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Apple: The LIVE Blog From Tuesday's Earnings Call

Wednesday, 23 Jan 2008 | 2:46 PM ET

6: 03 PM EST: That does it--the call is over. Meantime, I look forward to getting your comments about all this. Is the market over-reacting to softer than expected guidance? are there clouds over the horizon? doesn't seem to be the case.

I'm interested to cull the analyst reaction to all this and see whether today's news leads to a Wall Street downgrade parade. seems to me, Apple still looks solid and that shares are oversold. the metrics still seem solid.

I think everyone was stunned when these numbers came out. now we have to wait for Wall Street to follow through; see what the experts have to say for themselves. but on first blush, nothing jumped out at me as a red flag warning, or that Apple was waving the white flag in any way. should be interesting to see whether today's sell-off was merely momentum follow-through from the craziness we saw during the regular trading day. longer term, I heard nothing on the call that changes my opinion thatI posted here last Friday--nothing.

5: 59 PM EST: Call is wrapping up. I hope this was useful. I encourage all of you to listen to the replay and follow trading in Apple tomorrow. My snap reaction: all the themes headed into the earnings seem solid. Seasonal slowdowns, nothing unexpected. And while there was nothing to indicate no recession is at hand, Apple gave no suggestion whatsoever that it was worried in any way.

5: 58 PM EST: Just my two cents thus far: I have heard nothing on this call that would suggest anything that warrants this kind of after-market sell-off.

5: 57 PM EST: Deustche Bank: How many retail outlets was the Mac available and targets for year end? We (Apple) have moved the storefronts to 9,700 compared to 7,700 a year ago. We (Apple) plan to double the number of Best Buy stores but that's all I can say. What about iPhone retail distribution? We have about 2,500 storefronts in Europe that carry iPhone; we have around 2,000 or 2,100 in the U.S. In terms of expansion, I have nothing to announce today.

5:55 PM EST: American Technology Research: Desktop business seems a little stronger than portable business. The iMac announcement in August was extremely well received and iMac had enormous momentum. The total of our (Apple) desktops grew 53 percent, compared to overall market of only 10 percent, says IDC.

5: 53 PM EST: For the current quarter, our (Apple's) expectation is that DRAM and NAND flash memory markets will remain in an over-supply condition. LCD market should be right at demand, so we think a favorable climate for component pricing. We've recently begun selling iPhone, so we don't have any experience with March quarter seasonality.

5: 52 PM EST: RBC asked about 3G roll-out for iPhone. Apple isn't commenting. Nor will Apple talk about next countries to get the iPhone.

5: 51 PM EST: RBC: 2.3 million sold in December quarter versus 4 million total phones sold and announced at Macworld. Would you say that suggests a fairly significant increase in run-rates since December? (Certainly seems that way. Seems like sales are taking off since Dec. 31!)

5: 46 PM EST: Sanford Bernstein: I want to explore the different curve on demand in the U.S. during the last quarter. Was that only iPod related? Or did the Mac curve look different too. Answer: The Mac curve looked very strong throughout the quarter. I was referring to the iPod, which was also very strong. What about outside the stores? Stores seem to be growing at 50 percent. But overall 22 percent. Seems to suggest non-Apple channels are growing in single-digits.

There may be some confusion: Apple Americas grew at 22 percent. The U.S. grew at 27 percent. If you strip out retail, what did U.S. grow at? We don't have that number. He's suggesting that Mac sales may be healthy at Apple stores, but not necessarily at other places that sell Apple merchandise.

5: 44 PM EST: Bear Stearns: iPod unit sales YOY were flat in the U.S., clarifying. Yes. Can you give us a sense of consumer spending behavior? In the Dec. quarter, the retail stores had a quarter for the record books. Our Mac sales were 504,000 in the stores, up 64 percent YOY and over half were sold to first-time Mac users. Gives us great confidence.

We (Apple ) expect to open 35 to 40 stores in fiscal 2008. 25 of our 204 stores are outside the US; and we'll open more stores in 2008 than 2007 internationally.

5: 42 PM EST: iPhone international roll-out? We still plan to enter Asia in 2008 and we also plan to roll out additional European countries in 2008. Anything specific for China? Nothing specific to announce today. AppleTV was kind of a hobby in the past. As Steve covered in Macworld, we're back with AppleTV take two, and we think we have it right this time. So don't think of it as big impact in 2008? I'm not projecting volumes on it, but I think we have a great product.

5: 41 PM EST: Piper Jaffray: overall health of the high-end consumer? How should investors put that into perspective for Apple's business in 2008. We'll leave the economic forecasting to others. For the December quarter, if that's any indication, we (Apple) did incredibly well. 27 percent revenue growth in US. 46 percent outside the US. Retail traffic was significant. Up 10 million people. We're very confident in our strategy.

5: 40 PM EST: Needham & Co.: Revenue sharing arrangement. Orange is selling the iPhone $399 euros, and selling for $749 euros unlocked. Does Apple share in revenue from unlocked phones? Apple declines to answer. Direct sales in the quarter for Q1 were 46 percent, compared to 44 percent in the year ago quarter.

5: 39 PM EST: Japan had a nice bounce back. Tim says he's extremely happy about what happened with Japan last quarter. Desktop share went from 6 percent to 10 percent in a year. Touch is selling very well. Really drove Japan's performance.

5: 38 PM EST: Bank of Montreal: any help you can give us on Leopard in the march quarter? Can you compare to Tiger? Tim: As I indicated, Leopard is off to a great start. customer and reviewer response has been off the charts. 19 percent of the Mac osx has already moved up to leopard.

5: 36 PM EST: Talking about the new MacBook Air: We (Apple) think it's a great segment for us, and a great new product. The orders are very strong.

5:35 PM EST: Cross Research: Can we get an update on Mac channels, best buy, etc. Tim says: We ended the quarter with 286 stores with Best Buy; thrilled with the results we've seen. We've elected to expand that further. We'll go to 600 stores over the next six months. (this is a dramatic expansion and bodes well for revenue over the next three quarters. this is a significant surprise.)

Cross asked a question about iTunes; Apple says the goal with the store is to break even; that it's too soon to predict how the new rentals business will do.

5: 33 PM EST: UBS still asking questions: more specific guidance for the iPod? For iPods, in terms of assessing seasonality, we've learned in the last year that what drives the market is innovative product launches and holiday shopping. That's why we're forecasting a seasonal decline. And those special factors that impacted the iPod in the U.S.? Tim Cook had mentioned that iPod sales were flat in the U.S. because of iPhone.

We (Apple ) set out to achieve three things for iPod in December quarter: we wanted to keep our high marketshare in US, we wanted to grow marketshare internationally. And we're very pleased to have accomplished both of those. We wanted to sell at least the number of iPod units from our guidance and our iPod sales of 22 million set a record. The third thing, most important, we wanted to establish an entirely new kind of iPod. The Touch did that. We overwhelmingly met this goal. We may have traded off a bit of unit volume by introducing the Touch. We grew iPod revenue by 17 percent YOY, and that's the highest increase we've ever seen.

5:30 PM EST: Mac Book Air: incremental additions to the line? Or Cannibalizing existing products? Orders are very strong for the MacBook Air, but too early to tell about the cannibalization of other notebooks.

5: 28 PM EST: UBS Securities: questioning guidance. The guidance in my opinion on EPS: it's hard to get a feel for what you think is ahead of you. Can you give us an idea of how you feel going forward? Tim Cook says, I am very confident in our business, our strategy, our products. We are very confident with what's in the product line. We're innovating, we're delighted about what we have in the pipeline.

5: 26 PM EST: Share buyback. You now have $18.5 billion in cash on the balance sheet, no debt. You'll generate $1.5 billion in cash each quarter. What will the board do with the money? The cash generation of the business in the December quarter was very, very strong. Over $3 billion in the December quarter. Stock buyback programs and other forms of returning cash are discussed with the board from time to time, but no specific details on where it will be deployed.

5: 25 PM EST: Citigroup: Could you comment on the "linearity" of iPod sales versus seasonality. NPD suggests weakness of iPod sales during December. Did that increase the iPod inventory levels? When you look at the demand curve across the quarter, on a worldwide basis, it's what we saw last year. In the US, during the gift-buying season, we saw a slightly different curve than we did last year, but made up for based on sales we saw internationally?

What about consumer demand? We (Apple ) gave you guidance that we have reasonable confidence in achieving. We'll leave the economic forecasting to others. We are focused on managing our business. Revenue grew 29 percent year over year and that's faster than the 21 percent we reported during the same period last year. Mac sales rose 43 percent.

Our retail traffic grew by 10 million visitors in the U.S. year over year. We remain very confident in our strategy and our business. And we'll continue to invest to innovate.

5: 23 PM EST: iPhone inventories? We're (Apple) not providing specific iPhone inventories. ASP trends for iPod: should we see ASP's holding at these levels? We don't forecast ASPs, but it did increase sequentially and year over year and that was because of the introduction of the Touch. Our customers are really loving the product.

5: 22 PM EST: JP Morgan: is the iPhone cannibalizing the iPod? No obvious signs of cannibalization says Cook.

5: 21 PM EST: Goldman Sachs: Mac channel checks. Our target is to be between four and five weeks of inventory. We ended the quarter significantly below that range. Mac sales were much higher than we anticipated on the quarter. We're obviously trying to remedy that situation now. We don't forecast channel inventory, says Cook. As far as iPod sales, unit sales were only up single digits, is there concern that we've reached the saturation point?

Oppenheimer says the iPod is bigger than merely an MP3 player. Look at the Touch. A mobile, wi-fi platform. Growing revenue 17 percent year over year and growth like this is not characteristic of a saturated market.

5: 19 PM EST: FTN Midwest: Asking about Mac shipments, Oppenheimer says the Macintosh business is on fire. On the "pro" segment, Oppenheimer says the segment performed very well. iPhone redemption's (the $100 credit because of the swift price plunge), Oppenheimer says the impact is largely behind us. No longer an issue. Very confident of hitting the 10 million goal in 2008 on iPhone unit sales.

5: 18 PM EST: Oppenheimer: We provide guidance that's reasonable of achieving. macs just had a terrific quarter, up 44 percent year over year. I look forward and I remain very confident in the business. the guidance at 29 percent that we're providing is up compared to the 21 percent we did during the same time last year.

5: 17 PM EST: First question--Morgan Stanley: If I just look at revenue guidance, over the last few quarters, it was typically a 25 percent decline, but it's more significant this time around. The suggestion is that you should see better seasonality. What's going on?

5:15 PM EST: We expect to generate EPS of about 94 cents. We are extremely proud of our December results. He calls the results outstanding, proud of the growth we have achieved. Questions now beginning.

5:14 PM EST: Tax rate for the quarter was 32 percent. Cash balance increased by $3 billion, now over $18.4 billion. We are targeting $6.8 billion, or 29 percent growth over the prior March quarter. We expect gross margins of 32 percent. We are guiding gross margins down because of sequential decrease in software sales, as well as sequential sales declines that are seasonal.

5:12 PM EST: Apple retail strategy continues to surge. Amazing numbers: $1.7 billion, up 53 percent year over year. $405 million in segment margin, compared to $259 million during the same period last year.

Opened six new stores on the quarter; now 204 total. $8.5 million per store; 6.4 million last year. Stores sold 805,000 Macs. 38.4 million visitors at the store.

Total company gross margin was 34.7 percent. A favorable commodity market, stronger software sales, weak U.S. dollar. Operating expenses were $1.2 billion.

5:10 PM EST: 21.2 million iPods. We have 4 to 6 weeks of iPod channel inventory. We established a totally new iPod in the marketplace, the iPod Touch. The first mainstream wi-fi mobile platform. Because of the higher cost associated with the touch screen and components, it's the most expensive iPod Apple's ever made. We succeeded in selling the Touch very well. And the higher price led to a higher average selling price: $181, driving revenue up 17 percent year over year. Very pleased with the iPhone momentum. We sold over 2.3 million iPhones on the quarter. Total revenue recognized from all iPhone products: $240 million.

5:09 PM EST: We're extremely pleased to ship 2.391 million Macs. Sales of the new iMac continue to surge, helping drive a 53 percent increase in desktop systems. $170 million in Leopard revenue, way above the $100 million Tiger generated in its first quarter.

5:07 PM EST: Very pleased to report our best quarter ever, says Oppenheimer. The revenue growth was driven by record Mac, iPhone and iPod sales. Domestic revenue grew 27 percent, year over year; international business grew 46 percent, and operating margins up above 26 percent.

5:05 PM EST: The call is beginning. Peter Oppenheimer, CFO and Tim Cook, COO, are on the call.

5:03 PM EST: The conference call is beginning a little late. Sounds like they're still signing in participants. Which isn't a surprise. I gotta think after this report that we'll see a much higher-than-expected teleconference turnout.

4:56 PM EST: Hello everyone. This is the live blog of the Apple Inc, conference call. Before we do the call, here's something on Apple's earnings.

It's a stunning piece of news from Apple, no question. The company beat the Street soundly for its holiday shopping quarter, even though its iPod number missed, and missed badly. Overall, a strong report with Apple beating estimates by a big 14 cents a share, with EPS of $1.76 vs. the $1.62 analysts were expecting. Revenue of $9.6 billion also met the whisper number, and was well ahead of the $9.5 billion analysts expected.

But woe is the company that misses guidance, especially in a climate like this one. Apple historically sandbags the Street, dampens expectations and then becomes the hero when it beats. But this is a pretty significant sandbagging, if you will. Apple anticipates 94 cents a share in EPS this quarter, or 14 cents below consensus estimates. That hurts. The news comes on lighter-than-anticipated revenue of $6.8 billion when analysts expected something over $7 billion.

Gene Munster at Piper Jaffray, a well known Apple bull tells me he is stunned by the results. The Mac number was far better than estimates: 2.4 million versus the 2.2 million analysts anticipated. Same goes for iPhone with Apple reporting 2.3 million units shipped against the 2.26 million Wall Street expected. But Munster says investors are being rattled by the guidance.

"All of the numbers were fine. They continued to gain marketshare. The issue is that people wanted a more confident 'guide.' There's nothing wrong with the actual numbers, it's just that people are worried there's going to be a break," Munster tells me.

The earnings guide-down was a little bigger than historically. Typically they guide down earnings by 9 percent, but this time around it's closer to 15 percent. People were likely hoping for something stronger and now there's worry that maybe the robust earnings days at Apple may be waning.

Munster says he's a buyer at these levels because the overall Apple theme is still very strong: Mac is gaining marketshare, and that's the key for the company longer term.

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