for 2007.

Mac shipments were at 1,517,000 computeres, and 10,549,000 iPods; that’s 36% growth in Macs, and 24% growth in iPods.

We’ll be hearing from CFO Peter Oppenheimer, COO Tim Cook, and Apple’s treasurer in just a moment. Follow the jump for more.

And we’re in already, listening to CFO Peter Oppenheimer: Best March quarter in Apple’s history. Very strong demand for Macs and great iPod sales. 88% growth of profits over last year’s quarter. 56% of total revenue from Macs.

Music services 44% of revenue. Ended quarter with comfortable channel inventory. Other music revenue grew 35% year over year. Over 5 million songs, 350 television shows, and 500 movies. Tip o the hat to Paramount, Lionsgate, and MGM. iTunes has 85% of the market. $855 million brought in from retail stores. 177 stores total now; average revenue per store was $5 million. Now 21 stores outside US, including the new Rome store. Syndey and Glasgow stores opening later this year; third store in Manhattan coming in meat packing district. 79% year over year growth in Mac sales from stores; over 50% of customers still new to the mac. 21.5 million visitors to the stores; 10,000 customers per store, per week. Preparing for iPhone launch in “late” June.

Cash balance is now $12.6 billion.

More on Apple TV and iPhone strategy for accounting. Talking up the spiffyness of the iPhone, but nothing new on features. “New software features and new applications” due to be incorporated into the iPhone; features will be added at no additional charge (downloadable updates?). Subscription accounting, over 24 months. Now we get into tricky financial lingo on how they will account for those features, but I wonder if this is to avoid Sarbanes-Oxley issues (a la the N-enabler). Report iPhone results will include unit sales for iPhone, iPhone accessories, and payments from AT&T/Cingular.

Similar model in the Apple TV (i.e. downloadable updates). Included in “other music products and services.”

Looking ahead to the June quarter now. Targeting revenue of about $5.1 billion. Non-cash stock-based compensation $65 million; gross margins about 32%. Increased marketing expenses due to the iPhone launch. Very pleased with results (as if that’s a surprise).

First half 12.4 billion in revenue, 1.8 billion in earnings. Macs shipments up 32%; iPod shipments up 40%. Very confident about “other innovative products in pipeline.” Yeah, we’d like to see those too, Peter.

Bear Stearns: And the first question is about the options investigation, specifically as to the board’s statement. And Apple TV numbers at this point.

Oppenheimer: Board expressed confidence in what has been said and done. Steve “cooperated fully” with Apple’s independent investigation. Board has expressed complete confidence in Steve’s integrity and leadership.

Cook: “Incredible reviews; very good start; very excited in long-term potential.” Not releasing exact unit shipments (oh, Apple. Why must you taunt us?)

Cross Research: Subscription model for Apple TV and rationale? Staffing issues vis-a-vis Leopard delay.

Oppenheimer: Proven capability to creat innovative software that gives us tremendous competitive advantage in consumer electronics. Surprise and delight iPhone customers [by rolling software features later].

Cook: Re: Leopard delay. No problems staffing. Always planned on using OS X resources to complete iPhone. Taking a little more resource than thought, and made a choice and delayed Leopard (basically reiterating what we’ve heard).

Credit Suisse: Walks us through the sequential decline in gross margins. Component supplies.

Oppenheimer: Commodity pricing trending up, beginning of education buying season.

CS: Clarify payments from AT&T/Cingular? Percentage of contracts? Subsidies for phones?

Oppenheimer: Not able to comment. (Bah!)

Cook: Commodity environment was favorable, but even more favorable than predicted, particularly in memory area. Some commodities move to supply-demand balance: NAND flash, and memory in general.

Gene Munster, Piper Jaffray: More on gross margins consistency?

Oppenheimer: Gross margins predicted for 32% for June, but 27-28% range on longer basis.

Man, the commodities market always makes me think of Trading Places.

Munster: Wide availability for iPhone or relatively few units?

Cook: Very difficult to tell demand until shipping. “All of us have many anecdotal stories to tell…” ooh, story time with Uncle Tim!

Munster: Did AT&T say they have 1 million order for iPhone?

Cook: 1 million people interested. AT&T not taking orders.

Munster: Can you fulfill 1 million in June quarter?

Cook: Don’t want to predict yet (where’s your crystal ball now!?)

Lehmann Brothers: Subscription accounting on iPhone again.

Oppenheimer: Lots of variables. Two models, accessories, models sold directly and indirectly (is that AT&T/Cingular?).

LB: Any plans to do anything with cash balance at this point?

Oppenheimer: No change in our position. Retain our cash for flexibility to invest in the business. Do discuss some forms of returning cash to shareholders on occasion.

LB: Subscription accounting on Apple TV have any relation to subscription model for users?

Oppenheimer: Software updates coming periodically, provided to customers as they become available.

Goldman Sachs: iPod cannibalized by iPhone sales? Delay of Leopard effect on Mac sales in June/Sept quarters?

Cook: No obvious effect last quarter from iPhone on iPod cannibalism. In terms of Leopard, the upgrade is simple, but not sure whether customers will delay or not.

GS: Given amount of time between iPhone announcment and launch, can you ramp volume by June?

Cook: Focusing very heavily on production of iPhone/lots of expertise from iPod experience. No prediction.

UBS: Pre-orders for iPhone?

Cook: Currently not. Announce later when we’ll take orders.

UBS: Retail staff don’t know what’s coming; is retail staff being trained on iPhone right now? Investment on Apple’s part so staff is ready on day one?

Cook: iPhone is uniquely different, since they announced it in January. Retail stores putting a lot of energy into planning for launch.

UBS: Customer support on backend? Fully staffed support for the product?

Cook: We have award-winning support for Mac and iPod. Going at the iPhone with “the same rigor.”

UBS: Any updates on Best Buy Mac-distribution relationship?

Cook: Started with half dozen stores; then over 50, over 200 by fall. Some unique merchandising things with BB that we’re excited about. Evaluating Circuit City pilot. Decision on that this quarter. Mac point of sales up to 8000 now.

UBS: Any uptick from pros because of CS3 yet?

Cook: Just started shipping. Too early to tell. But between that, NAB, and 8-core Mac Pro, believe pro customers will be very excited.

Sanford Bernstein: Guiding revenue down, why?

Oppenheimer: Few reasons. This year, good supply-demand balance in March quarter, so bigger sequential decline. Very pleased with market share. Beginning of education buying season, so higher K-12 purchases in June quarter at lower prices.

SB: But that’s pretty ordinary.

Oppenheimer: June quarter not as strong from a consumer perspective, but we had a very strong March quarter this year.

SB: Question about margins (I hear they’re low in fat): higher iPod hardware margin that Mac hardware margin?

Oppenheimer: No specific gross margins for you! Both our Mac and iPod hardware margins strong in the quarter; both benefited from very favorable commodity market.

SB: On R&D side: revenues growing at 20% per quarter. R&D expenses have been flat for roughly last six quarters. Why hasn’t R&D gone up, especially with new products?

Oppenheimer: Fantastic folks in hardware and software energizing. Last quarter saw capitalizing software development, playing into this quarter. Spending will go up. (Your chair is creaky, Peter :P).

Citigroup: Why not pass commodity savings onto consumers?

Cook: We’re awesome; growing at 36%, compared to predicted growth of 4%. Really growing on a year-over year basis. We feel we’re very competitively price.

Merill Lynch: Gross margins and commodity savings combined into one uber-question.

Oppenheimer: “We have a long standing practice of…” (I think that’s going to be my new title for liveblogging financial results).

JP Morgan: Any change in the HD vs. NAND iPod mix?

Oppenheimer: Relatively flat.

JPM: On EMI deal. Assuming you hit your targets, will economics of iTunes change, given price increase for higher quality tracks?

Oppenheimer: Running iTunes a little bit over break even, since content helps sell iPods. Strategy working extremely well.

FTM Midwest: Update on direct sales vs. indirect?

Oppenheimer: Direct sales are via retail stores, education, online, enterprise, and music store, was 50% in the quarter; reasonably close to expectations.

FTMW: Revenue by geography?

Cook: From a Mac POV, growing in US, Europe, Asia Pacific (I think Tim has a dog in his room or something; it sounds like someone’s running around in there). Doing very well outside US. Pretty much everywhere you look, see good progress.

FTMW: Mac Pro to have positive effect on Mac ASPs?

Oppenheimer: We don’t forecast ASPs. But we’re very excited. *VERY* Excited.

Someone Partners: Seasonality questions. Leopard pushout explain being more cautious?

Oppenheimer: Mac sales have typically increased, but lower ASPs because of education.

Someone Partners: Any milestone update on music/video downloads to date?

Oppenheimer: Nothing new to share. You’ll see it on the website. “I’m sorry.” (Oh, I bet.)

GMP Securities: iPhone timing outside the US?

Cook: In Europe in Q4; Asia in 2008. (That’s all he’s saying).

GMP: AT&T/Cingular stores only or other partners?

Cook: Just Apple Stores/Cingular Stores and online stores for both.

Someone Research: Internal design strategy (and we’re back to commodities); in terms of what’s introduced in the future?

Cook: No comment on future product plan.

SR: What percent of music industry sales are digital? Any influence to royalty rate paid to music company?

Oppenheimer: We do not talk about agreement with music companies (he sounds pissed). Not seen most recent quarters digital % of total sales, but the trend is going up. Very strong growth on iTunes music store. Great merchandisign and seamless integration for the iPod.

Shaw Wu(!!!): Japan seems to lag; flat for three quarters. Anything going on there? And expenses going up next quarter because of iPhone?

Cook: Japan is very challenging market. Japan PC market contracted by 2% last quarter, as did Apple. Over 50% share for iPods in Japan, but MP3 market isn’t growing. Units growing very small. Coupled with ASPs decline in iPod produces negative revenue change year-over-year. Only major market in the world where not doing well.

Oppenheimer: Very confident. Increasing expenses related to higher revenue, stock-based compensation, and product launches

Last quesiton. Make it good!

Deutsche Bank: Inventory reduction on Mac unit sales during the quarter? Any reasons inventory levels going down?

Cook: Number of channel units very similar.

DB: iPhone to have higher cash margins than the core business?

Oppenheimer: We will tell you nothing. NOTHING! Except that we’re very excited about the iPhone. We believe that we can really delight customers. Can’t wait to launch.

And the conference is now finito. We didn’t learn much, but we had fun as always. Good times. Remember when that guy asked that thing? Yeah, that was awesome. You can catch the replay on Apple.com. We’ll see you next quarter!