Live: Apple FY Q3 07 Earnings call, 2 p.m. PST

July 25, 2007, 2:00 PM UTC

I will be reporting live while the call takes place; refresh this page for updates.

Apple (AAPL) is set to begin its conference call with analysts after reporting results for its third fiscal quarter that exceeded analyst estimates. Apple reported revenues of $5.41 billion and net quarterly profit of $818 million, or $.92 per diluted share. That’s up from revenue of $4.37 billion and net quarterly profit of $472 million, or $.54 per diluted share, a year ago. Gross margin was 36.9 percent, up from 30.3 percent a year ago.

Apple broke its record for Mac shipments – an extraordinary accomplishment considering the company’s strongest quarter is typically its fiscal Q1, which includes the holiday season. Apple shipped 1,764,000 Macs, 33 more than a year ago, topping the previous quarterly record by 150,000. All of Apple’s computers now use Intel (INTC) chips. Apple also sold 9,815,000 iPods during the quarter, 21 percent more than a year ago.

Apple’s accomplishment is also noteworthy because the company delayed the rollout of Leopard, the next generation of its OS X operating system, until October. Normally hardware sales slow down ahead of a major OS upgrade, as customers wait to buy computers that are pre-loaded with the new software. Apple is likely to reap benefits from this into the future, as the Mac installed base pays to upgrade to Leopard – a high-margin product.

The Apple call is slightly delayed as operators handle a last-minute surge in participants.

The Apple call has now begun.

Nancy Paxton is giving the usual disclosures.

Peter Oppenheimer is giving intro remarks, including the highest-ever revenue for a June quarter.

Operating margin was 19.2 percent, because of favorable commodity prices. Profits were up 73 percent.

U.S. Mac shipments grew 32 percent. Worldwide, Mac growth was more than 2.5 times overall market growth.

Laptop sales grew 42 percent, for 64 percent of Macs sold. Apple had 3-4 weeks of Mac inventory at the end of the quarter.

Apple ended the quarter with 4-6 weeks of iPod inventory, which is within the target range.

Apple saw 33 percent growth in “Other Music” revenue, driven by iTunes Store sales. (Note: This is the category Apple TV is counted in, and Apple says next to nothing about Apple TV.)

During the quarter, iTunes became the third-largest U.S. music retailer, passing Target (TGT). Apple sold 270,000 iPhones through AT&T (T) and Apple. Apple is apologizing for activation problems during the first week, but says AT&T largely has those worked out.

One research firm said of iPhones: Ninety percent of iPhone owners surveyed said they were extremely or very satisfied with their phones.

Apple hopes to sell 1 million iPods by September 29. Apple will announce Europe plans later this quarter.

Apple plans to incorporate new features into the iPhone over time, therefore Apple is recognizing iPhone revenues over 24 months. Apple will begin to recognize revenue from AT&T payments in the current quarter.

At the end of the June quarter, there were $180 million in deferred revenue from iPhone and Apple TV.

Apple is revisiting how it reports store performance based on iPhone subscription accounting. Apple is now going to begin measuring retail performance generally consistent with other operating segments, using the cost of sales metric for Apple products sold through retail stores — similar to other operating segments.

Apple is also changing the way AppleCare and .Mac are accounted for. They will now recognize the revenue over the life of the contract agreements.

There were $915 million in Apple Store retail sales for the quarter. Fifteen stores were remodeled and 8 new ones opened, for a total of 185 stores open by the end of the quarter. The stores sold 330,000 Macs, for 53 percent year-over-year growth. Half of buyers in Apple Stores were new to the Mac.

Education is booming — Macbook sales are particularly strong.

Gross margins were 36.9 percent because of components and 954 million in operating expenses.

For Q4, Apple projects:

  • $5.7 billion in revenue
  • Gross margin of 29.5 percent (lower because of back to school promotions, product transitions, and component costs)
  • 65 cents in EPS expected

QUESTIONS:

On gross margins:

It’s guided down because of the back to school promotion, which brings new customers (as well as components and product transitions).

Tim Cook:

Apple and AT&T sold 270,000 iPhones in the first 30 hours — AT&T told Apple it sold more iPhones sold in the first weekend than it had ever sold of any other wireless device during an entire month.

Our primary focus is not on initial sales — it’s on building a third great business for Apple alongside the Mac and iPod businesses. It won’t be easy because competitors are large and entrenched — Apple will measure success in years, not months.

Europe sales begin next quarter beginning with a few major countries and expanding through 2008. (Tim uses the term “model by model” to describe how he hopes the iPhone business will build, nodding to hardware upgrades in the future. It sounds like he’s trying to cool down the iPhone hype.)

Almost all AT&T and Apple stores have the iPhone in stock today.

AT&T payment:

Apple will not discuss the terms of the AT&T agreement, and how Apple is receiving payments from AT&T. Analyst asks if she can take the $180 million in deferred revenue and divide it by 270,000 units, and get an average selling price for iPhone hardware. Apple says basically, yes. (Oddly, that comes out to an ASP of $666, which is more than the most expensive iPhone costs. UPDATE: The $180 million includes Apple TV hardware sales.)

Apple is refusing to explain the terms of the revenue share between Apple and AT&T, and what kinds of payments Apple is getting. Apple won’t say whether the payments from AT&T will be recognized over two years, or some other way.

Tim reiterates that Apple expects to sell the 1 millionth iPhone by the end of September, and Apple feels confident about selling 10 million by the end of 2008.

Is Apple getting payment from vendors whose apps are on the front of the iPhone? Apple refuses to answer. (Does this mean Apple is getting payment, or hopes to? It wouldn’t be unheard of. Software companies like Google (GOOG) routinely pay for desktop placement on PCs.)

On Besy Buy:

At the beginning of the quarter Apple was in 50 Best Buy stores, by the end it was in 75 stores. By the end of this quarter Apple expects to be in 200 stores, and expects to be almost at 300 stores by the end of the calendar year.

On margins:

Apple sees the NAND flash market tightening. Low DRAM prices really helped profits in the third quarter quarter. Also, in the fourth quarter LCD supply is tightening more than usual.

On whether 270,000 iPhone shipments include those to AT&T stores, and how many were in inventory at the end of the quarter:

Yes, that includes the AT&T number. (Apple doesn’t answer the inventory question, exactly.)

Apple clarifies that the $180 million number (mentioned above) includes Apple TV.

On whether iPhone prices will be coming down:

Apple is talking about how satisfied customers are with the phone at the current price. (That makes it sound like the price isn’t coming down soon.)

Apple: “We saw absolutely no obvious evidence” of iPod cannibalization from the iPhone. But executives said they will continue to track it.

On corporate e-mail, and business use of the iPhone: Will Apple be doing anything more?

Apple repeats the line about the iPhone being a breakthrough device that’s great for everyone. Says a number of corporate customers are piloting use of the iPhone and are very happy with the results so far.

Retail was a standout for CPU growth, and Japan was weak. What does that mean?

Retail stores had an outstanding quarter — revenues up 33 percent, Macs up 34 percent on a per-store basis. There’s tremendous interest in the phone … and the traffic (partly from iPhone interest) has been a benefit to Apple retail stores.

Costs of the iPhone launch:

Apple provided extra staffing in stores, and online in support areas for the iPhone launch. Also because of marketing, there were added expenses. Apple notes that it’s taking the marketing costs for the iPhone quarterly, but recognizing the revenue over two years.

Apple says Apple TV revenues are recognized in the “Other Music” category as an accessory. (Wow. That’s not a huge category. More evidence that Apple TV isn’t doing very well.)

Another question presses on why the gross margins will be down so much. Apple refuses to give more info.

It’s mentioned that Apple begins to use “more and more flash in all of our products.” (What would account for the projected drop in Q4 margins is if Apple starts using flash in laptops during this quarter, just as flash prices are beginning to firm up.)

iPhone in Europe: How does Apple expect to do?

Repeats the line about iPhone being a breakthrough product, saying “It’s great for Americans and Europeans.”

On iPhone:

We’ve only been at this for a few weeks — we’re very much beginners at this.

On component availability:

Apple ended the quarter with 3-4 weeks of Mac availability, which is on the low end. (He seems to be suggesting that yes, there are some component issues throttling things.)

Apple won’t disclose iPhone average selling prices. Apple does say the mix skewed toward the 8-gigabyte iPhone.

(There’s a lag here because of questions Apple either won’t answer, or gives a non-answer to.)

Apple reiterates its plan to enter Asia with the iPhone in 2008. Apple says it is not setting specific market share goals.

The earnings call has ended.