The AAPL quarter
I listened to the AAPL March quarter conference call yesterday and looked at the financials.
the numbers–really good
“CUPERTINO, California—April 20, 2010—Apple® today announced financial results for its fiscal 2010 second quarter ended March 27, 2010. The Company posted revenue of $13.50 billion and net quarterly profit of $3.07 billion, or $3.33 per diluted share. These results compare to revenue of $9.08 billion and net quarterly profit of $1.62 billion, or $1.79 per diluted share, in the year-ago quarter. Gross margin was 41.7 percent, up from 39.9 percent in the year-ago quarter. International sales accounted for 58 percent of the quarter’s revenue.”
It was reassuring to hear that, as usual, AAPL executives are “thrilled” over just about everything and customers of all products in all countries are, like the McDonalds ads say, “lovin’ it.”
But it was an outstanding quarter, AAPL’s best non-holiday three months ever, featuring an all-time high for iPhone sales. The company sales highlights:
–2.9 million Macs sold during the quarter, up 33% year on year vs. 24% growth for the PC industry. 50% of Mac buyers are still first-time users. The company didn’t exactly answer the question put to it, but it sounds like the “halo effect” of the iPod and iPhone on Mac sales is a global phenomenon, not just a US one.
–10.9 million iPods sold vs. 11 million in the year-ago period. But iPod Touch showed 63% year on year growth, creating a 12% revenue gain for this product line.
–8.75 million iPhones sold vs. 3.8 million in the march quarter of last year. This is 133% growth, or 4x the rate of market expansion.
–AAPL is “shocked” by high demand for the iPad in the US, so much so that AAPL had to postpone the foreign launch of the product so that it would have enough manufacturing capacity to roll out the 3G version of the device on time in the US. What was the problem? Other than DRAM, components are easy to get on short notice at reasonable prices. And there’s lots of AAPL-quality contract manufacturing capacity available. But it takes a period of weeks to get everything lined up–and more time to get the finished goods into stores.
It sounds as if AAPL has already ramped expanded production up, so it looks like an unrestricted flow of iPads will be coming from the company for the June quarter.
AAPL responded to questions about possible cannibalization of other AAPL offerings by saying that it’s too soon to tell–which it is (and Macs and iPod Touches are the only areas where you might be able to notice)–but that there’s no evidence of it to date.
what I thought was interesting
the geographical breakdown of operating income (in $millions)
US $1674 up 20% year on year
Europe $1661 up 102%
Asia-Pacific $892 up 320%
Japan $441 up 80%
Only about a third of operating profits, not counting retailing income from the Apple stores, are coming from the US.
AAPL said on the conference call that first-half revenues from “greater China,” that is, the mainland + Taiwan + Hong Kong were up 9x year on year, at $1.3 billion. This is presumably the introduction of the iPhone there.
If we figure that AAPL gets $600 for each iPhone it sells to a carrier, that amounts to $5.25 billion in sales for the quarter, or close to 40% of the company total. That number understated the importance of the iPhone to AAPL, because it doesn’t include the share of revenue from carriers that AAPL also gets.
You may remember that AAPL recently changed the way it accounts for the carrier revenue. It used to show this money more or less as it came in, over a two-year contract period. Now it does a present value calculation and recognizes it all when the contract is signed. (I think the new way is the better accounting method, but AAPL actually provided more information under the old method, when it also gave the new method results in footnotes. Oh, the exciting life of an analyst!!!)
This time last year, AAPL was using the old method. This year’s financials restate those results. The restated number show a gross profit that’s $656 million higher than what was originally reported. If we assume that’s all the present value of carrier contracts, and that present contracts have the same profitability, then the comparable number for carrier payments for the March 2010 quarter is a gross profit of $1.5 billion. If AAPL takes the same manufacturing markup on iPhones as on other products, then the iPhone is producing 55% of AAPL’s gross income. You can do more refining that would imply that the “real” percentage is actually higher, but the point would remain the same–AAPL has transformed itself in just a couple of years into a smartphone company that happens to do other stuff. This is an almost unbelievable achievement.
the tax rate (a minor point, but an accounting thrill)
AAPL estimated three months ago that its full-year tax rate would be 29%, based on its forecast of the geographical composition of revenues. Now it realizes it wildly underestimated foreign sales, presumably in the Pacific. Its new estimate for the year is 27%. To offset the first quarter tax rate being too high, AAPL had to make the second quarter rate low enough (at 24%) so that the first half as a whole was back on track. This had the effect of shifting some profit recognition from the first quarter to the second.
AAPL believes that the market potential for the iPad is huge. As a result, it says, it is pricing the iPad in an “extremely aggressive” manner. Even so, it was caught by surprise by the high level of demand for the device in the US.
AAPL expects sales of the iPad to depress gross margins in the June quarter by 1.5%, or 25% of the gross margin drop from 41% to 35% that it is guiding analysts to expect for the next three months.
Question: how many iPads do you have to sell, and at what sub-par markup to make such a big dent in gross margins for a firm as big as AAPL?
AAPL’s answer: we’re not saying.
What I think: if AAPL marks up the iPad by a third over its manufacturing cost–remember, there are a lot of marketing expenses for a new product–then it has to sell about 2 million in the June quarter to move the gross margin down that much. Depending on the model chosen, that could end up being $1.5 billion in sales. Wow!
other stuff (not on the conference call)
The iPad is banned in Israel, because it uses too much mobile bandwidth. Tourists have to leave them at the border.
An AAPL employee left a test model of the yet-to-be-released iPhone 4.0 in a bar in Redwood City, California. Whoever found it sold it to the blog Gizmodo, where you can see an analysis. Interestingly, just like Mission Impossible, AAPL caused the phone operating system to self-destruct when it discovered it was lost.
AAPL doesn’t like netbooks. No surprise here. But the company said on the conference call it “couldn’t think of a single thing a netbook does well.” I guess we have to wait for ASUS or Acer to release Chrome-compliant models.