Notes of interest from Apple's Q407 quarterly conference call

Apple on Monday announced its most profitable September quarter in company history, and later held a financial conference call with analysts and members of the media. Several notes of interest from the call follow:

Apple's Q4 conference call was marred by technical problems that prevented both phone and online listeners from hearing or participating in the call at various intervals. This resulted in some missing information that will be obtained later.

Apple on Monday announced financial results for its fiscal 2007 fourth quarter ended October 1, 2007, posting revenue of $6.22 billion and a net quarterly profit of $904 million, or $1.01 per diluted share.

Apple's Mac business

Overall, Apple experienced the best Mac unit sales in its history, besting its previous the record by 400,000 units thanks to an "incredible reception" to the new iMac.

Apple's Mac business accounted for 50 percent of the company's total quarterly revenue.

Apple sold 817,000 desktops during the quarter and 1,347,000 notebooks.

This has been the most successful back-to-school season that Apple has ever had, the company said.

Apple now sports a total of 8,700 Mac distribution points, up 2,000 over the course of the fiscal year.

The "vast majority" of the more than 21 million Macs shipped over the past four years will be capable of running Leopard when it is released later this week.

Apple's iPhone business

The quarter represented the first full quarter of iPhone sales for the company.

Apple's iPhone business accounted for 1.9 percent of the company's total quarterly revenue under the company's deferred revenue approach.

Apple is amortizing iPhone handset sale revenue over a 24-month period, but payments from AT&T are recognized over "time as earned." Apple would not go into further detail on this topic.

Apple sold 1.119 million iPhones during the quarter and 1.4 million since launch.

The company was "very happy" with the elasticity iPhone sales after the price cut to $399.

Apple is working with SalesForce.com to help monetize the iPhone for business.

The $100 iPhone credit is being recognized as customers redeem them, and most credits should be redeemed by the end of the December quarter.

Roughly 250,000 iPhones had been sold since launch with the intention of unlocking the phone; many of these sales occurred after the price cut.

Apple remains very confident with its prediction of shipping 10M iPhones by the end of calendar year 2008. It took two years to achieve 1.4M iPods sold. Apple achieved that for iPhone in just over 3 months.

The company reaffirmed its plans to enter Asia with the iPhone in 2008.

Apple saw no signs of cannibalization of the iPod by the iPhone ahead of the September iPhone refreshes. However, the company does not yet have enough data to quantify the effect — if there is one — following the refreshes. It will have comments next quarter.

Apple's iPod business

Apple's iPod business accounted for 26 percent of its total quarterly revenue.

Over 10.2 million iPods were sold this quarter, with more than 120 million sold to date.

iTunes remains the third largest distributor of music in the U.S. Apple's retail stores generated $268 million is segment margin, up from $156 million during the year-ago quarter.

Apple's iPod distribution points have increased slightly to over 40,000.

Apple's Retail business

Apple's retail stores combined to sell 473,000 Mac units and generate $1.25B in revenues during Apple's fourth fiscal quarter, representing yearly growth of 46 percent in units and 42 percent in revenue. Sequentially, the retail segment produced a 43 percent rise in units and a 12 percent increase in revenue.

Apple opened 12 new stores during the quarter, ending with a total of 197 stores.

Average store revenue was $6.6 million — an increase of approximately $1 million per store from the same quarter last year.

Apple plans to open 40 additional stores over the course of the next year, including new stores in New York, Boston and its first-ever store in China.

Average store revenue was $6.6 million — an increase of approximately $1 million per store for the same quarter last year.

At the end of September quarter, Apple had store-within-a-store boutiques at 230 Best Buy locations. The company plans to end the current December quarter operating out of more than 270 Best Buy locations.

Apple has decided not to pursue its pilot program with Circuit City.

Other Apple business and segments

Apple Americas accounted for 965,000 Mac sales and $2.928B in revenues. These figures are up 24 percent and 25 percent year-over-year, and 17 percent and 9 percent sequentially.

Apple Europe accounted for 499,000 Mac sales and $1.339B in revenues. These figures are up 46 percent and 36 percent year-over-year, and up 27 percent and 15 percent sequentially.

Apple Japan accounted for 72,000 Mac sales and $255M in revenues. These figures are up 16 percent in units but down 11 percent in revenue year-over-year, and down 11 percent and 1 percent in these respective areas sequentially.

Apple's Asia Pacific (and FileMaker Inc) accounted for 89,000 Mac sales and $310M in revenues. These figures are up 6 percent and 21 percent year-over-year. Sequentially, unit sales rose 35 percent in the Asia Pacific regions but revenues dropped 5 percent.

Apple's "Other Music Related Products and Services" segment accounted for $601M in revenue. The figure represents a 33 percent year-over-year increase but a 1 percent sequential decline.

Apple's "Peripherals and Other Hardware" added $346M in revenue, representing a 16 percent growth year-over-year and 12 percent sequentially.

Apple's "Software, Service and Other Sales" segment accounted for $430M in revenue, a jump of 36 percent year-over-year and 11 percent sequentially.

There was an "incredible growth" in the audio and video businesses, driven by Logic 8 and Final Cut Studio 2. The digital media production space was nonetheless "slow," Apple noted.

The financial side of Q4

Gross margins for the quarter came in at 33.6 percent.

The operating margin for the quarter came in at 13 percent.

Direct sales accounted for 57 percent of Apple's total revenue, which is up from 53 percent in the year-ago quarter.

Apple's next (Q108) fiscal quarter

Looking ahead to the current quarter ending December, Apple expects revenue of about $9.2 billion and earnings per diluted share of about $1.42

The company is guiding gross margin down to 31 percent.

Operating expenses are estimated at $1.165B, including $80 million related to stock-based compensation.

The tax rate should be 32 percent.

Apple is "looking forward" to its best ever quarter in company history, as it has the "best product lineup" in Apple's history.

Couple of quotes

The small-to-medium business market is difficult to measure and is operating slowly. "We are doing well there and growing... clearly there are some businesses buying [iPhone]," Apple said.

The company is not going to speculate on when Apple will hit the 3 million mark for iPhone sales.

Japan is the only major market Apple is "struggling" in, but Apple saw strong sales of the iMac in an overall market that had shrunk 2 percent sequentially.