Jobs On Q1 2010 Results: Apple Now A $50+ Billion Company — Major New Product This Week

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Screen shot 2010-01-25 at 1.46.37 PMApple has just announced its Q1 2010 earnings, and as expected, they’re very good. I’ll get to the numbers in a second, but perhaps more notable are two Steve Jobs quotes in the release:

If you annualize our quarterly revenue, it’s surprising that Apple is now a $50+ billion company.”

and

“The new products we are planning to release this year are very strong, starting this week with a major new product that we’re really excited about.”

I think we all know what that means.

In terms of the financials for the quarter itself, Apple continued strong momentum in terms of Mac and iPhone sales, while iPod sales continued to slip. The iPhone numbers are the most impressive: 8.7 million iPhones in the quarter, a 100 percent unit growth over the year-ago quarter — and up 17.6 percent from the previous quarter. Meanwhile, Apple sold 3.36 million Macs, which was a 33 percent increase over the year-ago period. iPod sales totaled 21 million, which was down 8 percent versus a year ago.

Overall, the company posted revenue of $15.68 billion and a net profit of $3.38 billion. That means revenue was up about $4 billion versus a year ago, while profit was up over $1 billion. Gross margin was 40.9 percent, up from 37.9 percent a year ago.

Apple also notes that it has gained another $5.8 billion in cash for the quarter, which should push its war chest very close to $40 billion.

Also noteworthy is that Apple decided to start adopting the new accounting principles for subscription devices such as the iPhone and Apple TV this quarter. During last quarter’s conference call, Apple noted that it wasn’t sure when it would start doing that, saying that it only had to by the end of the year. But with this new method in place, it “significantly changes” how Apple reports its numbers.

Below find my conference call live notes (paraphrased):

On the call: Apple CFO Peter Oppenheimer, Apple COO Tim Cook, as well as Apple’s Treasurer.

  • PO: Our best quarter ever. New records for Macs and iPhones.
  • We’re using the new accounting standards
  • Revenue grew 82%. It was our highest ever. By far.
  • Operating margin was our highest ever.
  • $3.57 earnings-per-share
  • 3.36 million Mac sales, beating our record by over 300,000.
  • Portable sales robust – up 18% year over year.
  • Desktop sales were way up due to the new iMac.
  • Very strong results for education in the quarter.
  • Music products
  • 21 million iPods. Less than a year ago. Traditional iPods went down, but iPod touch still growing well. Revenue growth due to that.
  • Share is still over 70% of U.S. MP3 players. Continues to gain share internationally.
  • iTunes Store had a record quarter. Its the largest online catalog with 11 million songs. 8,000 films, 2,000 in HD.
  • App Store has more than 3 billion downloads.
  • 8.7 million iPhones – 100% growth versus year ago.
  • Added 17 new carriers throughout the world in the quarter.
  • 86 countries for iPhone distribution
  • Japan, UK, Australia, France, Germany growth is strong.
  • 70% of Fortune 200 companies deploying iPhones to employees
  • Retail: $1.97 billion revenue – 13% increase.
  • About half of Macs sold were to new customers
  • 10 new stores opened in the quarter – including the Louvre in Paris.
  • 283 stores in 10 countries.
  • 100 remodels in the calendar year.
  • $7.1 million is average revenue per store.
  • Record number of visitors to the stores.
  • 40-50 new stores in 2010. Half in international.
  • Cash: $39.8 billion now. Up from $34 billion
  • Investment is all about preservation of capital, and high quality investments.
  • With the new accounting principles, we’ve retrospectively tinkered with results back to 2007 (when we started selling iPhones and Apple TVs)
  • With the new method, there is now much less deferred revenue for iPhones and Apple TV.
  • There is now hardware and software at the time of sale – and future software updates. $25 predicted upgrade price for iPhone and $10 for Apple TV. This is recognized immediately.
  • These new rules also change things like educational sales.
  • Looking ahead to March quarter: Revenue: $11 – $11.4 billion, versus $9 billion last year. (Apple always low-balls these)
  • 50% net income growth this quarter.

Q&A Session

  • Before the economic slowdown, Macs were growing faster (40+%) – should they continue in the new ranges?
  • Tim Cook: At 33% growth rate we’re 2x the market. In some international markets Mac growth is over 40%. Australia up over 70%. China almost 100%. These are our best products we’ve shipping.
  • 40% iPhone users are on AT&T – the bad press impacts you right? What are the benefits?
  • TC: AT&T is a great partner. We’ve been working with them since before the first iPhone. It’s important to remember their usage numbers – higher than any carrier in the world. In the vast majority of locations, they give a great experience. But they have acknowledged issues in some cities – we have personally reviewed their plans to make things better.
  • Gross margin with the old method would have been higher right?
  • PO: Our actual revenue exceeded the guidance we gave by far under the old method. Mac and iPhone fueled this, but iPod touch up 55% as well. Pleased with how fast our teams got up to speed on the new rules.
  • Which component prices will be up next quarter?
  • TC: Market is constrained in DRAM – which will drive prices higher.
  • Does guidance include unannounced products this quarter?
  • PO: I think you’re alluding to our event on Wed. Nothing to share today – stay tuned.
  • Now that the iPhone has been around a few years, can you forecast?
  • TC: 2.7 million units in the channel at the end of the quarter.
  • PO: For seasonal: Macs we expect a decline next quarter. For iPods we’ll see a decline too and it may be bigger than we’ve seen before. For iPhone we should see a dip too quarter-to-quarter.
  • Question about cash generation – will it change?
  • PO: I don’t see it changing. We’re very good at managing that stuff.
  • Can you talk about China and the iPhone? Did it meet expectations? Better this year?
  • TC: We usually don’t disclose units by country. But I will here. We started at the end of October/beginning of November. Earlier this month we passed the 200,000 unit mark that we’ve activated. We’re very focused on point of sale and customer experience, so we’re moving slow. We’re focused on the long term in that market. I won’t forecast on new partners, but we’re happy with China Unicom.
  • Can you comment on iPhone inventory comfort levels? You were worried previously.
  • TC: Channel inventory grew by 230,000 units to the 2.7 million level, which we’re comfortable with. I won’t put a target of 4-6 weeks on iPhone, Mac is 4-5 weeks, iPod is 4-6 weeks. But we’re seeing great expansion for the iPhone. And launching with big countries like China.
  • Any update on the Nokia lawsuit? Is Apple at any risk?
  • TC: We can’t comment on pending litigation.
  • iPhone app approval process is under fire. Is it the model itself with you as the gatekeeper?
  • TC: We have over 100,000 apps in the store – 90% are approved within 14 days of submission to put it in perspective. It’s about protecting consumer privacy, and to protect children – pornography is rejected outright. But most rejections are bugs in the code itself. This is to protect the customers and the developer. The noise is much higher than the reality. We’re doing pretty good.
  • Have you received feedback from iPhone owners who buy at stores about the method?
  • TC: I haven’t.
  • Everyone knows you’re going to be unveiling something exciting soon. How do you feel about new product opportunities ahead? Will there be a new iPhone, iPod, Mac?
  • TC: “I wouldn’t want to take away your joy of surprise on Wednesday when you see our latest creation.”
  • I want to revisit China and emerging markets from a broader perspective.
  • TC: We’ve just gotten going in China, and I’m really excited. Average income isn’t as high as the U.S. and the European markets, but there is a good size middle-class. We’re also learning about Brazil. 58% of our revenue last quarter was from outside the United States. And our growth rate is much higher.
  • What about non-retail store cap ex?
  • PO: $1.9 billion in 2010, unchanged from what we said a quarter ago.
  • Can you provide more color from developers and customers in the App Store?
  • PO: For competitive reasons we don’t want to share much of what you want to know. I will say we are way ahead of our competitors with 100,000 apps. It was a key reason why iTunes set a record in the quarter.
  • Can you talk about corporate iPhone usage? Are new apps helping that?
  • TC: Early to comment on the halo from the iPhone to the Mac. That did exist with the iPod. iPhone saw a big jump in acceptance in corporate environments with the iPhone 3GS. 70% of the Fortune 100 are piloting or deploying the iPhone. That’s great when we’ve been in the business only 2.5 years. We feel great about it.
  • Have you seen a change in financial model when you move beyond one carrier for iPhone?
  • TC: In the countries we have done that in, the sales are incremental as we ad carriers. We have multiple in the UK and France – and the numbers are good. Other countries as well. In most cases we’ve selected countries that we thought it would be helpful to have multiple carriers in.
  • Anything you’re doing for corporate growth of the iPhone?
  • TC: We’ve done a lot in the software with the iPhone OS. We’ve also added sales staff to help the carrier staff. So yes, this is a key focus.
  • Can you talk about the acquisitions of Lala and Quattro? Will there be services element to Apple’s business?
  • PO: We acquired Quattro to offer our developers a seamless way to make money. We occasionally acquire small companies from time to time for their tech and talent.
  • Will tax rates affect things?
  • PO: We did have a lower tax rate for this quarter. We expect it to be around 29% in 2010. It’s down a point due to foreign earnings.
  • Talk about the cash?
  • PO: I don’t really have a change in philosophy there.
  • What about App Store revenue?
  • PO: iTunes and App Store are still running “a bit over break-even.” We’re investing a lot in these stores – that’s where the revenue is going.
  • What would revenue have been under the old practice?
  • PO: I didn’t say, and that’s not something we’re going to spend time on working out. Half of the huge rev growth was driven by the accounting change.
  • What role will mobile advertising have on the business going forward? What about Google?
  • PO: We work with Google in some areas, and compete with them in others. I think mobile advertising is in its infancy. With the great folks we bought at Quattro, we look forward to giving our developers a great way to earn money. I don’t know how big it will actually be, but we’re working hard on it.
  • What are you seeing the Pro segment?
  • TC: We saw a small year-over-year in Pro software sales (Aperture, etc). I would still describe that as an economically challenged area currently.
  • What are you thoughts on education?
  • K-12 and higher ed in the US was up 16% year over year – which is the best rate we’ve seen since the recession began.

And that’s a wrap.

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