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A look at Apple\'s holiday earnings

updated 08:00 pm EST, Wed January 18, 2006

Apple\'s holiday quarter

Apple offered details of its holiday quarter financial results during a conference call, saying that demand for its iPod digital media players was staggering. Apple sold over 1.25 million Macs--including 667,000 desktops and 587,000 portables, a 20 percent increase from the year-ago. The company sold 14,043,000 iPods during the last quarter, revealing a year-over-year increase of 207 percent. Apple did say, however, that it may not be able to meet demand for its new Intel-based MacBook Pro in the current quarter. The company plans to open 40 new retail stores--most of which will open domestically--while others are to be built in Canada, the UK, and Japan. Apple's music business accounted for 59 percent of the company's revenue, while the iTunes Music Store accounted for 83 percent of legally downloaded music in the month of December. iTunes reaches 90 percent of the global music market and sold 850 million songs and 8 million videos to date.

Unit/Revenue Breakdowns

  • Apple sold 1,254,000 Macs, including 667,000 desktops and 587,000 portables--a 20 combined percent increase year-over-year. Portable sales accounted for $812M in revenue, a 34 percent increase year-over-year, while desktop sales accounted for $912M in revenue, a 9 percent decline year-over-year. Combined, Apple's Macintosh system sales accounted for 41 percent of the company's total revenues.

  • Apple sold 14,043,000 total iPod units in the quarter, representing a 207 percent increase year-over-year. iPod sales accounted for $1.74B in revenue, up 46 percent year-over-year. Apple's "Other Music Related Products and Services" brought added $491M in revenues, a 177 percent increase over the year-ago quarter.

  • In total, Apple's music business accounted for 59 percent of the company's revenue, while "Peripherals and Other Hardware" accounted for $303M in revenue--up 7 percent year-over-year. The company's Software and Service sales brought in $325M during the quarter, an increase of 53 percent from the year-ago quarter.

Operating segments

  • Sales of Apple products in the Americas included 515,000 total Macs. Total revenue for the segment was $2.7B in revenue--a 65 percent increase year-over-year. Apple sold 387,000 Macs in Europe, realizing $1.24B in revenue--a 47 percent increase year-over-year; however; lImited iPod availability in some European countries kept revenue down, according to Apple.

  • Japan saw sales of 81,000 Macs, accounting for $355M in revenue--a 92 percent increase year-over-year.

  • Apple's "Other Segments," which includes Asia Pacific and FileMaker, accounted for 78,000 Macs and $380M in revenue--a 46 percent increase year-over-year.

Retail Segment

  • Apple's Retail Segment had its best quarter ever, selling 193,000 Macs,, which generated over $1.072B in revenue--a 91 percent increase year-over-year.

  • Apple opened 11 new stores during the quarter, ending with a total of 135 stores. With an average of 129 stores open during the quarter, each store accounted for $8.3M in revenue, an increase of 43 percent from the year-ago quarter.

  • Apple's retail sales accounted for over $90M in profits, and the company plans to open 40 new stores in the 2006 fiscal year. Most stores are planned for the US, however Apple will continue to open new locations in Canada, UK and Japan.

iPods and iTunes notes

  • Music revenues were up to $491M. Both Apple and third-party accessories saw tremendous growth. Apple has over 2000 accessories--the vast majority of which Apple does not make. "People are coming to add their next accessory."

  • According to Nielsen SoundScan, the iTunes Music Store accounted for 83 percent of legally downloaded music in the month of December. iTunes has reached 90 percent of the global music market, selling 850M songs and 8M videos to date.

  • There are now over 35,000 iPod retail distribution outlets, but not all models are sold at all outlets. Apple did very well with sales of Apple and third-party iPod accessories during the quarter.

  • The Music Store once again operated at above "break-even" during the quarter.

  • iPod gross margins in the quarter were above 21 percent; however, Apple refused to comment about iPod sales by model or geography. The company would not also say whether component pricing helped sustain margins or whether a greater mix of high-end iPods had pushed margins on the player higher.

  • Apple said it sold many iTunes Music Store gift cards throughout the quarter, which accounted for a significant portion of the iTunes Music Store sales.

  • During the quarter, Apple experienced lower-than-expected iPod inventory, but during second half of December iPod inventory increased. iPod inventory was below the 4-6 week expected inventory for the December quarter, but within the 4-6 week inventory levels expected during the seasonally-lower March quarter. The 4GB model of the iPod nano is still 'lean' in some locations and the company is working to stabilize inventory levels.

  • The company saw "stunning" customer reactions to the iPod nano and iPod video. The second half of December saw iPod shipments improve significantly by nearly 550k compared to earlier in the quarter as supply improved, but still below Apple's projected 4-6 week levels for the December quarter. Much of the inventory at the end of the quarter was still in transit, but inventory was in inline with the company's expected levels for the March quarter (because of seasonal sales decline).

  • Apple has begun shipping the iMac Core Duo, and said it was "very happy" with the production ramp as well as with response to the product. The company is hopeful it will meet demand for the March quarter.

Other Notes

  • The MacBook Pro will ship in February, but given the number of weeks to ship and extraordinary response, Apple may not be able to meet demand, hinting that demand would outstrip supply for this quarter. Apple said that orders on the new iMac and MacBook Pro were "impressive."

  • Research and Development increased from $123 million in the year-ago quarter to $182 million in the December quarter. This included stock-based compensation expense of $15 million and $2 million, respectively.

  • Total operating expenses increased from $470 million to $632 million, as the company saw greater variable expenses associated with higher-than-expected revenues.

  • Apple said it would expedite shipping of the iMac Core Duo's via air-freight to get them into the hands of customers faster. It did the same last quarter with the new Front Row-enabled, iSight iMac, according to the conference call.

  • While Mac sales exceeded internal expectations--Apple said it expected more waiting--the company said it did see the much anticipated "sales" pause, which capped Mac sales for the quarter.

  • Overall direct sales, Web sales, retail sales, direct sales to US educational institutions and enterprises comprised 49 percent of total revenue, up from 44 percent in the year-ago quarter.

  • Apple ended the quarter with $4.15 billion in cash and $4.557 billion in short-term investments, adding $282 million from cash flow. (This includes the pre-payment of $750 towards its previously announced NAND flash investments to maintain memory supply for its iPod.) Cash and short-term investments total at the end of the quarter was $8.707B.

  • For the quarter, Apple had $82M in capital expenditures, including $40M for retail initiative.

  • The company saw greater direct sales than it expected, and realized an operating margin between 13-14 percent, depending on GAPP expenses.

For Current Quarter

  • Apple expects its second best quarter in history, with revenue of about $4.3B, 33 percent year over year growth, or $1B year-over-year. The company forsees a seasonal decline in iPods, and factored in the transition to Intel Mac alongside expected 27.8 percent GAPP margins.

  • Apple said it expects a tax rate of 32 percent (same as last quarter). The company estimates a profit of 42 cents per share before items such as stock compensation.

  • Apple expects to pay this quarter another $500M deal for NAND flash memory in the March quarter as well.

  • Intel Macs were very well received, and the company remains enthusiastic of product its pipeline and confident in its strategy.

  • The December quarter was longer than most with 14 weeks of sales, including a "big shopping" week between Christmas and New Year's. This week contributed to both greater expenses and higher-than-expected revenues. Apple's March quarter, which ends on April 1, will be 13 weeks.

  • Seaonality effect--dropoff in sales after the holiday quarter--will be greater this year than previously, because music business was a larger part of the December quarter than ever before. The music business experiences a greater after-holiday-dropoff than the Mac business.

  • Apple experienced a favorable component pricing environment in the December quarter with lower-than-expected LCD and memory pricing; however, going forward, expects DRAM prices to stabilize--as manufacturing capacity is converted to NAND flash--while LCD prices to continue to decline. In addition, hard drive prices are decreasing at a lower rate because of certain component shortages.

by MacNN Staff





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