The numbers game: liveblogging Apple’s Q4 2007 earnings

Posted Oct. 22, ’07, 1:45 PM PT by Dan Moren

Category | Money

Why, hello. It’s been a while, hasn’t it? Almost three months. We know you were a little confused about the scheduling; after all, Apple usually releases its earnings on Wednesdays. So why are we here on Monday? Because, as most of you know, Steve Jobs—not unlike Garfield—hates Mondays. And loves vegetarian lasagna. It’s uncanny, is what it is.

We suspect the transition to the beginning of the week has to do with another member of the feline species—Leopard, and its appearance this Friday. Anyway, here we are, with the conference call scheduled to begin shortly. Apple, as always, has (SPOILER ALERT) published the headline numbers in a press release. Apple posted revenue of $6.22 billion, with profit of $904 million (aka $1.01 per diluted share). Compare to the same quarter last year, in which they reported $4.84 billion and profit of $542 million ($0.62 per diluted share), and the results ought to merit at least an impressed nod. Perhaps even a widening of the eyes.

It also proved to be another record quarter for Mac sales, with 2,164,000 Macs sold, beating the previous quarterly record (that was last quarter, if you’ve forgotten) by 400,000. iPods sold to the tune of 10.2 million, with iPhones selling 1,119,000 units (total for the year is 1,389,000). Cumulative figures for fiscal 2007 include $24 billion in revenue and net of $3.5 billion. CFO Peter Oppenheimer issued guidance for Q1 2008 estimated revenue of approximately $9.2 billion (bolstered by the holiday season) and earnings per diluted share of roughly $1.42.

So, with all those numbers already revealed, there’s really no conceivable reason for me to listen to this hourlong webcast, is there? Except that you—the readers—demand it. And we are here to serve your every whim. So here you go, you jackals.

Hit the jump to follow along with the blow-by-blow account and analysis of this, one of the four most fascinating days of the entire year.

(4:44:43 PM) Standby, we’ll be on the line shortly.

(4:54:55 PM) Oh, the joys of classical music. I can almost imagine myself on a sunny hillside somewhere, frolicking amongst the grasses. Numbers, in truth, are the furthest thing from my mind…

(5:02:21 PM) Now, if only my Wi-Fi connection will calm down, all will be right with the world.

(5:10:15 PM) Here we go! We’re under way. We’ll be having by CFO Peter Oppenheimer and Tim Cook, as per usual. We’ve got the standard boilerplate about forward-looking statements, so I’m guessing, no predictions from Tim & Peter about whether or not the Red Sox will sweep the Rockies, or win in five games.

(5:11:21 PM) Oppy! We’ve missed you. Peter is pleased to announce the highest September earnings in Apple quarter, with record Mac sales, and continued strong demand for iPods. Operating margin was 17.1%, with higher revenue and gross margins than anticipated. First we’re going to talk about Macs. Macs were 62% of total revenue, 400,000 more than the previous record, and 34% growth. Worldwide growth rate was over 2 times IDC’s market growth rate for the quarter. Favorable reception to iMacs, 31% year-over-year growth in desktops. Sales of portables increased 37% year-over-year and 62% of Macs sold.

(5:13:06 PM) On to music. 36% of total revenue during quarter. 10.2 million iPods, 17% year-over-year growth. 4-6 weeks of iPod channel inventory. Positive reactions to iPods introduced last month. No hitches in iPod transition. Other music revenue, 33% year-over-year growth, fueled by strong iTunes sales. iTunes accounts for over 85% songs purchased and downloaded in the US. Purchased over 3 billion songs and 100 million TV shows. 17% of global music sales in first half 2007 were digital.

(5:15:09 PM) 1.1 million iPhones sold in quarter. 95% of iPhone customers would recommend iPhones to others. Subscription accounting over 24 month; $118 million from iPhone, accessories, AT&T; $636 for Apple TV. $100 credits are charging to cost of goods sold. Reminder of global iPhone deals: Germany, France, UK.

(5:16:23 PM) Apple retail stores posted record quarterly traffic and revenue. $1.25 billion revenue, 42% year-over-year growth. Twelve new stores, now 197 stores. Average revenue per store was $6.6 million compared to $5.6 million year ago quarter. 473,000 Macs sold, 46% year-over-year growth. Over 50% of customers were new to Mac. Delivered oer 300,000 personal training sessions; over 387,000 members in ProCare and One-to-one programs. Continuing to invest in new stores US and internationally; 40 stores opening in the next year, including stores in New York and Boston (woot!). First store in China will open in Beijing next summer.

(5:18:21 PM) Best higher ed quarter ever in Mac sales. Total company gross margin, 33.6%. Higher margin product mix, weakening US dollar, better than expected commodities market. Capitalized 22 million of software development expense related to Leopard during the quarter. Tax rate was 27%, lower than anticipated rate of 42%, primarily due to benefit from the settlement of prior year audits. $15.4 billion in cash (sweet).

(5:19:36 PM) Here’s the forecast for next quarter. Targeting revenue of $9.2 billion. Guiding gross margin down sequentially for several reason. Lower sales of iLife and iWork, product transitions, seasonally higher component costs. Tax rate will return to 32%. EPS $1.42.

(5:21:11 PM) Proud of record-breaking quarter. And you should be, Petey. Very excited about arrival of Leopard later this week (us too!). Accelerated momentum of iPhone sales with the price drop. Looking forward to best December quarter ever. Strongest product lineup in Apple’s history. And it’s question time!

(5:22:34 PM) UBS: “Don’t want to cheerlead, but nice quarter.” (Oh go ahead and cheerlead!). Why is guidance so optimistic? Oppenheimer: We’ll leave forecasting the global economy to others. Apple’s shipping the best products. Just eclipsed the Mac sales from last quarter by 400k. Best iPods we’ve ever made. iPhone is doing really really well. Good momentum. UBS: Guidance for iPods. Full iPod sales not fully reflected by fall quarter? And Macs up too? Oppenheimer: Units usually flat from September->December. Mac sales could be sequentially lower, given extraordinary success of back-to-school promotion in Sept. quarter. Cook: Sales of iPods accelerated dramatically after the new introductions. Global numbers suggest the sales are up. Very well positioned going in to holiday quarter. UBS: (It’s the first gross margin question!) Why not mentioning Leopard as major offset on gross margins? Oppenheimer: Just pointing out the big questions.

(5:26:19 PM) Gene Munster from Piper Jaffray: Line up of iPhone products and related services? Accounted by the month or by the quarter? AT&T revenue shares? Day, month, quarter? Oppenheimer: iPhone recognizing revenue from handset sales over a 24 month period. Daily basis. For the handset, amortizing (hey, I spelled that right) the revenue over 24 months. AT&T payments as revenue, over time as earned. No more detail for you! Munster: AT&T long term agreement? Oppenheimer: As we indicated a couple quarters ago, multi-year exclusive agreement. Munster: Best Buy stores? How many up and running? How many by the end of the year? Cook: 230, more than 270 at the end of December. Munster: Impact? Cook: Very pleased, very good results. Looking forward to expanding. And Munster gets the hook!

(5:29:01 PM) CitiGroup: Why were channel inventories lower? And why higher component prices for sequentially lower gross margins? Components seem to be coming down. Tim? Cook: DRAM and NAND flash were favorable last quarter, and that ought to continue. Hard drive and LCD were tight, and continue to be, but expect to stabilize. Other commodities are declining near historic norms. In terms of channel inventory, primarily have low inventory because sales higher than expected. CitiGroup: Clarification on accounting for iPhone rebate? Oppenheimer: Accounting for the credits as they are redeemed by customers. Charge the associate product cost to cost of goods sold (I kept hearing “cost of good soul”). Estimating most by end of Dec. quarter.

(5:31:21 PM) Goldman Sachs: Pricing of iPhone in Europe? Oppenheimer: Set our price in Europe when announced. Includes VAT and other related duties. Goldman Sachs: Percentage of direct sales, and sales in Dec.? Oppenheimer: Direct sales were 57% of total company revenue, up from 53% in year ago quarter. But no forecast for Dec. quarter, but last year direct sales were 44%.

(5:32:31 PM) Morgan Stanley: Europe outgrew US for four quarters in a row? Sustainable, or currency factors? Cook: Europe had excellent growth. Year-over-year 37% in revenue, 47% in units. 4x the IDC projected gain in Europe. No typical lull in August, due to possibly iMac and iPod announcements. Morgan Stanley: [I did not understand one word in this entire question.] Oppenheimer: Not sure how to answer the first part of your question [See, even Peter doesn’t get it].

(5:34:17 PM) Shannon Cross of Cross Research: Biggest drivers, quarter-over-quarter? Oppenheimer: Holiday quarter is usually big for iPods. Looking forward to Dec. quarter. Cross: Ramp in iPhone through quarter? Cook: Certainly saw sales accelerate after price reduction (surprise!). 1.1 million for quarter, cumulative 1.4. Cross: Efforts to address SMB channel with Macs and iPhone? Cook: SMB market is difficult to measure, but we are doing well there from what we can see, and growing. In terms of iPhone, many business love the desktop-class email and unprecedented Internet device. Business are buying them and very much enjoying them. Cross: Work with salesforce.com on their inititative? Cook: yes.

(5:36:51 PM) Bear Stearns: Clarify tax rate for this quarter? Any idea when you’ll ship the 3 million iPhone? Cook: Not predicting. Very confident with shipping 10 million in the calendar year of next year. Interesting to note it took over 24 months to achieve a comparable number of iPods. Very focused on going into UK, Germany, and France. On target to enter Asia in calendar 2008 (hence the China store, I bet).
Oppenheimer: tax rate question. Tax rate was lower due to benefit from prior year audits we had. Expect tax rate to return to 32%. Bear Stearns: Japan seems down (sad, even). Why is that? Cook: Japan continues to be our most challenging major market. Very encouraged by Mac results. iMac very well reserved. Mac had best year-over-year in Japan in seven quarters. It’s a tough market. Sold a very large amount of iPods to a telecom company a year ago, so that might have had an effect.

(5:40:30 PM) Lehmann Bros.: [$100 credit question. Again.] Oppenheimer: [Same response as above. Whee.] Credit was additional product delivery to iPhone customers. Not accounting for it before it was redeemed, but at the point of redemption. Lehmann: European revenue accounting similar to AT&T revenue accounting? Oppenheimer: Same structure in Europe as in the US. Cook: Over 40,000 iPod retail locations.

(5:42:55 PM) Stanford Bernstein: How significant was the elasticity around the price cut of the iPhone? Q3: 135k phones a day. Past quarter, 5-10k phones a day. Average 18k after price cut? Trajectory of daily sales of iPhone, after price cut? Relatively constant, or get better? [Anything? Please? Something? I just need an answer!] Cook: Very happy with the elasticity we saw [stretchy!]. Far surpass our estimation of 1 million units. Some number were sold to people with an intention to unlock. Don’t know how many people, but our guess is 250,000 of 1.4 million were people who bought with the intention to unlock. Many of those happened after the price cut. But we’re not going to project precise numbers going into Q1. Remain confident with hitting 10 million in calendar 2008. SB: Sense of daily sales rate at price cut? Cook: We will tell you nothing. Nothing! Other than acceleration after price cut. SB: The issue of the unlock intention. Phones that are sold not ultimately subscribed to AT&T merit no payments? Cook: Correct. SB: Next quarter. Cell phone market modestly seasonable. You’re anticipating, all else being equivalent, do you think iPhone more or less seasonable than typical phone market? Cook: Looked at 3 new market, and that had lot to do with internal estimates. Looked at seasonality of phone market in US.

(5:46:58 PM) Credit Suisse guy….is not there. Doh!

(5:47:07 PM) Next guy isn’t there either? WTF are these guys doing? [Rustle, rustle].

(5:47:28 PM) Bank of Montreal. Not there either…

(5:48:00 PM) Okay, we found a guy [apparently, there are some phone problems]. Anyway…seeing any cannibalization, updates on pilot with Circuit City? Cook: Not doing pilot with Circuit City. Expanding with Best Buy. 95% of customers would recommend phone to others, so numbers unprecedented. Analyst: Any update on Enterprise test? Cook: No. Analyst: Cannibalization? Cook: We saw no obvious cannibalization prior to new iPod announcement. post announcement, we don’t have an updated comment. Report again in January (so is that a maybe?) Analyst: Any update on Pro segment? Uplift from CS3 or other new products that are Universal? Cook: We’ve seen an incredible growth in video business, driven by Final Cut Studio. Growth in audio, from Logic. Other spaces slow, evaluating CS3 and Leopard.

(5:50:39 PM) Credit Suisse guy, take two! And he’s there!: Question on iPod touch or iPhone? Cannibalization from iPhone for the iPod touch? Anecdotally? Cook: No obvious evidence for cannibalization prior to launching new products. [Toeing the company line]. CS: Estimate of Mac installed base, and how many on Tiger? Cook: Vast majority of Macs in last 4 years are able to run Leopard (21 million). When Tiger was announced, 15 million could run Tiger, and $100 million of revenue on Tiger, first quarter of launch. [That doesn’t really answer it, does it?]

(5:52:58 PM) RBC (we can hear him now too): Drivers on market share shifts? Most significant on the momentum? Cook: Incredible quarter on the Mac, breaking record by 400k (yada, yada yada). Twice as many Macs as 2004. Over 50% of the Macs sold in retail store are people who are new to the Mac. Very successful at expanding customer base. Most successful back to school season we’ve ever had. All of those together have led to continuation of huge momentum. 11 quarter of the last 12 have grown faster than the market. Last several at a multiple of the market. RBC: Any risks of scale? Advantages include lack of viruses, ability to maintain high class buying experiences. Feel confident you can sustain it? Cook: Our NPD share is up to 16 percent in US. Scaled iPod from small business to 21 million in last holiday quarter. Over 120m in total. RBC: iPods to shipping in Windows a big driver. In Europe, similar halo due to iPhone sales? Cook: We’ll see. Point out that Mac grow 47% in Europe, over 4x IDC’s projections of growth. Substantial evidence to say iPod has helped in Europe.

(5:56:48 PM) Bank of Montreal guy. Yes, we can hear you: How do you think about expanding channels directly or indirectly to continue to capture growth in other segments? Cook: Other segment was Asia/Pacific. Fastest growing region. 2000 store fronts added to Mac distribution over the last year. Continuing to increase that. BoM: What proportion of 2000 in US? Cook: “Many” are in Asia and Europe. Many of those. [He said that a little creepily.] BoM: Can you enter Asia/Pacific with 2.5G phone vs. 3G? Cook: [Deflect mode!] Nothing to announce other than our plans to enter in 2008. BoM: Cash flow? Oppenheimer: $1.7 billion.

(5:58:46 PM) Pacific west securities: Strategy in terms of getting video content on iTunes changed, given competition from other sources? Oppenheimer: We’ve got the largest library of content available in the world for sale to customers. More than 5 million songs, 500 movies, hundreds of TV shows. Our store is unparalleled. PW: Qualitive or quantitative on $100 rebates? How much sales, and what percentage redeemed? Oppenheimer: No. [Yeah, didn’t think he’d answer that].

(6:00:09 PM) Apologize for technical difficulties. Replay will be available as podcast on iTunes and webcast. Available beginning at 5PM pacific.

And that be the end! We hope you enjoyed our liveblogging coverage of the financials. See you in three months!