Apple Q1: Disappointing Guidance Killing Stock (AAPL)

Apple's Q1 results are a mixed bag: The company beat its (conservative) guidance and beat the Street's revenue and EPS consensus. But Apple missed elevated whisper numbers, as well as the Street consensus on iPod sales and Q2 guidance. That's why the stock was trading down 11% after hours.

Key stats:

• Revenue: $9.6 billion, up 35% y/y, vs. Street consensus $9.46 billion & $9.75 billion whisper number
  
• EPS: $1.76 (diluted), vs. Street consensus $1.60 & $1.80+ whisper number
  
• Net income: $1.58 billion, up 57% y/y
• iPhones shipped: 2.315 million, vs. 2.26 million Street consensus
• iPods shipped: 22.1 million, vs. 24.7 million Street consensus (Related: The Macworld Flipside: Apple's iPod Sales Growth Slowing)
• Macs shipped: 2.32 million, vs. 2.2 million Street consensus
• Q2 guidance: $6.8 billion revenue, $0.94 EPS (diluted) vs. $6.96 billion revenue, $1.08 EPS Street consensus
  

Live conference call notes and analysis. Refresh for updates.
5:04 Call begins. Typical forward-looking statements disclaimer.
5:05 Oppenheimer: Best quarter ever. Highest revenue and earnings in Apple's history. Going over the stats.
5:07 Began and ended the quarter with less than 3 weeks of Mac channel inventory. $170 million Leopard revenue, up 70% from about $100 revenue generated by Tiger in its first quarter.
5:08 Began and ended quarter within target range 4-6 weeks of iPod inventory. iPod touch has potential to grow iPod into first mainstream wi-fi mobile platform. Was most expensive iPod brought to market in some time. Challenge of establishing new top-line iPod with high price point. In addition to selling very successfully, helped increase iPod ASPs to $181, driving y/y rev up 17%.
5:09 Gaining market share in virtually all European and Asian countries. Very pleased about iPhone momentum. Sold more than 2.3 million iPhones during quarter. Total revenue recognized $241 million.
5:10 $1.7 billion retail revenue, 53% y/y growth. Opened third store in Manhattan. Opened six other new stores, ending with 204. With an avg. 201 stores open in store, avg. rev was $8+ million, compared with $6.6 million a year ago.
5:12 Stronger software sales, higher overall revenue, favorable components, and weak dollar helped drive gross margin up.
5:12 Outlook for March quarter. Targeting $6.8 billion, or approx 29% growth. Expect 32% gross margin. Guiding gross margin down sequantially because 1) sequential decline in software sales, 2) sequentially lower revenue due to seasonality.
5:14 Going through new product announcements. MacBook Air, iTunes movie rentals, etc. Open to Q&A.
5:15 Should expect better seasonality than usual in March quarter this year. Why the outlook? 29% better than 21% a year ago. Tim Cook: Started and ended quarter below Mac inventory target range.
5:17 What did Adobe creative suite, bigger monitors, Mac pros, etc. do? Mac business "on fire." Pro segment -- audio software and video -- audio up significantly up y/y. iPhone rebate effect? Customers "really appreciated that we provided" them. Impact largely behind us. Saw that in both Sept. and Dec. quarters. iPhone unit expectations: Any update? Remain confident in hitting 10 million goal. Translation: No update!
5:19 Target for Mac is to be within 4-5 weeks of inventory. Entered quarter with less inventory than wanted to. No guidance for inventory. Reaching saturation point for Mp3 players? Peter: View iPod market as bigger than market for just simple music players. Believe one of the iPod's future directions is to become the first mainstream wi-fi mobile platform. We don't think revenue growth like this is characteristic of a saturated market.
5:21 When we look at UK, France, and Germany, no cannibalization between iPod and iPhone. In U.S., hard to tell with any precision. Not providing iPhone inventory numbers. ASPs to continue to go up thanks to iPod touch? We don't forecast ASPs.
5:23 Demand curve very similar to last year. International growth made up for some weakness in U.S. Concern about economy and consumer demand? Factored into guidance? "We'll leave economic forecasting to others."
5:25 Retail traffic grew by over 10 million customers y/y.
5:25 What will you do with cash? Cash generation of business was very strong. Cash went up by over $3 billion, of which $2.76 billion came from operation. Stock buyback programs and other returns are discussed, but preference remains to keep strong balance sheet for strategic investments and acquisitions.
5:28 UBS analyst desperately trying to get qualitative commentary!
5:28 Will MacBook Air be additive or will it cannibalize Pro/notebook lines? Orders are "very strong" for it but too early to tell.
5:29 iPod guidance: We've learned in the last years that what drives MP3 markets are innovative product launches and seasonal Dec. quarter buying. Expect sequential decline. But we're shipping the best iPods we've ever made, etc.
5:30 We set out to achieve three things with iPod business. Wanted to hold already high share. Wanted to continue to grow share internationally, and pleased to report that we did both. Some of share gains are stunning -- UK, France, Spain, Australia. Also wanted to sell at least the number of iPod units in our guidance. Sales of 22+ million iPods were consistent with what contemplated in (conservative!!) guidance. Also wanted to establish entirely new iPod -- you know what's next -- iPod touch at high end traded off unit volume but helped establish platform.
5:33 286 stores at Best Buy. Expanding to 600 over the next 6 months. Very happy with how that relationship is coming out. Goals for iTunes rentals? Growing incremental Apple TV sales? Profitability for that unit? Just introduced it. Our objective with iTunes store is to run it a little above break-even; think it helps us sell iPods and Macs.
5:35 19% of Mac OS X install base already on Leopard. In Tiger's first quarter, about 100 million. In second quarter, about 35 million. Leopard sales 170 million in first quarter. Expect similar trajectory? Where does 19% go? Sales will be down sequentially. Don't know if it will follow same trend.
5:39 Does Apple share in incremental revenue that Orange gets with an unlocked phone? No comment. Direct/indirect sales? Direct sales 46%, compared to 44% in year-ago quarter.
5:41 iPhone: Still plan to enter Asia in 2008, additional European countries. Anything for China? Nothing specific to announce today. Apple TV: "Hobby" in the past. What will it take to move the needle? Many companies have tried and missed. We're back with Take 2, think we have it right this time. We'll see. Not projecting volumes on it.
5:45 Unlocked phones? We believe number of phones bought with intention of unlocking was "significant" in the quarter, but unable to guess. Sales increased with holiday gift buying pattern. But as we're new in business, don't know when people will activate. Don't have a precise estimate. We see this as being an expression of very strong interest in iPhone globally. Good problem to have. Higher or lower than last quarter? Too early to tall. "I think it is significant."
5:49 4 Million iPhones sold were to date as of keynote. 3.7 million iPhones sold cumulatively were part of that. Uptick in run rate since December?
5:50 Europe vs. U.S.? Very limited experience but "very happy with all of the launches so far." 3G important to 10 million iPhone outlook? We don't talk about new products.
5:52 No experience with March quarter phone seasonality: No guidance for iPhone.
5:53 iMac had enormous momentum. Total desktop grew at 53% vs. IDC growth rate of 10%. Over 5x market rate. iMac even faster. iPhone seasonality: Guidance implies seasonality for whole company, etc. A little help: What should we think of iPhone seasonality or just too early? Not something Apple can comment on this quarter.
5:55 iPhone distribution points: 2500 storefronts in Europe carrying iPhone, 2100 in U.S. between Apple and ATT stores. Nothing to announce today regarding expansion.
5:56 Looking at better Apple TV in-store displays but nothing to comment on today.
5:58 Call ends.