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  • The Apple Earnings Report

    April 23rd, 2008

    I'd like to say that there's no truth to the rumor that the financial media and Wall Street analysts are out to get Apple. But they've had a long-term habit of creating negative spins about Apple's ongoing sales picture that have, at times, knocked its stock price for a loop. So I suppose you know where I'm going here.

    Take the claim that there were hundreds of thousands, perhaps over a million, unsold iPhones left catching dust in stock rooms, a theory that was quickly abandoned as it became clear there are an awful lot of these gadgets being unlocked and used with unapproved providers around the world. You also heard that, while Mac sales were extremely high, iPod sales had gone flat and maybe even declined.

    So what is the truth?

    Well, basically it appears that the analysts penchant for underestimating Apple's achievements haven't changed. For the quarter ending in March, Apple reported sales of $7.51 billion, or $1.16 per diluted share, compared to $5.26 billion and 87 cents per diluted share for the same quarter last year. Profits came in at $1.05 billion, compared to $770 million last year.

    The analyst crystal balls predicted revenues of $6.95 billion and earnings of $1.07 per share.

    Sales of new Macs continued to soar, with 2,289,000 units sold, representing an improvement of 51 percent compared to the same quarter last year. Despite claims that fewer iPodes were sold, sales actually increased but barely. Unit sales amounted to 10,644,000, one percent above last year, but revenue growth was up eight percent, in part due to sales of higher-cost models, such as the iPod touch.

    According to Apple, the average sale price of iPods was $171 for the quarter, compared to $160 last year. In addition, iPhone sales amounted to 1,703,000.

    You can check Apple's site for the raw numbers, if you're so inclined.

    In its regular conference call with financial analysts, Apple executives delivered their usual enticing tidbits of information, fleshing them out only when it had some strategic advantage.

    So we learned, once again, that 50% of the sales of new Macs at Apple's retail stores are new to the platform. This is what they always say, but they never seem to be asked just how they come by these numbers. I mean, I've registered new Macs periodically, using the Setup Assistant, and I've never seen a question asking what kind of computer I had previously.

    When it comes to the iPhone SDK, Apple reports that more than 200,000 developers have signed up and downloaded the SDK. Of these, 400 developers are involved in higher education, and the roster also includes more than a third of the Fortune 500 companies.

    Clearly the iPhone is a serious contender for the enterprise, what with Apple's decision to license Microsoft's ActiveSync technology. RIM, makers of the BlackBerry, surely have a lot to fear. What's more, if millions of iPhones turn up in businesses, can more business-oriented Mac sales be far behind?

    In case you're wondering, Apple says it's still on track to sell 10 million iPhones by the end of the year and the iPhone 2.0 software is due in late June, essentially on schedule.

    The 3G iPhone? Well, you know Apple never comments on unreleased products.

    Apple's cash reserves continued to soar, reaching $19 billion. It was also announced this week that Apple spent an estimated $278 million to purchase PA Semiconductor, a firm that designs low-power chips based on the Power PC platform.

    That step alone raises huge question marks. For one thing, Apple supposedly abandoned that chip technology when it moved to Intel processors, so where does its new acquisition fit in? Apple isn't saying, of course, but it does appear that Apple might use its new assets to produce chips for the iPhone and iPod. Since Mac OS X is quite portable when it comes to processor families, I suppose this won't present a serious development Issue.

    What's more, if Apple builds the chips themselves, there's nobody else to blame for late delivery of a new version or production shortfalls

    More to the point, just what does Apple plan to do with the rest of its cash hoard? $278 million is chump change for a company the size of Apple and it may take a year or two before the real reason for the purchase is known, if then. That would, of course, depend on whether the chips will actually ever find their place in a future Apple product. You never know.

    What about this quarter? Well, Apple is forecasting sales of approximately $7.2 billion, just a hair above the $7.16 billion that Wall Street expected, but profits will be $1 per share, as opposed to the $1.10 per share financial analysts expected.

    So what happened to Apple's stock in after-hours trading? Funny you should ask. It tumbled once again, in part over the company's conservative outlook and the perilous state of the U.S. economy. So what were you expecting?

    Well, maybe this: As of Thursday morning, the stock was heading upward once again. Maybe Wall Street got a needed dose of sanity this time out.



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    15 Responses to “The Apple Earnings Report”

    1. Dana Sutton says:

      Here's an interesting game to play. Imagine you were able to ask questions during a conference call or at a stockholders' meeting. What would you like to ask? Here are some possibilities, in no particular order. 1.) Why is Apple sitting on that huge cash reserve? Aren't you afraid that makes you an attractive target for a takeover bid? Why not invest a significant amount in further corporate acquisitions or share some of it with stockholders in the form of higher dividend payouts? 2.) Why do you think it's taking the iPhone so long to find its way into foreign marketplaces and what do you plan to do about it? 3.) Why are the overseas prices of Apple products so prohibitively high? Why do silly things like take the American price of a product and simply replace the dollar sign with a euro one? Don't you realize this is the sort of thing that's killing you in foreign markets? 4.) Why are you taking so long to modernize some of your products which are lagging way behind the industry: for example, why aren't you switching over to BluRay optical drives and adding SATA ports on your computers, and why do you persist in selling monitors at price points that are absurdly out of step with the competition? 5.) Exactly what contingency plans do you have if Steve ever needs to be replaced? Good answers to awkward questions like these might play well enough with Wall St. analysts that AAPL might fare better.

    2. Tim says:

      The P. A. SEMI acquisition is the interesting bit for me, since I think the Intel transition had more to do with frustration over the pace of PPC development than any intrinsic flaw in the architecture. I'm not holding my breath for the return of PPC to the mac, it would be disruptive, unless it was in something that wasn't strictly speaking, a mac. And, wouldn't it be amusing if sony, M$ and nintendo needed to deal with Apple for cool-running, reliable PPC chips?

    3. The P. A. SEMI acquisition is the interesting bit for me, since I think the Intel transition had more to do with frustration over the pace of PPC development than any intrinsic flaw in the architecture. I'm not holding my breath for the return of PPC to the mac, it would be disruptive, unless it was in something that wasn't strictly speaking, a mac. And, wouldn't it be amusing if sony, M$ and nintendo needed to deal with Apple for cool-running, reliable PPC chips?

      Daniel Eran Dilger (who appears on our tech show from time to time) has an interesting article about this on his Roughly Drafted Magazine blog:

      http://www.roughlydrafted.com/2008/04/24/why-did-apple-buy-pa-semi/

      Peace,
      Gene

    4. Rod says:

      Perhaps Apple knows that a Mac owner is "new to Mac" when they register (the first time they power on the computer), because their name (and other identification information in the form) was not previously in their registration database.

      I too have registered the dozen or so Macs that I purchased. I am guessing that after the first one, they recognize that I am no longer "new to Mac".

      Just a thought...

    5. Perhaps Apple knows that a Mac owner is "new to Mac" when they register (the first time they power on the computer), because their name (and other identification information in the form) was not previously in their registration database.

      I too have registered the dozen or so Macs that I purchased. I am guessing that after the first one, they recognize that I am no longer "new to Mac".

      Just a thought...

      Perhaps, but the registration is not sent to Apple until after the process is finished. They can't know this before the fact. Unless they know more than we suspect. :D

      Peace,
      Gene

    6. Mitch says:
      Perhaps Apple knows that a Mac owner is "new to Mac" when they register (the first time they power on the computer), because their name (and other identification information in the form) was not previously in their registration database.

      I too have registered the dozen or so Macs that I purchased. I am guessing that after the first one, they recognize that I am no longer "new to Mac".

      Just a thought...

      Perhaps, but the registration is not sent to Apple until after the process is finished. They can't know this before the fact. Unless they know more than we suspect. :D

      Peace,
      Gene

      Gene - Huh?

      It doesn't matter when the registration is sent to Apple (before, during or after the process is finished.

      Whenever the data reaches Apple - they compare the registration info with their existing database of previously registered systems. If there is a match then you are an existing user if there is no match then you are new to the Mac platform and you are counted in the switchers column. It's not 100% but it sure seems like a reasonable way to estimate this number.

    7. That presumes a bit too much. They can't assume, because they don't have your name in their database, that you are a Windows switcher or a first-time computer owner. You may have registered under a different address, using a different username (because you couldn't remember the previous one) or the registration was sent by a another member of your family.

      It's Apple's claim, to be specific, that more than 50% of the people buying new Macs at their stores are newcomers, but nobody asks them during the analyst meetings how they come by that information. Do they perform random surveys during the checkout process? I mean, I've accompanied people who have bought Macs at Apple's own stores, and they were never surveyed.

      Then again, Gallup doesn't call me either. :)

      Peace,
      Gene

    8. Mitch says:

      Why can't they assume that someone registering with new and unique registration info is a new customer? This is an estimate so if the % is off a few points, no big deal. Seriously, how many people register their expensive purchases under different names?

      This is the only possibility for Apple coming up with this number. They know which computers are purchased at their stores (unique serial number) and they know the info provided during the non-optional registration. They match the buyer info to the serial number and match it against their database of previously registered computers and decide if this is a new customer or an existing customer.

      Gene - I think you are making this more difficult than it needs to be.

    9. Apple is making a flat statement of having information that really can't be gleaned by a simple registration process where certain questions aren't even asked. How many people register under different names? Different addresses? Probably more than you think. I can't tell you how many times I've encountered people who just don't know what their previous registration username was so they make a new one. In my case, some of our purchases are under a company name, my name, my wife's name, my son's name? My son uses a different address, so how can they make assumptions about him? He is not a newcomer to Macs.

      Peace,
      Gene

    10. Mitch says:

      Gene, do you have a different theory? Do you think Apple is making up a number?

      There is no username during registration (meaning no username to forget).

      Again, sure there is a margin of error but so what? Consistency is the key.

      If Apple continues to use the same methodology, then trends will appear and comparing numbers will be a useful metric.

    11. Gene, do you have a different theory? Do you think Apple is making up a number?

      There is no username during registration (meaning no username to forget).

      Again, sure there is a margin of error but so what? Consistency is the key.

      If Apple continues to use the same methodology, then trends will appear and comparing numbers will be a useful metric.

      I don't assume they are making up the numbers. I just want to know how they're doing it.

      As to username: Yes, I've gone through screens where your Apple username is requested. It won't be there if you migrate your content from another Mac, which would simply pick up the information from a previous installation.

      Peace,
      Gene

    12. mark says:

      More from Jobs on the PA Semi acquisition:
      http://blogs.wsj.com/biztech/2008/04/24/jobs-still-hearts-intel/?mod=WSJBlog

      Looks like it's the engineering expertise and unannounced/future product development for mobile devices that Apple is buying.

      One question I'd like answered: How much, if any, has already been recouped of the $1.25B investment that was made in flash memory companies? It's a just wondering question.

      And: Approximately what percentage of the sales in the Americas region is from the United States?

    13. John says:

      I always guessed that Apple did some random surveys of new customers to come up with this number. I also always assumed it was not very accurate. The trends in this number are something they'd rather not broadcast.

    14. KenC says:

      I agree with John. I'm quite sure Apple samples customers from their store, using consultants. It has nothing to do with registrations.

    15. Spencerian says:

      Wow.

      I remember when Apple struggled to sell maybe 700,000 Macs in a quarter back in 2000. Now, that number has more than tripled. I hate the so-called "market share" number comparison because pundits incorrectly measure Apple's quarterly share of the hardware sales pie to the Windows OS marketshare or installed base, or lump all other hardware sellers's numbers together for a lopsided comparison. The numbers now point to a very significant growth of Macintosh sales, which ultimately translate into a rapidly growing installed base. I haven't any stats to support it, but it looks that Apple's installed base will grow from about 15% nationwide to as high as 22% by my tech-sense reckoning. Almost 1 in 4 locations or homes will have some Mac there. Interesting. Keeps me employed.

      And I don't even want to speculate much on the iPod/iPhone numbers. The sales are flattening (naturally, since iPods are more luxury than relative necessity as a computer might be) but the new programs from the SDK will likely push popularity up noticeably by the fourth quarter as Christmas nears, the presidential election comes and goes (bringing the "honeymoon mood" with it) and the economy weathers the recession. It's gas prices, I feel, that will really affect iPod sales.

      I shake my head at what Wall Street ever really wants. They "asked" for a low-cost Mac, and got one. They "asked" for noticeable growth. They have it now. Apple should encourage more stock buying by announcing a split, in my opinion. But the various securities litigation might have something to do with Apple not yet splitting.

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