Highlights From AAPL's Q4 Conference Call: 25% Revenue Growth Year-Over-Year, Issues Mixed Guidance

October 20, 2009 10:49 AM EDT

Apple Inc. (NASDAQ: AAPL) reports Q4 EPS of $1.82, 40 cents better than the analyst estimate of $1.42. Revenue for the quarter was $9.87 billion, which compares to the estimate of $9.20 billion. Shares are up about 5% this morning.

Highlights From AAPL's Q4 Conference Call:

• Sees Q1 EPS of $1.70-$1.78, versus the consensus of $1.91, sales of $11.3-$11.6 billion, versus the consensus of $11.45 billion.
  
• iPhone units sold 7.4 million units, up 7%, Mac units sold 3.05 million, up 17%, iPods sold totaled 10.2 million, down 8%
  
• (CFO) Revenue for the quarter was 9.78 billion, representing 25% growth over the prior September quarter's result. This was Apple's second highest quarter avenue prior to last December quarter.
  
• Operating margin was Apple's highest ever at 2.19 billion, representing over 22% of revenue and higher than our guidance due to better than expected revenue and gross margin.
  
• Net income was 1.67 billion, which translated to earnings per share of $1.82. In terms of non-GAAP measures, adjusted sales totaled 12.25 billion for the September quarter, which was almost 2.4 billion higher than our reported revenue.
  
• Adjusted gross margin was 5.21 billion, which was almost 1.6 billion higher than our reported gross margin. And adjusted net income was 2.85 billion or almost 1.2 billion higher than our reported net income.
  
• We generated outstanding Mac sales of 3.05 million, beating our previous record set in the year-ago quarter by over 440,000.
  
• Quarterly Mac sales grew 17% year over year and this compares extremely favorably to IBC's latest published estimate of 2% growth for the market overall in the September quarter.
  
• Portable sales increased 35% year over year and represented 74% of our Mac mix.
  
• We once again had a very successful back-to-school season, and we're very pleased with the 12% year-over-year increase in Mac sales for U.S. education institution.
  
• We sold almost 10.2 million iPODs which was down from over 11 million in the year-ago quarter. Our latest research indicates that 50% of recent iPOD buyers were purchasing their first iPOD, including those in our high market share countries such as the U.S., Japan, Australia, Canada and the UK.
  
• With stores in 23 countries, I tune sometimes store's largest music retailer offering over 11 million songs in addition to over 50,000 TV episodes and 7,500 films.
  
• I would now like to turn to the iPhone. We are thrilled to have sold almost 7.4 million handsets in the September quarter. That's a new company record and an increase of 7% over the prior September quarter when we increased channel inventory by two million handsets foal hosting the introduction of the iPhone 3G and dramatic expansion of geographic distribution.
  
• iPhone sell-through in the quarter increased 38% year over year.
  
• With over 85,000APS available and two billion customer downloads to date including half a billion downloads in the September quarter. In addition to adding more Apple APS at an amazing pace, we continue to enhance the store experience with 0S3.1 which includes futures and genius recommendations and a way to organize AP. Revenue handset sales, carrier payments was 2.3 billion during the quarter compared to 806 million in the year-ago quarter, an increase of 185% the sale value of iPhones sold during the quarter was 4.5 billion.
  
• The stores had a record quarter posting the highest revenue, segment margin and Mac sales ever. Revenue in the quarter was 1.87 billion compared to 1.72 billion in the year-ago quarter. Our stores sold 670,000 Macs compared to 596,000 Macs in the year-ago quarter.
  
• With an average of 262 stores open during the quarter, average revenue per store was 7.1 million compared to 7.6 million in the year-ago quarter. Retail segment margin was 410 million, or 22% up from 301 million, or 17.5% in the year-ago quarter.
  
• We hosted 45.9 million visitors in our stores during the quarter compared to 42.7 million visitors in the year-ago quarter, an increase of 7%.
  
• In November, we plan to open our first two stores in France, including one at the Louvre as well as our fourth high profile store in Manhattan on the upper west side.
  
• Operating expenses were 1.42 billion and included 151 million of stock compensation expense. OI&E was 45 million and the tax rate for the quarter was 26%.
  
• Turning to the cash, our cash plus short-term and long-term marketable securities totaled 34 billion at the end of the September quarter compared to 31.1 billion at the end of the June quarter. An increase of 2.9 billion.
  
• The guidance for the December quarter that we are providing today is based on the subscription accounting treatment that we have applied today for the iPhone and Apple TV sales.
  
• (Q&A) Peter, I was just hoping you could talk a little bit about the factors informing your guidance for the following quarter. Specifically, you know, why the sequential jump in revenue is so far below what you've experienced in the last couple of years, and also, why gross margin should be down as much as you've got it sequentially, the main factors there. Thank you. (A)Let me start with gross margin. I'll come back to revenue. We expect gross margins to decline sequentially, about 34%. Primarily as a result of four factors. First, for the new products that we have and will announce, we're delivering greater value to our customers and these products have lower gross margins than their predecessors. Second and as expected, we will see a seasonally higher mix of iPODs and expect snow leopard box sales to be less in their second quarter. And third, we'll incur significantly more air freight and fourth, we expect component costs to be higher than what we saw in the September quarter. You know, regarding our revenue, as you know, the education and back-to-school seasons have largely concluded. And the December quarter has been typically driven by holiday purchases in the second half of the quarter. Our guidance this quarter includes double-digit revenue growth from last year, which was the best quarter from a revenue perspective in Apple's history. We're also seeing lower ASP's this year, but we remain very confident in our business. We're shipping the best products that we ever have in Apple's history and customers have clearly responded.
  
• Can you discuss two questions, one on iPhone. Can you discuss channel inventory, what it was ending the quarter, and what the supply situation is, if there are any supply constraints during the quarter?We noticed lack of availability overseas and that looked alleviated toward the end of the quarter, pit would seem like there's pent-up demand heading into December. If you could discuss that, that would be great. (A)For much of the quarter, most of the countries where we're selling the iPhone 3GS was very low in inventory as demand outstripped the supply. We did improve supply markedly in September and supply and demand converged in the vast majority of countries either in September or in early October. In terms of your channel inventory question, we now have about 2.4 million units in the channel, and that's an additional 585,000 from the previous quarter end.
  
• Are you comfortable with that given that you have China launching and maybe even a few other GOs? (A)I would have liked to have had more honestly because we were still short in some countries at quarter end. As indicated, it was early October before we were able to get supply and demand balanced in some countries.
  
• I know you don't want to quantify China maybe, but are there any certain levels of excitement you have and any limitations in terms of APS and iTunes that may limit the sales out of the gate, or anything else you can say qualitatively around that launch that gives us an idea of velocity of units? (A) We're thrilled to be launching there on October 30th with China Unicom. We will start with 1,000 points of sale and expand further over the next several months thereafter. They've announced the plans and prices that they'll have for the device and for the service, and there's a very wide range here from on the post-pay side from $18 a month all the way up to 8,500 a month, and at the higher price points, an individual is able to actually get the device for free and it goes up as you go down the ARPU as it would in most countries. As you know, as we shipped the 3G and the 2G phone prior to that, we discovered that there were quite a few phones going into China, so it would seem to us to indicate that there's a good opportunity, and we're really excited to get started. We're not making any projections on the volume, but it's a huge market. The largest market in the world in terms of total phone, and I think it's very important that we get started to make it as large as possible on Smart Phones.
  
• Do you guys have any updated comments on the economy? That's my last question. It seems like the quarter must have closed very strong especially with those Mac numbers. You. (A) No, we just spend our time projecting our business and leave the economy forecasting and comments to the economists.

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