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Notes of interest from Apple's Q209 quarterly conference call

Apple on Wednesday announced a mixed second quarter, providing its best-ever earnings and iPhone sales for a March quarter but relatively weak Mac numbers. It just concluded a financial conference call with analysts and members of the media. Several notes of interest from the call follow:

Apple on Wednesday announced financial results for its fiscal 2009 second quarter ended March 28, 2009, posting revenue of $8.16 billion and a net quarterly profit of $1.21 billion, or $1.33 per diluted share. 

Apple's regional business segments

Apple Americas accounted for 809,000 Mac sales and $3.517 billion in revenues. These figures are down sequentially from the holiday by 11 percent in units and 22 percent in revenue, but better year-over-year; units dropped 8 percent, but revenue increased 8 percent.

Apple Europe represented 658,000 Mac sales and $2.097 billion in revenues. Sequentially, he numbers are down 17 percent in units and 24 percent in revenue, but stand as increases of 5 percent in units and 18 percent in revenue annually.

Apple Japan was responsible for 109,000 Mac sales and exactly $500 million in revenues. These are both up sequentially, boosting unit shipments by 10 percent and revenue by 4 percent, but present a mixed bag as unit shipments are down 8 percent annually while increasing revenue 18 percent over the same period.

Apple's Asia Pacific (and FileMaker Inc) divisions accounted for 202,000 Mac sales and $578 million in revenues. Unusually, the difference is flat in terms of units both sequentially and year-over-year, though revenue is down 14 percent compared to the last quarter and 2 percent versus early 2008.

Apple's "Other Music Related Products and Services" segment produced $1.049 billion in revenue. The achievement is a 4 percent boost from the prior quarter and up 19 percent from year to year.

Apple's "Peripherals and Other Hardware" added $358 million in revenue, signaling a 5 percent drop in sequential revenue and a 13 percent drop annually.

Apple's "Software, Service and Other Sales" segment generated $625 million in revenue, a 3 percent gain over the December quarter and an 18 percent rise compared to the March 2008 quarter.

Apple's Mac business

Apple sold a total of 818,000 desktops during the quarter, generating $1.05 billion in revenue. The shipments and revenue are up 12 percent and 1 percent sequentially, but down 4 percent and 22 percent year-over-year.

In notebooks, Apple shipped 1.398 million of its portables during the quarter, creating $1.895 billion in revenue. These statistics are down sharply from the holiday quarter, falling 22 percent in units and 25 percent in revenue, but are softer in annual changes at decreases of 2 percent in shipments and 12 percent in revenue.

There is between 3 and 4 weeks of channel inventory.

Sales of iLife 09 and iWork 09 have been strong.

There was an "acceleration" of desktop sales after Apple updated all of its lines near the end of the quarter, helping to improve its relative results.

Apple is "positive" about Mac performance, which shrank more slowly than the rest of the industry (3 percent versus 7 percent). On a sell-through basis, Macs were actually flat. It was hard to compare sales from a year ago as those were spurred by the launch of the MacBook Air.

The US was Apple's weakest segment due to the economic crunch, but a significantly larger percentage of Apple's economic sales are in the US and so were hit harder. Less pro systems were also sold in the US, where the pro market has been more deeply affected by reduced spending. Apple is convinced that it will still earn share over the long term and isn't worried about each quarter.

Apple's iPhone and Apple TV businesses

Apple sold 3.793 million iPhones during the quarter, producing $1.521 billion in revenue. This is down 13 percent in sheer units compared to the previous quarter, but up 22 percent in revenue. It's also a dramatic year-over-year increase of 123 percent in units and 302 percent in revenue.

Over 21 million iPhones have been sold to date.

iPhones are being sold in 81 countries and 50,000 storefronts. Apple has 100,000 iPhone demo units across those points, which are counted as channel inventory even if they can't be resold.

Apple ended the quarter with 1.83 million iPhones in its channel inventory versus 1.75 million for the December quarter.

The iPhone plus iPod touch equate to about 37 million total OS X iPhone devices.

Apple declined to break down App Store downloads between free and paid apps, or between genres. However, it will acknowledge that many of the most popular downloads are games.

iPhone business was relatively "linear" in the quarter, with relatively little fluctuation either up or down.

AT&T is still viewed as a "very good partner" in spite of some customers declining to buy iPhones because of the network. They put the "full force" of the company behind it. Apple doesn't have a plan to change this. From a technology perspective, Apple wants to have one phone for the whole world and so can't support Verizon (or Sprint), which uses CDMA.

Apple would like to have the iPhone in China within the next year but doesn't have any details on how likely that is.

Apple's iPod business

Over 11.013 million iPods were sold this quarter, resulting in $1.665 billion in revenue. The sequential decrease is the single largest registered in this quarter's results, plummeting 52 percent in units and 51 percent in revenue. Compared to early 2008, however, units are up 3 percent while revenue is down slightly by 8 percent.

The sales results are a new unit record for a non-holiday quarter.

Apple has between 4 and 6 weeks of iPod channel inventory.

Sales of the iPod touch are strong, and buyers responded well to the third-generation iPod shuffle. The iPod touch is likened to a "runaway hit."

Apple's market share of digital media players in the US continues to be over 70 percent, according to NPD data. There have also been gains in Australia, China, France, Japan and the UK.

The App Store continues to be an "unparalleled success" and has over 35,000 apps. The company is "within hours" of reaching 1 billion apps downloaded.

Apple's retail business

Apple's retail stores combined to sell 438,000 Mac units and generate $1.471 billion in revenues during Apple's fourth fiscal quarter, representing sequential declines of 15 percent in both units and revenue. Yearly, the retail segment had a 4 percent decrease in Mac units but a 1 percent climb in revenue.

About half of Mac buyers at Apple retail stores were new to the platform.

There were 39.1 million visitors to Apple's retail stores, an increase from 33.7 million a year ago. Retail segment margin was $308 million.

Just one store opened during the quarter, giving Apple a total of 252 stores. With an average of 251 stores open during the period, average revenue per store decreased from $7.1 million in early 2008 to $5.9 million and was attributed directly to the "grim macroeconomic environment."

Apple plans to open 25 stores in its fiscal 2009, with half of those outside the US.

There was a higher mix of Mac mini sales and a lower mix of Mac Pro sales following the March updates compared to before.

Average selling prices for MacBooks dropped due to a shift towards the $999 white MacBook, which was upgraded to the aluminum model's internals in most respects.

The company believes the consumer (home user) market is holding up much better than the educational and pro markets, which are much more likely to trim their budgets. However, these are delaying their purchases rather than giving up or switching to competitors.

Apple isn't worried about pure market share, saying it remains committed to making the best computers in the world, not the most computers in the world.

The financial side of Q2

Outside of the subscription accounting Apple needs for the iPhone and Apple TV, Apple's actual sales were $9.06 billion, while net income was $1.66 billion.

Operating margin was the highest ever at 20.4 percent.

Gross margin was 36.4 percent and helped by component costs that were significantly lower than expected as well as better-than-expected sales of high-margin products and lower freight costs.

The tax rate for the quarter was 33 percent.

Direct sales accounted for 48 percent of Apple's business.

Apple made about $1.3 billion in tax payments during the quarter. This is a quarter where Apple's tax payments start to come due. Some expected audit settlements were also paid in advance.

Apple's next (Q309) fiscal quarter

The company says it expects revenue in the spring quarter to hover between $7.7 billion and $7.9 billion, with diluted earnings per share ranging between $0.95 and $1.

Apple's finances are "very robust" and give the company $28.9 billion in cash and marketable securities as of the end of March. This is up from $28.1 billion in the December quarter. Apple plans to hold on to the cash to maintain its capital.

The US dollar impacted Apple as it had made hedges when the dollar wasn't as strong as it is now.

Apple is "very excited" about the products in the pipeline.

Component pricing will still be very favorable, but Apple expects NAND flash prices to go up as companies cut their shipments to improve their profitability and reduce inventory. It doesn't expect a drop as severe as in Q1 (fall).

Schools start their buying during the June quarter, which Apple expects will help its performance.

Apple wouldn't provide an update on the development of its new Cupertino office.

Steve Jobs is still expected to return to his post at the end of June.

Quotes from the conference call

Apple CFO Peter Oppenheimer on netbooks: "I see cramped keyboards, terrible software, junky hardware, very small screens. And just not a consumer experience and not something we would put the Mac brand on, quite frankly. It's not a segment we're interested in and we don't believe customers are interested in."

"A customer who wants to buy a small computer for e-mail or web browsing may want to buy an iPod touch or an iPhone."

"If we find a way to deliver a product that makes an innovative contribution," Apple may enter the space if a real market market materializes.

It's a "stretch" to call a netbook a personal computer. They're "propping up numbers for the industry as a whole."

The Mac pipeline "looks fantastic."

"We have a plan that we believe will continue to make the company a leader in the smartphone space." Als, Apple promises that it will "not leave a price umbrella" that will let competitors sneak underneath.

Apple sees itself as "years ahead" of competitors and isn't worried about the Palm Pre. It notes the breadth of software on the App Store. "We are just scratching the surface" of the opportunity.

On whether the Palm Pre may violate Apple IP, and whether the lack of lawsuits is an indication of Apple's response: "We think that Apple's innovation is leading the industry by years, and we think that competition is great... as long as other companies invent their own stuff."