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conference date: October 18, 2006
for quarter ending: September 30, 2006 (Q4 2006)
Overview: Great sequential and annual growth heading into the year-end consumer buying spree. These are preliminary results due to the need to restate historic results from employee options backdating.
Additional analysis: iPod market may be nearing saturation, but Macs are making a comeback as a consumer computer. But with a high price-to-earnings ratio and lower iPod pricing, I would urge caution.
Basic data:
Revenues of $4.84 billion are up 10.8% sequentially and 31.5% from prior year (Q4 2005).
Net profits were $546 million, resulting in EPS of 62 cents, up 24% over the prior year.
8,729,000 iPods were sold, up from 8,111,000 prior quarter.
1,610,000 personal computers were sold, well up from 1,327,000 prior quarter.
Gross margin was 29.2%
Cash and equivalents ended at $10.1 billion
Guidance:
December quarter revenues between 6 and 6.2 billion. $45 million in stock-based compensation expense. 28.25% gross margin. Tax rate 32%. 70 to 73 cents GAAP EPS.
Conference Highlights:
58% of revenue was from Macs. Very successful back-to-school season. Unprecedented demand for portable products. Inventory ended below desired level.
Music products were 42% of revenue, up 36% year over year. Back to school promotion successful. Has 85% of purchased downloaded songs in the U.S.
Retail store revenue showed a 41% annual increase. $5.9 million average per store. 50% of Mac buyers were first time buyers.
Ecucation program resulted in 49% increase of portable sales in that market.
Gross margin was higher than expected due to good product mix.
Tax rate of 24%, well lower than expected.
Cash $934 million increase.
Q&A:
Lower price points for new iPods impact? Started September 12, average prices will be down in December quarter.
Component prices? Notebook hard drive to decline, some seasonal firming in other component prices.
Gross margins? Declined by 1.1% from prior quarter despite better mix of higher-margin products. In December quarter margins will be down another 1% because of product mix and lower iPod pricing. But iPod gross margin is above 20%, despite price reductions. Happy with Mac margins.
Running a small pilot selling Macs at Circuit City.
New products? No specifics, but confident in pipeline.
Other music line down? Relatively flat sequentially, but up 70% annually. Some accessories were not available due to new lines. Seasonality for music sales. Would expect to pick up for holidays.
Inventory and receivables up? Inventory up $100 million annually, all due to increased number of stores. AR up $350 million which is in line with top line growth.
Japan down? 10% sequentially decline in revenues. Market is very weak in Japan. But up 26% annually on strong iPod sales.
International music sales? Music store runs above break-even, but mainly helps sell iPod. Market share is 40 to 50% in key countries and is increasing.
Mac inventory? Shortages due to strong demand, believes can get channels filled for holidays.
New Nano launch? Excellent reception, iPod total demand accelerated largely due to Nano. Does not see an issue in shipping older products.
Portable Mac sales grew 56% year-on-year. Mac sales included two very large education deals.
Switcher operating system preference? Bootcamp downloads over 1 million; will be integrated with Leopard in spring.
Is seeing a delay in Mac purchasing associated with a delay in release of Creative Suite.
Same store sales revenues were up "a couple of percent." iPod sales were down per store on an annual basis largely because of large number of alternative outlets for iPods.
Last year December quarter had an extra week? Yes.
Macro view of consumer buying? Believes is economy is heading for soft landing with resilient consumers.
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