Notes of interest from Apple's Q2 2006 conference call

Apple Computer on Wednesday announced financial results for its fiscal 2006 second quarter ended April 1, 2006. The Company posted revenue of $4.36 billion and a net quarterly profit of $410 million, or $.47 per diluted share — the second best in its corporate history.

Some notes of interest from the conference call with Apple CFO Peter Oppenheimer and vice president Tim Cook follow:

Apple sold 1,112,000 Macs during its March quarter, accounting for $1.572B in revenue. This amounts to a 4 percent increase in units and 5 percent increase in revenue year-over-year (y/y).

614,000 of the Macs were Desktops, accounting for $833M in revenues — an increase of 1 percent in units shipments and 4 percent in revenue y/y.

The remaining 498,000 Macs were portables, accounting for $739M in revenues — an increase of 8 percent in units and 7 percent in revenue y/y.

Throughout the quarter, Apple also sold 8.526M iPods, accounting for $1.714B in revenue — a dramatic increase of 61 percent in units and 69 percent in revenue y/y.

Apple's "Other Music Related Products and Services" category also excelled to $485M in revenue, an increase of 125 percent y/y.

"Peripherals and Other Hardware" added an additional $264M in revenue, a decrease of about 6 percent y/y.

The company's "Software, Service and Other Sales" posted impressive gains, coming in at $324M, an increase of 36 percent y/y.

In the Americas, Apple shipped 494,000 Macs plus other products that totaled $2.122B in revenue, an increase of 4 percent in units and 47 percent in revenue y/y.

In Europe, the company shipped 316,000 Macs in addition to other products that brought in a total of $996M in revenue — an increase of 14 percent in units and 37 percent in revenue y/y.

In Japan, Apple shipped 82,000 Macs plus other products that totaled $309M in revenue. This represented a 20 percent decrease in Macs sales y/y, but an increase of 9 percent in revenue.

Apple's retail stores combined to sell 154,000 Macs and other products that totaled $636M in revenue, which was an increase of 7 percent in units and 11 percent in revenue y/y. However, these results represent a 20 percent decrease in Mac units and 41 percent decrease in revenue for the retail segment quarter-to-quarter.

Finally, Apple's Asia Pacific and FileMaker divisions combined for sales of 66,000 Macs and other products that added an additional $326M in revenue. This implied a 7 percent decrease in units and 36 percent increase in revenue y/y.

Apple said a pause in consumer Mac purchases was "very evident" in the March quarter, possibly more so than the December quarter, due to several reasons such as a lack of Intel iBooks (MacBook) and Intel-native software from companies like Adobe.

Apple representatives openly admitted that a lack of Intel-native Adobe software is effecting its Intel Mac sales. The company said it is working with Adobe to help deliver software such as Creative Suite 3.0 as soon as possible.

The iTunes Music Store is responsible for over 87 percent of legal music downloads in the United States.

The iTunes Music Store now boasts over 2.9M audio tracks, 60,000 Podcasts, 9,000 videos and 70 TV shows.

There are now over 2000 accessories for Apple's various versions of the iPod.

Apple expects 30 percent of all new cars sold in the US this year to offer iPod integration.

Gross margins for the quarter were higher than expected (5-year high) at 29.8 percent, due mostly to more favorable component pricing, higher than expect software sales (including iLife '06 and iWork '06), and lower-than-expected costs associated with the company's Intel transition.

During the quarter, Apple was able to secure lower-than-expected costs on NAND flash memory and LCD panels, which helped drive its gross margins.

Operating expenses came in at $768M; Non-GAAP OpEx was $731M.

The tax rate for the quarter was 32 percent. It's expected to remain the same for next quarter.

Outside the US, the iPod is the leading digital audio player brand in the UK, Australia and Canada.

Apple will open 40 new retail stores this year, with over 30 of them being US-bound.

Commenting on some of its investments during the quarter, Apple said it paid off the remaining $500M committed to its NAND flash memory suppliers, net-share settled 5.5M shares, and also spent about $120M for its new data center in Newark, Calif. and property in Cupertino, Calif. for its upcoming headquarters expansion.

Despite all its investments, cash declined only $481M to approx $8.32B.

Apple said its retail segment profits were lower because: the stores were focusing on the Intel transition; had a lack of shipping Intel Mac products for the majority of the quarter; and witnessed consumer buying pause (and advocated it in some instances).

Apple's iPod market share increased from 71 percent to 78 percent in the quarter (probably one of the most significant data points revealed by NPD this week, evincing that Apple continues to grow its share in the US).

In other regions, iPod holds the following market share 40 percent (UK), 54 percent (Japan), 45 percent (Australia), and 58 percent (Canada) .... (Last two may be inaccurate).

Apple is focused on increasing iPod market share in some other regions where it trails, such as Italy, Spain, Eastern Europe, China and Korea. It plans to do so by increasing local advertising and points of distribution.

However, Apple has already succeeded in bolstering its share in some other regions such as France (up to 11 percent from 4 percent) and Germany (up 10 percentage points to 21 percent).

Seeing as it jacked the price of the Mac mini considerably when it introduced the Intel versions, analyst tried to pry an answer out of the company about whether it planned the same course of action for the upcoming Intel iBook. Apple would not comment, but our gut reaction is that the $999 Intel iBook (MacBook) may not happen.

The company said it remains "proud" of its iBook G4, which customers continue to buy.

Apple said it sees the bulk of its education buyers in the months of July - Sept.

The iMac Core Duo was in "reasonable supply" throughout the quarter (and sold a ton), the MacBook Pro was ramped hardcore only for the last couple of weeks of the quarter, and the Mac mini shipped in volume only the 4 weeks in March.

iPod gross margins once again came in above 20 percent, and that's all the company would say. As expected, Apple would not break down the iPod mix, saying only that it is "please with sales of all its iPod models."

Apple ended the quarter within its inventory target range of 4-5 weeks. It began the quarter with less than 4 weeks in anticipation of the new Intel Macs in January, but brought levels back to normal by later increasing inventory by about 5 days.

Overall, Apple was "thrilled with 'other music sales'," which were actually higher in the March quarter than they were in the December quarter. Apple representatives commented that this shows the momentum that the iTunes Music Store has around the world.

Intel Mac shipments accelerated throughout the quarter.

Apple reiterated that it has no desire or plan to sell or support Windows, but believes Boot Camp should make Macs more appealing to Windows users.

Apple refused to release Boot Camp download count (it's a beta, the company explained).

Apple said there is no significant component constraint in the industry at the moment.

Apple doesnt think the proposed French legislation "is good for anybody."

Once again, the iTunes Music Store operated at "above cost" and that is all the company was willing to say on that front.

Apple is "very excited" about the products it has in its pipeline, including Macs.

Direct sales accounted for 44 percent of revenue during the quarter.

Retail profit was $29M.

Apple will continue to be conservative with its cash, retaining it for flexibility to invest in its business. The company has discussed some share buy-back moves with its board, but had nothing to report at the moment.