Live from Apple’s Q2 earnings call

April 22, 2009, 8:37 PM UTC

Apple (AAPL) on Wednesday posted sharply higher revenue and earnings in its second fiscal quarter of 2009, beating both its guidance and analysts estimates.

iPhone sales were particularly strong — up 123% year to year — and seem to have offset a 3% decline in the Mac division.

The headlines from the company’s press release:

  • Revenue: $8.16 billion, up 8.16% from $7.94 billion in Q2 2008
  • Profit: $1.21 billion, up 15.8% year to year from $1.045 billion
  • EPS: $1.33 per diluted share up 14.6% from $1.16
  • iPods: 11.01 million up 3.3% from 10.644 million
  • iPhones: 3.8 million, up 123% from 1.7 million
  • Macs: 2.22 million down 3% from 2.289 million
  • Gross margin: 36.4%, up from 34.7% in Q1
  • non-GAAP revenue: $9.06 billion, including deferred revenue from 7 quarters of iPhone sales
  • Guidance for Q3: Earnings of $.95 to $1 on revenue of $7.7 to 7.9 billion

CFO Peter Oppenheimer’s canned quote: “We are extremely pleased to report the best non-holiday quarter revenue and earnings in our history.”

That 36.4% gross margin is actually quite impressive, particularly in this economy. It must make the PC makers fighting over the razor thin profits in the netbook market crazy.

The conference call:

5:03 p.m. ET: Were in.

5:04: Peter Oppenheimer is going over the numbers summarized above.

5:05: Talking about how difficult it was to compare Mac sales, given the 50% growth last year. “Very positive about Mac performance.”

5:06: Touts iLife and iWork.

5:07: iPod sales. “Strong sales” of iPod touch, but no numbers. Share of MP3 market over 70%, according to NPD. iPod sales growth in Europe, Australia and China.

5:08: iTunes sold developments. App store. Over 35,000 applications. This is a new stat. Close to 1 billion downloads (but no cigar today).

5:09. iPhone. Now in 81 countries. Rev recognition $1.52 billion, up more than 300% from last year. Repeating what’s new in iPhone 3.0. Deferring rev. on all iPhones sold after March 17.

5:11: Stores. Now 252 stores, one new this quarter. Rev. 1.47 billion, up from 1.42 billion, but average sales per store was down: $5.9 million down from %7.1 million.

5:13: Gross margin discussion. Why up? Commodity costs. Higher-rev products. Etc. He’s losing me.

5:13: Cash discussion.

5:14: Guidance: Forecasting is “challenging.” Rev: 7.7 billion to $7.9 billion. GM: 33%. OpEx $1.35 billion. Tax rate: 31%. EPS”: 95 cents to a dollar.

Confident. Pleased. Etc.

5:16 Q&A below the fold.

See also: Five key quotes from Tim Cook.

Q: Tim, what is outlook for component pricing? A: Cook: Still favorable, but NAND will increase sequentially. Last quarter was about wringing out excess inventory. Average bill of materials in range, not necessarily down.

Q: Peter, cash flow was down year to year. First time in a long time. How come? A: No because of deferred revenue. Three things. 1st: Made pre-payment to LG.(?) 2nd accoungs payable. 3rd: Tax payments. Made 1.3 billion payments in march quarter.

Q: Mac business. Desktop side exceeded expectations, but ASP down. What’s going on in this tough economy? A: Tim: With new desktop line we saw acceleration of sales, which allowed us to equal year before. After launch, higher mix of desktops, helped push average selling price down. Mac pro lower, higher Mac mini. All through quarter pro products were weaker than year before, mainly due to the economy and businesses cutting back. And education in U.S. contracted 11% year over year, due to states not having tax revenues as projected. Hoping stimulus funds will start to flow. In notebooks, sales of $999 Macbook helped drive down ASP. Good news: consumer holding up much better than businesses and education.

Q: What about netbooks? A: Tim: For us it’s about doing great products. When I look at what is being sold I see cramped keyboards, terrible software, junky hardware, small screens. Just not something we would put the Mac brand on. So it is not a space as it exists today that we are interested in. But we’re interested in people who want a small device to do e-mail and browse the net. (The old buy an iPhone story.) But if they can find a way to deliver a product that does something interesting, that could change. Says to perform as they did in this terrible economy is “quite an accomplishment.” The pipeline looks fantastic.

Q: App Store. Paid v. free apps. iPhone v. iPod touch. A: Sorry, don’t disclose. Just hours away from billionth download. Tim: One of the keys to the growth of the iPod this quarter was that the iPod touch more than doubled year over year. The sum of iPhone and iPod touch is about 37 million. So great platform for developers. Apple years ahead of everyone else.

Q: Indirect sales mix. A: Direct 48%. Didn’t bear on gross margins. In June quarter, ed buying begins, one of the reasons expects gross margins to fall and impact of US dollar and commodity costs.

Q:  Gross margins. A: Won’t stay as high.

Q: Consumer turnaround? A: Tim: If you look at iPod, you see little difference year to year, except that iPod touch is a runaway hit. On Mac side, sell-through accelerated in March after we turned every desktop in the company on the same day. iPhone was reasonably linear business after the first week or two, so we were pleased not to see the usual seasonality curve.

Q: iPhone. What about new carriers and what about Steve Jobs? A: Tim: We view AT&T as a very good partner etc. Have no plan to change it. Verizon is on CDMA, and we wanted one phone for the whole world.

Q: China. A: We now have three of the four BRIC (Brazil, Russia, India and China) countries. China we would like to be in withing the next year (!) but nothing to announce.

Q: Steve Jobs. A: Peter: What is your question? We look forward to Steve returning to Apple at the end of June.

Q: Mac question. Down 8% in Americas. Lost share in U.S. market. Do you care about your market share? Change in pricing. A: Tim: One world wide basis, IDC said market contracted 7%, we contracted 3% but flat in sell through. But in U.S., a large percentage is education oriented, so subject to budget constraints in states. Also, we saw less pro-Macs being bought in U.S. compared to other countries, which we attribute to the economy. Yes we do care about market share, but cycles come and cycles go, and what we care about is making the best computers in the world, not making the most. We believe that if we do that over the long term, that we will gain share.

That’s a quote for the books.

Q: iPhone price elasticity. A: Tim: Goes off topic to talk about product plans and app store and int. exapansion. We have a plan that continues to make us leaders in the space and years ahead of the competitors and not leave a price umbrella for our competitors.

Q: How do we think about 36.4% gross margins this quarter vs. 33% next quarter? A: Stronger U.S. dollar and education buying season. Expands on both.

Q: % of customers who upgraded iTunes library to DRM? A: Nothing specific. Too soon. iTunes store was strong in general.

Q: Cash flow. Any one-time items in June quarter? A: Goes over what happened this quarter, going from holiday to march quarter. No pre-paids to announce in June quarter. Will make an estimated tax payment, but don’t expect to have audit “true-ups” so not as significant.

Q: iPhone. Wal-Mart. How much impact on Wal-Mart? A: Tim: A key partner for iPod and expanded to iPhone. We believe they provide us with extended reach. But early days yet, not much to report. In terms of total distribution, selling in over 50,000 store fronts in 81 countries. Regarding inventory: Last quarter 1.7 million units in inventory. We are very conservative in how we count that. E.g. we count demos that we can’t sell. 100,000 units. We count units in transit. 100,000 units. In many cases count inventory all the way to the store front. Other companes don’t. Not going to talk about weeks of inventory because its our first June quarter with worldwide spread, but we saw channel inventories were in fall by the end of the quarter, but we ended at 1.83 million units. Long answer.

Q: Explosion of apps, what steps taking to ensure iPhone apps can be discovered? A: Peter: Easy to find top 50 and 100. Genres as well.

Q: Unusual patterns by title? A: Hitting a billion downloads in 9 mos. (not answering question). Games quite popular.

Q: Competition in smartphones? Palm pre? A: Tim: Difficult to comment on products that aren’t shipping. iPhone now sold over 21 million, highest satisfaction, a billion downloads, breath of apps, so we think we’re years ahead. The power of the device and the ecosystem is enormous and we think we’re just scratching the surface.

Q: Cash? A: Peter: We’re working hard to make sure it grows. Nothing new to announce today. Very focused on principal preservation. No update on new headquarters. (!?)

Q: Gross margin guidance suggests strong ed selling season? A: Peter: Last year our GM was down 1% sequentially, this year down a few percent more. Back to his answer about the education buying season.

Q: Protection your intellectual property. No action this year on Palm. How come? A: Tim: We thinks iPhone innovation is leading the comp. by years. We think competition is great as long as companies invent their own stuff.

That’s a wrap. Replays will be available at roughly 5 p.m. PT (8 p.m. ET).