Apple Q4 Analysis: Mac Red Hot, iPhone Price Cut Doubles Sales Rate

SAI's Apple earnings analysis is brought to you by Petsky Prunier LLC, a leading specialty investment bank serving the marketing sector. Petsky's clients include companies in the marketing services & technology, interactive advertising, digital content & commerce and specialty media industries.

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Conference Call Transcript

SAI Apple Analysis Spreadsheet

Initial Assessment: Strong quarter across the board. Easily beat consensus revenue, crushed consensus EPS, driven by strong Mac (laptop and desktop) sales. iPhone sales also well ahead of expectations.

Post-Call Analysis:

Another record quarter for Mac sales proves that Apple is more than just an iPod factory. Apple sold 2.2 million Macs during Q4, almost 25% more units than during Q3 and a 35% year-over-year unit-sales jump. Desktop Mac unit sales, which had essentially been flat for the last 2.5 years, jumped about 30% both sequentially and year-over-year, thanks to (we think) the super-thin, new iMac design, and built-up interest from the creative community, which was waiting for Adobe's CS3 suite to come out before buying new Macs.

The surprise $200 iPhone price cut essentially doubled Apple's phone sales rate. Apple said today that it sold 1.12 million iPhones in Q4. In the first 71 days of the quarter, it sold 730,000 phones -- a run rate of about 10,000 phones a day. It cut price of its phones on day 67, so we're not sure how many it sold immediately after the price cut. But we do know that in the last 20 days of the quarter, it sold another 390,000 phones at the reduced price -- a run rate of about 20,000 a day. Apple management said during today's conference call that perhaps as many as 250,000 of the iPhones sold so far -- more than 15% -- were bought by people who want to unlock them to work on other networks. That's a lot, and Apple doesn't get any AT&T revenue from those phones.

Apple is expecting a monster December quarter. Management gave guidance for $9.2 billion in Q1 revenue, representing 30% year-over-year top-line growth. How will it get there? Macs, new iPods, and selling more expensive iPhones in Europe will help: by hopping the pond, Apple expands its iPhone market opportunity by 60%.

Key Stats:

• Revenue: $6.22 billion (vs. expected $6.07 billion)
• Gross Profit, Margin: $2.09 billion, 34%
• Operating Income: $1.06 billion
  
• Net Income: $904 million
• Earnings Per Share: $1.01 (diluted)
  
• iPods Sold: 10.2 million
• iPhones Sold: 1.12 million (vs. expected 975,000)

Conference call notes after the jump.

• 5:14 p.m. EDT Call hasn't started yet: Apple is "admitting additional participants." Note that Webcast (using Apple QuickTime technology) is totally silent. No way to tell if working or not.
• 5:20 $9.2 billion rev. projected for Dec. qtr. Gross margin guided down because of product transitions, reduced pricing, component costs, indirect sales.
• 5:22 Q&A: Why so confident about Q1 rev. while some worried about economy? Mac sales, iPod sales. (But Mac sales could be lower thanks to back-to-school promotions.) European market research suggests iPod market share up in Sept.
• 5:28 230 Best Buy stores operating at end of Sept. qtr, expect more than 270 by end of Dec. qtr.
• 5:30 Why components more expensive while (Citi analyst) sees lower prices? DRAM and NAND Flash markets favorable last qtr, believe will continue. Hard drive and LCDs tight, continue to be. Do expect to stabilize.
• 5:31 Sounds like we missed most of prepared remarks thanks to shoddy conference call setup.
• 5:32 Why is Europe outgrowing U.S.? Did not have typical lull in August thanks to iMac, iPod announcements.
• 5:35 Saw iPhone sales accelerate after price cut. Shocking!
• 5:36 Working with Salesforce.com to get product to work on iPhone. Businesses love it! (Do they?)
• 5:38 Japan still most challenging market. (Revenue down 11% y/y.)
  
• 5:39 Note that Webcast still not working on MacBook/QuickTime/Safari. Perhaps time for Apple to switch to Windows Media? (*ducks*)
• 5:42 More than 40,000 iPod sales locations, 8,700 Mac locations
• 5:44 We don't know how many people are buying iPhones just to unlock. Guessing 250,000 of 1.4 million total sold with intention of doing that. Many after the price cut. (Wow! That's a lot. Did I hear this correctly?)
  
• 5:45 iPhone more or less seasonal than typical phone market? Non-answer from Apple.
• 5:47 Lots of confusion with conference call. Just skipped two analysts. Ouch! What a joke.
• 5:49 95% of iPhone owners would recommend the phone to others. No updates on enterprise tests. No obvious iPhone/iPod cannibalization pre-new iPods, no analysis post-new iPods.
• 5:52 21 million Macs eligible to run Leopard, new Mac OS launching Friday
• 5:53 iPod halo effect: selling iPods to Windows users has driven Mac sales. Most successful back-to-school season ever.
• 5:56 "Can you hear me now?" from every analyst during Q&A thanks to shoddy conference call setup. Sounds like a Verizon Wireless commercial. AT&T (iPhone carrier partner) must be cringing.
• 5:58 Nothing to announce re: iPhone in Asia.
• 5:59 Call's over.

SAI's Apple earnings analysis is brought to you by Petsky Prunier LLC, a leading specialty investment bank serving the marketing sector. Petsky's clients include companies in the marketing services & technology, interactive advertising, digital content & commerce and specialty media industries.