Apple Rocks Christmas, Guidance Strong, iPhone Weak (AAPL)

Apple (AAPL) sales and profits beat expectations on huge iPod sales, but iPhone sales came in weak. Apple shares are up 8.6% to $89.99 in after-hours trading.

On Apple's conference call, executives did not offer an update on CEO Steve Jobs' health. But COO Tim Cook, who is taking over Jobs' day-to-day duties while he's on medical leave, talked up the breadth and depth of Apple's "wicked smart" staff.

The iPod numbers are most surprising, and probably came at some expense to iPhone sales. We think the iPod touch, which offers access to the Internet and Apple's App Store, did particularly well. (There's some irony here, as the concern has always been that the iPhone would hurt iPod sales.) Apple said iPod growth came entirely during the last week of December, and that overseas sales led growth while U.S. sales dropped.

How to boost iPhone sales? Apple needs to further cut iPhone 3G prices -- a $99 model, as soon as possible. And Apple should consider convincing its carrier partners to offer cheaper service plans -- not everyone will spend $80-$100 per month on AT&T (T) service. On the conference call, Apple's Tim Cook admitted that smartphone service pricing was too expensive for many people, especially in a recession.

Apple's March quarter outlook came in relatively strong: It's below the Street's published consensus, but above the numbers analysts expected -- based on Apple's tendency to give very conservative guidance.

Key Stats:

Dec. revenue: $10.17 billion vs. $9.74 billion consensus, $9.0-$10.0 billion guidance
Dec. EPS: $1.78 vs. $1.39 consensus, $1.06-$1.35 guidance
Dec. Mac units: 2.52 million vs. 2.5 million consensus
Dec. iPod units: 22.7 million vs. 18.6 million consensus
Dec. iPhone units: 4.36 million vs. 5 million consensus

Mar. quarter revenue guidance: $7.6 billion to $8 billion vs. $8.2 billion consensus, forecast could be as low as $7 billion
Mar. quarter EPS: $0.90 to $1.00 vs. $1.13 consensus, forecast could be as low as $0.65

Add your comments below or join our live discussion here.

LIVE Conference call notes: (Refresh for the lastest.)

5:00 On hold! Soothing music.

5:01 Call beginning.

5:01 CFO Oppenheimer, COO Cook on the call as usual.

5:02 Passed $10 billion in sales for first time ever, set iPod sales record.

5:02 As we discussed last quarter, supplement business internally with non-GAAP numbers. Now including in press release. Adjusted sales $11.8 billion, $1.6 billion than reported revenue. Adjusted GM $4.5 billion, $1 billion more than reported.

5:04 2.5 million Macs, representing 9% growth over the prior December quarter's growth. Proud in context of the rest of the market. IDC estimated that overall market contracted during December quarter.

5:04 71% portable mix, the highest ever. Desktop sales down, but last December they grew 53% y/y with new iMac launch. Tough comp, reflection of shift toward portables.

5:05 3-4 weeks of Mac channel inventory.

5:06 New iPod record, representing 3% growth. Thrilled with customer response to new iPods. Customers love sleek design of nano, iPod touch App Store. iPod touch outstanding gaming, entertainment, communications platform. Share of US MP3 market over 70% in month of December. Continue to gain share in international markets. iPod share over 70% in UK and Aus, over 60% in Japan, and over 50% in Canada.

5:07 4-6 weeks of iPod channel inventory

5:07 iTunes had record quarter.

5:08 13.7 million iPhones in calendar year, beating the 10.0 million Apple had predicted in Jan 2007.

5:09 Ha, AdMob's iPhone ad request numbers now being discussed. NOT VALID! (Huge iPhone favor.)

5:11 34.7% GM, much better than guidance. About half of difference more favorable component pricing. Remainder: Lower than expected transportation, warranty, and second, favorable adjustments related to prior quarter supply chain matters.

5:12 $28.1 billion in cash, vs. $24.5 billion at end of Sept quarter.

5:13 Over $3.9 billion cash flow from ops.

5:14 Outlook: Very confident in our business. Visibility rather low in current environment, making forecasting tricky. Broad range: $7.6-8 billion rev. About 32.5% GM, vs. 34.7% last qtr. Favorable US dollar, sequentially lower revenue, no supply chain adjustments. $1.33 billion opex. Tax rate 31%. Targeting EPS $0.90 to $1.00. Extremely proud of performance and record results.

5:15 Q&A begins.

5:16 How's Steve? And hope he's doing well. How will run company differently with Tim? If need be, is Tim... do you feel like you'd be the likely candidate if the worst cast scenario would happen if Steve was unable to return? Peter: Steve is the CEO of Apple and plans to remain involved in major strategic decisions. Tim: There is an extraordinary breadth and depth and tenor among the Apple executive team. They lead over 35,000 "wicked smart" employees from engineering to marketing. Values of company extremely well entrenched. We believe in the simple and not the complex.

5:18 Deep collaboration and cross pollination among our groups. Frankly, we don't settle for anything less than exellence in any group in the company. Regardless of who is in what job, those values are so embedded in this company that Apple will do extremely well. I strongly believe that Apple is doing the best work in its history.

5:19 Plan to open about 25 stores in fiscal 2009, about half internationally. Ron and team very selective with real estate. Stores are amazingly productive and providing outstanding service to customers.

5:20 Now that several quarters of iPhone data, is iPhone elastic or inelastic? Price reductions eventually make sense for unit demand? This segment is clearly elastic. You can see that over the course of the time we've been selling iPhone, U.S. market to make simple, moved from 599 to 399, then to 199, another significant jump in run rate. We believe that the 199 level is a compelling value and we see nothing in the marketplace that's anything close to it. Still believe we're years ahead of the competition. (PALM PRE!?) Feel very good about competitive position.

5:22 Guidance in March quarter of 32.5 is benefiting from very favorable commodity environment.

5:23 Giving a wider range than normal, but range is considerably more narrow than for Dec. quarter. Building base of recurring revenue with iPhone, but anything else giving you more confidence going into March? Our models are not as precise as they have been and visibility really isn't as good as it had been in the past. In prior quarters given more of a single point estimate. Much bigger quarter with much higher level of sales. But I'd consider $400 million range pretty wide for us.

5:24 If you think back to timing of guidance, in a period of time when banks were going down what seemed like every other day. Economy clearly in bad shape but not as unpredictable as it was in October perhaps.

5:25 We do expect continued favorable environment on both supply and price this quarter for NAND, DRAM, LCD, drives, and most other commodities.

5:27 Munster: Congrats. Talk about pricing umbrella on iPhone. 60% of addressable in non contract markets. How think about market you're priced too high for? Now in over 70 countries. Some are nonsubsidized markets. Like India. Our sales are clearly materially less in those markets than in subsidized markets that have postpaid contracts. Constantly evaluating best way to play.

5:28 We're not going to play in the low-end voice phone business. That's not who we are, that's not why we're here. Goal is not to lead unit sales, but to build the world's best phone.

5:29 How do you think about sub-$500 netbook market? We're watching that space, but from our pov the products are based on hardware that's much less powerful, software technology that's not good, cramped displays. We don't think that people are going to be pleased with those type of products. It's a category we watch, we have some ideas here, but we think the products there now are inferior and won't provide the kind of experience people want.

5:30 Tremendous Apple TV pickup. Unit sales up almost 3x year-over-year. Still consider this a hobby. But movie rental business has really helped Apple TV. Going to continue to invest because we fundamentally believe there is something there in the future.

5:31 Any update on pro segment? Mac Pro percentage of desktop business is not large. Primarily iMac. Pro segment was down y/y as you might expect because small biz cutting back on expenditures.

5:32 Don't see education doing much until huge infrastucture outlay.

5:32 Where's Snow Leopard? No comments. Very excited about next release but no specific launch date.

5:33 iPhone channel inventory. Channel build in previous quarter of launch qtr 2 million. In Q1, despite launching in 20 or so additional countries and some additional channels, we ended with sequentially lower channel inventory. At a "very comfortable" level. Take changes in channel inventory in both quarters to see sell through. (Very vague.)

5:35 Draw down about 250,000.

5:35 iPod strength U.S. versus international: Relative growth rates in US vs Intl.? Linearity of growth? If you look at US, iPod sales contracted at unit level about 3% year-over-year. All of the growth that you see in our numbers was all international.

5:36 Rush of buying the last week of the quarter. All of growth occurred in last week of quarter.

5:39 Investing in engineering, marketing, customer experience.

5:40 Not to make answer more difficult, over $28 billion in cash. There is no new update from what we shared with you.

5:42 Higher monthly fees may keep some customers away esp. with economy. Feel very good about competitive position. Feel very good about product pipeline.

5:43 Just started working with Walmart. From a reach point of view, reaches a tremendous amount more people than we could with our stores.

5:44 Mac sales were second highest in our history, only surpassed in previous quarter. As you might guess, when announced new portables, sellthrough jumped in October. Team did excellent job with production ramp, so Oct y/y data is very good. Portables led 34% y/y unit increase despite tough environment. International on Mac much stronger than U.S. US growth 2%, international 16% year-over-year. Canada, LatAm, E.Europe over 20%. Strong in October. Spike at the end of the quarter not as strong as iPod but still there.

5:46 Very strong ending of the quarter on iPhone, but can't make educated comment given first December in the business rolled out in a lot of countries.

5:47 Think that retail stores are helping us in each of our geographies. A great place for new customers to experience our products.

5:51 iPhone 3G gross margin higher due to lower product cost.

5:52 Many competitors coming to market, including Android, Palm Pre. Beyond what's been a powerful leadership in applications, how do you think about sustaining leadership and brand? Tim: First of all, difficult to judge products that are not yet in the market. iPhone over 17 million units thus far, highest overall customer satisfaction from many different surveys. Since beginning, software the key ingredient. Still think years ahead on software.

5:53 Many different types of input, display, etc., big challenge to software developer. But we shall see what people will do.

5:54 Fine with comeptitors if they don't rip off our IP. If they do, we're going to go after them.

5:55 Ready to suit up and go against anyone. We will not stand for having our IP ripped off. We will use whatever weapons we have at our disposal.

5:58 Not disclosing what percent of iPhone apps are paid versus free.

5:59 Call over.

Preview:

Apple (AAPL) reports its December quarter results this afternoon after the bell. Shares jumped about 6% in trading today to around $82.80.

The two big questions on everyone's mind:

How is Apple fairing in the global recession?
How is Steve Jobs?

As for Apple's business, it seems the company will be able to meet tempered expectations for Christmas sales. Guidance for the calendar first quarter, however, will be critical, and last quarter the company shocked the market by how conservative it was.

Apple has three major product lines: Macs, iPods, and iPhones.

Macs: Piper Jaffray analyst Gene Munster's analysis of NPD Group retail data suggests that Apple's Mac sales will be in line with expectations, up slightly year-over-year.

iPods. Munster thinks iPod sales could be higher than expected, but still down year-over-year. We'd note that the expensive iPod touch seems to have had an excellent Christmas, suggesting that iPod revenue could be higher than expected.

iPhones. The iPhone, meanwhile, is a wild card. We see them everywhere these days, and Apple had the opportunity to fill some more channel inventory as it expanded its sales network into more countries and stocked Walmart stores. The Street expects Apple to report 5 million iPhone shipments, down from 6.9 million in the September quarter (which included 2 million units of inventory). We think 6 million is achievable for the December quarter. Anything above 7 million would be big.

We don't expect a formal update on Steve Jobs' health, even now that the SEC is investigating Apple's disclosures in this area. We do expect analysts to ask about it, however, and to ask about a succession plan. We do not expect Steve to make an appearance on the call as he did last quarter.

As usual, we expect Apple to offer conservative guidance. Last quarter, the company gave especially broad, conservative guidance. Given the uncertain economy, we think it's likely they will do that again.

Key Stats:

Dec. revenue: $9.74 billion consensus, $9.0-$10.0 billion guidance
Dec. EPS: $1.39 consensus, $1.06-$1.35 guidance
Dec. Mac units: 2.5 million consensus
Dec. iPod units: 18.6 million consensus, 20 million would be huge
Dec. iPhone units: 5 million consensus, 7 million would be huge

Mar. quarter revenue: $8.2 billion consensus, forecast could be as low as $7 billion
Mar. quarter EPS: $1.13 consensus, forecast could be as low as $0.65