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Apple sails past Q1 earnings expectations

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Income,
Officer,
Culture,
Guidance

Tom Krazit CNET News

Published: 22 Jan 2009 08:26 GMT

Apple reported first-quarter earnings significantly higher than analysts had expected coming off a disappointing Christmas season for most tech companies, but provided its usual conservative guidance.

For the three-month period ending 27 December, Apple recorded $10.2bn (£7.3bn) in revenue, as compared with $9.6bn a year ago, and net income of $1.6bn, as compared with $1.58bn a year ago. That translates into earnings per share of $1.78, far more than the $1.39 in earnings per share that analysts surveyed by Thomson Financial had expected. Expected revenue was $9.75bn.

On a conference call following the release of the numbers, Apple chief financial officer Peter Oppenheimer noted that Apple passed $10bn in quarterly revenue for the first time and recorded its highest net income ever. Gross margins also increased thanks to favourable prices for commodities such as DRAM, flash memory and LCD displays, he said.

Analysts wasted little time inquiring about the health of chief executive Steve Jobs, who is on medical leave until the end of June to recuperate from what he described as health-related issues "more complex than I originally thought". Without replying directly to the question, chief operating officer Tim Cook, who is running the company in Jobs's absence, said Apple's culture doesn't "[settle] for anything less than excellence" and that "regardless of who is in what role, those values are so embedded in the culture of this company that Apple will do extremely well".

Investigators with the Securities and Exchange Commission are reviewing how Apple handled the disclosure of information surrounding Jobs's health, according to a report on Wednesday by Bloomberg, citing a person familiar with the matter.

Apple sold 2.5 million Macs during the quarter, 22 million iPods and 4.3 million iPhones. The Mac shipments were about in line with expectations, the iPod shipments were significantly higher, and iPhone shipments were slightly less than estimates that ran all over the map.

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With regards to the Mac, Apple saw a strong uptick in sales of notebooks following the launch of new systems in October, Cook said. Portables now account for 71 percent of Apple's Mac lineup, an all-time high, and notebook sales increased by 33 percent compared to last year's first quarter. Desktop sales fell, which Cook attributed to a tough comparison with December 2007, when Apple had just refreshed the iMac, and a general disenchantment with desktop computers in general.

Cook declined to comment on any launch plans for Mac OS X Snow Leopard, the next version of the company's operating system that is expected to make an appearance around or before Apple's Worldwide Developers Conference in June.

Apple continues to check out what's happening with the netbook market, Cook said, but at the moment isn't interested in a product that is "principally based on hardware that's less powerful than customers want, software that's not good, cramped keyboards, and small displays. We don't think people are going to be pleased with those types of products, but we'll see, we're watching that space".

The iPod shipment totals were surprising to the financial analyst community, which was expecting something around 18.5 million units for the quarter. Perhaps that was because much of the growth took place overseas; iPod units decreased in the US compared to last year's first quarter. Overall iPod revenue fell slightly compared to last year, suggesting that the growth came from lower-priced iPods.

On the music front, the iTunes Store had a record quarter for music sales, Oppenheimer said. Music sales especially peaked on Christmas Day and that following week, he said, suggesting that more than a few people received iTunes gift cards this Christmas.

iPhone sales, at 4.4 million units, were a little less than expectations of around 4.5 million units. But there seems to be widespread agreement that with just two Christmas quarters under Apple's belt selling the iPhone, it is difficult to predict how the iPhone will fare in a given quarter. For example, about two million of the 6.9 million iPhones Apple sold during its fourth fiscal quarter were designated for channel inventory, and there was clearly pent-up demand in that quarter.

Cook noted that Apple is willing to tinker with the price of the iPhone in certain countries, such as India, where phones are not subsidised by a mobile operator. But he also declared "we're not going to play in the low-end voice subsidised business. Our objective is not to be the market-share leader in the phone industry, it's to build the world's best phones".

Looking ahead to the March quarter, the company followed a pattern familiar to Apple watchers in providing second-quarter guidance well below analyst expectations of $8.2bn in revenue and earnings per share of $1.13. The company said it expects revenue between $7.6bn and $8bn, and earnings per share between 90 cents and $1.

It didn't seem to matter as much as in past quarters, however, as Apple's stock surged 10 percent in after-hours trading. Perhaps investors were expecting worse guidance based on the health of the economy, or were simply cheered that Apple appeared to skate past any worries over poor retail sales this Christmas season.

Credit: Apple soars past first-quarter earnings expectations from CNET News