Apple earnings set new record; shares explode in after-hours trading
So much for expectations. Apple (AAPL) blew past them all — its own and those of a crowd of increasingly bullish analysts — by reporting its most profitable quarter ever, earning $1.82 a share on revenue of $9.87 billion for the fourth fiscal quarter of 2009.
The Street was expecting quarterly earnings of $1.42 on revenue of $9.2 billion, according to Thomson Financial.
Apple's shares exploded in after-hours trading. Having closed at $189.86, shares leaped more than 13 points in the next hour and 40 minutes to $202.87 — one thin dime away from the all-time high of $202.97 set in intraday trading on Dec. 27, 2007.
Sales for the year were a record $36.5 billion, up 12.5% from 2008. Earnings per share for the year topped $6.29, up more than 17% from the year before.
Strong sale of iPhones — following price cuts and the introduction of a new model — helped boost Apple's earnings.
But the big surprise was the Macintosh. Apple sold 3.05 million Macs for in Q4 — a 17% increase from same quarter last year — thanks to its new Snow Leopard operating system, re-energized back-to-school sales and a big order from the state of Maine.
"We are thrilled to have sold more Macs and iPhones than in any previous quarter," said Steve Jobs in a prepared statement."
Highlights from Apple's earnings report include:
Who will replace Eric Schmidt on Apple's board?
Tim Cook. Photo: Apple Inc.
Now that Google (GOOG) CEO Eric Schmidt has resigned from Apple's (AAPL) board of directors — something that actually happened last Friday, according to Apple's form 8-K filing with the SEC — who will replace him?
Names of potential nominees have already started to pour in. Tim Cook — who ran Apple during both of Steve Jobs' medical leaves — would be our first choice, and he's the leading vote getter in 9to5Mac's reader poll (with 674 of 1,994 votes as of Tuesday morning).
Meanwhile, the newly revived Fake Steve Jobs spent Monday pretending to take calls from an even wider (and a lot funnier) field of candidates, from Henry Louis Gates (looking pretty silly on a Martha's Vineyard trike) to former Apple hardware chief and current Palm (PALM) CEO Jon Rubinstein (pictured with a Pre).
Below the fold: our handcapping some of the more serious the names we've seen so far.
Apple: 'Steve Jobs is back to work'
Technology's most closely watched chief executive is officially back on the job, according to an Apple (AAPL) spokesman.
“Steve Jobs is back to work," chief spokesperson Steve Dowling told CNN.com. "He is at Apple a few days a week and working from home the other days. We’re glad to have him back.”
Jobs, who is recovering from two major surgeries — one to remove a tumor from his pancreas nearly five years ago, the second a transplant performed two months ago to treat end-stage liver disease — was scheduled to return from a six-month leave of absence before the end of June.
Apple to Palm Pre: Drop dead
Ever since January when Palm (PALM) unveiled the Pre — the first smartphone to challenge Apple's (AAPL) iPhone with a multitouch screen of its own — the tech press has been waiting for Cupertino to respond. COO Tim Cook made a couple of clenched-teeth threats about companies that rip off Apple's intellectual property, but nothing came of it.
Until now.
On Tuesday, 10 days after the Pre went on sale, Apple published a one-paragraph support article on its website that addressed one of the device's most ballyhood selling points: its ability to sync seamlessly with iTunes. The note doesn't mention Palm or the Pre by name, but it doesn't have to:
Apple designs the hardware and software to provide seamless integration of the iPhone and iPod with iTunes, the iTunes Store, and tens of thousands of apps on the App Store. Apple is aware that some third-parties claim that their digital media players are able to sync with Apple software. However, Apple does not provide support for, or test for compatibility with, non-Apple digital media players and, because software changes over time, newer versions of Apple's iTunes software may no longer provide syncing functionality with non-Apple digital media players. (link)
As John Gruber, the first to spot the snippy missive, put it in his Daring Fireball blog, "Translation: 'Nice iTunes syncing you’ve got, Palm. Be a shame if something happened to it.'"
Other devices can be made to sync with iTunes, of course. Apple used to maintain a list of compatible MP3 players that included the likes of Creative Labs' Nomad and SonicBlue's Rio. And there are plenty of BlackBerry owners who regularly download songs from their iTunes libraries.
But the Pre is different. It presents iTunes with a hardware ID that identifies itself as an iPod — a hack the former Apple engineers on team Pre are well equipped to pull off. Led by Jon Rubinstein, who built the original iPod, they are perfectly capable of engaging in the kind of cat-and-mouse games Apple regularly plays with iPhone jailbreakers.
Indeed, Palm's response to Apple support article HT3642 suggests that it has plenty more tricks up its sleeve.
“Palm’s media sync works with the current version of iTunes,” Palm spokesperson Lynn Fox told Digital Daily's John Paczkowski. “If Apple chooses to disable media sync in a future version of iTunes, it will be a direct blow to their users who will be deprived of a seamless synchronization experience. However, people will have options. They can stay with the iTunes version that works to sync their music on their Pre, they can transfer the music via USB, and there are other third-party applications we could consider.”
Let the games begin.
Image courtesy of the New York Daily News.
See also:
Live from Apple's Q2 earnings call
Apple (AAPL) on Wednesday posted sharply higher revenue and earnings in its second fiscal quarter of 2009, beating both its guidance and analysts estimates.
iPhone sales were particularly strong — up 123% year to year — and seem to have offset a 3% decline in the Mac division.
The headlines from the company's press release:
- Revenue: $8.16 billion, up 8.16% from $7.94 billion in Q2 2008
- Profit: $1.21 billion, up 15.8% year to year from $1.045 billion
- EPS: $1.33 per diluted share up 14.6% from $1.16
- iPods: 11.01 million up 3.3% from 10.644 million
- iPhones: 3.8 million, up 123% from 1.7 million
- Macs: 2.22 million down 3% from 2.289 million
- Gross margin: 36.4%, up from 34.7% in Q1
- non-GAAP revenue: $9.06 billion, including deferred revenue from 7 quarters of iPhone sales
- Guidance for Q3: Earnings of $.95 to $1 on revenue of $7.7 to 7.9 billion
CFO Peter Oppenheimer's canned quote: “We are extremely pleased to report the best non-holiday quarter revenue and earnings in our history."
That 36.4% gross margin is actually quite impressive, particularly in this economy. It must make the PC makers fighting over the razor thin profits in the netbook market crazy.
The conference call:
5:03 p.m. ET: Were in.
5:04: Peter Oppenheimer is going over the numbers summarized above.
5:05: Talking about how difficult it was to compare Mac sales, given the 50% growth last year. "Very positive about Mac performance."
5:06: Touts iLife and iWork.
5:07: iPod sales. "Strong sales" of iPod touch, but no numbers. Share of MP3 market over 70%, according to NPD. iPod sales growth in Europe, Australia and China.
5:08: iTunes sold developments. App store. Over 35,000 applications. This is a new stat. Close to 1 billion downloads (but no cigar today).
5:09. iPhone. Now in 81 countries. Rev recognition $1.52 billion, up more than 300% from last year. Repeating what's new in iPhone 3.0. Deferring rev. on all iPhones sold after March 17.
5:11: Stores. Now 252 stores, one new this quarter. Rev. 1.47 billion, up from 1.42 billion, but average sales per store was down: $5.9 million down from %7.1 million.
5:13: Gross margin discussion. Why up? Commodity costs. Higher-rev products. Etc. He's losing me.
5:13: Cash discussion.
5:14: Guidance: Forecasting is "challenging." Rev: 7.7 billion to $7.9 billion. GM: 33%. OpEx $1.35 billion. Tax rate: 31%. EPS": 95 cents to a dollar.
Confident. Pleased. Etc.
5:16 Q&A below the fold.
See also: Five key quotes from Tim Cook.
Apple's Q2: A test of fundamentals
When Apple (AAPL) reported its fiscal 2009 first-quarter earnings, exactly three months ago, the stock opened the day at $78.20, its lowest point since October 2006.
On Wednesday, when Apple is scheduled to report its second-quarter results, the same shares opened at $122.27 — a 56% increase.
While that's still below the price targets set by most analysts — many of whom revised their targets upward in just the past week — some think Apple's share price has got ahead of itself.
RBC Capital's Mike Abramsky (an Apple bear) said as much in a note to clients Tuesday. "Valuation has risen faster than peers … and while we expect near term upside around the refreshed iPhone, we continue to see elevated challenges ahead to valuation."
Still, Apple is not in the same kind of trouble as its competitors — like Dell (DELL) for example. Apple still has rich cash holdings ($25 billion, or $29 per share), enviable profit margins (34.7% last quarter) and the deferred revenue from seven quarters of iPhone sales (which could add 30 or 40 cents to its earnings per share).
But the company has a basic problem with its fundamentals: two of its three primary engines of growth have stalled.
As Silicon Alley's Dan Frommer points out, the Street is expecting Apple to report that it shipped 2.1 to 2.2 million Macs in the second quarter — a year-over-year decline of 4% to 9%. That would represent the first time in five years that Mac sales have shrunk. Moreover, it's being compared with a quarter (2008 Q2) in which Mac sales grew by more than 50%. (See chart below.)
Chart: Andy Zaky
Meanwhile, iPod shipments are also expected to shrink — a 6% decline, to about 10 million units.
The iPhone — which was supposed to fill the gap — is still on its growth curve. The Street expects Apple to report that it shipped 3.3 million units in the quarter, nearly doubling last year's Q2 shipments of 1.7 million.
But that may not be enough to make up the difference. The consensus, according to Thomson Financial, is that Apple will report earnings of $1.09 a share on revenues of $7.94 billion — a 5.7% year-to-year increase in revenue and a 6% decline in earnings.
"How can the market justify giving Apple a 22 P/E," asks Andy Zaky of Bullish Cross, "when it's not growing at all?"
Zaky, a blogger-analyst who has taken his Apple profits and turned "agnostic" on the stock, acknowledges that he could be wrong. One could argue, he says, that the market has already adjusted for the current state of affairs by taking Apple's stock price from $200 to $120. Or that Apple's growth drivers have stalled because of weakness in the economy and not because there's anything inherently wrong with the company.
And there are several things that could kick-start Apple's growth. Like if the rumors are true that Apple is about to cut an iPhone deal in China, or that it's set to unveil a new family of iPhones, or that it's working on a new device that will be its answer to all those $400 netbooks — or that the global economy has turned a corner and started to recover.
Meanwhile, the pressure is on COO Tim Cook (standing in for Steve Jobs) and CFO Peter Oppenheimer to report Q2 results that surprise the skeptics, chart a path for growth and offer guidance for Q3 that, while dutifully conservative, reflects a little more confidence in Apple's future.
Apple will report its earnings on Wednesday after the markets close. A conference call with reporters and analysts is scheduled for 5 p.m. ET (2 p.m. PT). Tune in here for live coverage and analysis.
See also:
- Bearish grunts from a pair of Apple bulls
- Why Apple’s shares rose as its market share shrank
- Kaufman’s Wu changes tune, ups Apple target 26%
- Barclays raises its Apple target 26%
Below the fold: more Zaky charts, including operating expenses by quarter and Mac sales by region.
Is Steve Jobs really in charge?
In what reads like a strategic leak from Apple's (AAPL) Cupertino boardroom, the Wall Street Journal reports in its Saturday edition that Steve Jobs — half-way through a six-month medical leave — still "maintains [his] grip" on the company from his Palo Alto, Calif., home.
But the evidence the Journal offers doesn't go much beyond Jobs' January statement to Apple's staff that he planned "to stay involved in major strategic decisions while [he was] out."
Citing unnamed "people familiar with the matter," the Journal writes that Jobs …
- Regularly reviews products and product plans
- Was particularly involved in the user interface of iPhone OS 3.0
- Is involved in the development of future projects
As examples of future products that Jobs might be working on, the Journal mentions two: the new iPhone models expected this summer and a portable device that is "smaller than its current laptop computers but bigger than the iPhone or iPod touch."
But it's common knowledge in Silicon Valley that Apple is working on these devices, and it's not clear if the Journal's sources for this part of its story know anything about the level of Jobs' involvement in them.
The only other nugget of news in the Journal's account is buried near the bottom:
"Some of these people also say members of Apple's board of directors are monitoring the situation directly, communicating regularly with Mr. Jobs's physicians."
It's not surprising that the board would want to know how their CEO is doing — especially a CEO as closely identified with his company as Jobs — but direct communication with his physicians goes beyond the usual bounds of doctor-patient confidentiality. It suggests that the board of directors may have played a deeper role in Jobs' abrupt decision to take a medical leave than has hitherto been reported.
Apple has not yet returned a request for comment.
Jobs was treated for a rare form of operable pancreatic cancer in 2004 and announced afterward that the operation was a success. But concerns about his health resurfaced last June when he appeared in public looking markedly thinner. In January he said he had a hormone imbalance that was "relatively simple and straightforward" to treat, then announced 10 days later that he was taking six months off to focus on health problems that were "more complex" than he initially thought.
In the interim, COO Tim Cook has been running Apple's day-to-day operations — as he has been for some years now — and the company seems to be doing just fine. Its shares have risen 40% since Jobs announced his leave, closing before the Easter holiday at $119.57. Second quarter earnings are scheduled to be announced on April 22.
See also:
New Chinese iPhone talks target May 17 — UPDATE
Has Apple switched horses in China?
That's the thrust of a pair of news reports out of Beijing this week that suggest a deal to carry the iPhone in China could be reached as early as May 17.
The first report, published Monday by Interfax-China, offered a recap of the sticking points that seem to have scuttled negotiations between Apple (AAPL), which is desperately seeking a partner in the world's largest cell phone market, and China Mobile, the country's — and the world's — largest carrier (415 million subscribers at last count).
According to a source who claimed to have been briefed by China Mobile president Wang Jianzhou himself, the "third and final round" broke down over which company gets control of the App Store in China. (link) [See UPDATE below for the latest twist.]
The second story, filed Wednesday by China Business News via China.org.cn, reports that Apple is now negotiating with China Unicom, the country's No. 2 mobile carrier (about 130 million subscribers).
"Yes, we are in talks with Apple Inc.," a China Unicom manager told the newspaper. (link)
According to this account, the two companies have had several rounds of negotiations, beginning as early as last October, and have stumbled over some of the same issues as the China Mobile talks — including government restrictions on cell phones with integrated Wi-Fi.
But China Unicom has an edge over its larger competitor: On May 17, it will launch China's first 3G service based on the WCDMA (Wideband Code Division Multiple Access) protocol — the one Apple employs. That would allow China Unicom's customers to use off-the-shelf iPhone 3Gs without modification.
China Mobile, by contrast, is sticking with its home-grown TD-SCDMA (Time Division Synchronous Code Division Multiple Access) protocol for 3G service. In order for Apple to serve China Mobile customers, it would have to build a special Chinese iPhone with a different cellular modem chipset.
So keep your eye on May 17 … but don't hold your breath.
"We will enter Asia with the iPhone in 2008," acting Apple CEO Tim Cook said nearly a year ago, as AllThingsD's John Paczkowski reminds us.
"We will one day enter China," Cook added. "We’re not saying when."
UPDATE: China Mobile and Apple are "currently negotiating iPhone cooperation" according to a report in China Business News Thursday. The brief item, which comes via the English language headline service JLM Pacific Epoch, attributes the remark to China Mobile CEO Wang Jianzhou. iPhoneAsia speculates that "cooperation" might be a ploy designed to keep the estimated 1 million Chinese iPhone owners currently using China Mobile's EDGE network from switching to China Unicom when its 3G service arrives.
Apple awarded iPhone patent
Tim Cook must have known.
One day before Apple's acting CEO told Wall Street analysts that his company would not stand for having its intellectual property "ripped off" — a remark clearly aimed at certain iPhone-like features of the Palm Pre — the U.S. Patent Office awarded Apple Patent No. No. 7479949.
This 358-page document, originally filed on Sept. 5, 2007, is the mother of all iPhone patents. Signed by 21 Apple (AAPL) employees — starting with Jobs, Steven P. and Forestall, Scott — it covers everything from the way a finger or fingers touch the screen to the heuristics that turn those touches into commands.
Other smartphones introduced since the iPhone came out have avoided using the multi-touch technology covered by this patent. The Palm Pre may have crossed the line. See Apple vs. Palm: Geeks with grudges.
Patents in the United States are enforced through civil lawsuits in Federal court. The patent holder will typically ask for monetary compensation and an injunction prohibiting further violations.
In order to prove infringement, the patent owner must establish that the accused infringer practices all of the requirements of at least one of the claims of the patent. The accused infringer has the right to challenge the validity of that patent, something Palm has already suggested it plans to do.
“If faced with legal action,” a Palm spokesperson said last week, “we are confident that we have the tools necessary to defend ourselves.”
Palm (PALM) shares were down more than 10% in mid-morning trading, but had made back half those losses by mid-afternoon.
Kudos to Alex Brooks of World of Apple for spotting the news.
Apple vs. Palm: Geeks with grudges
The bad blood between Apple (AAPL) and Palm (PALM) that bubbled to the surface last week has a history that long predates Palm's launch of the Pre, a smartphone that flatters Apple more sincerely than any of the other iPhone imitators.
When asked at Apple's earnings call last Wednesday how the iPhone was going to going to stay ahead of competitors nipping at its heels, you could hear the heat in acting CEO Tim Cook's answer.
"We think competition is good. It makes us all better. And we are ready to suit up and go against anyone.
"However," he added, his voice rising, "we will not stand for having our IP [intellectual property] ripped off, and we'll use whatever weapons that we have at our disposal. I don't know that I can be clearer than that." (link)
Cook had been asked about the Pre's multi-touch interface, whose technology Steve Jobs insists is heavily protected by multiple patents and which other iPhone competitors — Google's (GOOG) Android, for example — have been careful not to use.
Palm was quick to respond to what it perceived as a shot across its bow.
"If faced with legal action," a spokesperson told Digital Daily, "we are confident that we have the tools necessary to defend ourselves."
But the bad blood between Palm and Apple goes deeper than a patent dispute, as my colleague Brent Schlender presciently pointed out when the venture capitalists at Elevation Partners made their first big investment in Palm — a $325 million cash infusion just a few weeks before the iPhone hit the market.
In a column written at the time of the loan, Schlender noted that both the giver — Elevation partner Fred Anderson — and the receiver — Palm executive chairman Jon Rubenstein — had long, complex relationships with Apple.
Anderson, who was Apple's CFO from 1996 to 2004, before he became a venture capitalist, had just reached a settlement with the SEC over his alleged role in backdating Apple stock options — including hundreds of millions of dollars worth for Steve Jobs. At the time of his settlement, Schlender reminds us, Anderson "denied any wrongdoing, paid a fine, and issued a vaguely antagonistic statement disputing Jobs’s account of the options backdating. Clearly Anderson felt he had been thrown under the train."
Rubenstein's relationship with Jobs is even older and more complex. It dates back to 1990, when Jobs asked him to run hardware engineering at NeXT. Rubinstein came to Apple with Jobs' return in 1997 and played a key role in developing some of the revitilized company's most profitable products. As Schlender tells it:
"Rubinstein … who was instrumental in developing the iMac, the PowerBook, the Power Macintosh, and the iPod, retired quietly a little over a year ago, on April Fools Day, 2006 — the 30th birthhday of Apple. Interestingly, about six months before that, he gave a rare interview to the Berliner Zeitung in which he threw water on the idea of converging a cellphone and an iPod media player into a single device — basically what is now the iPhone. “Is there a toaster that also knows how to brew coffee?” he asked. 'There is no such combined device, because it would not make anything better than an individual toaster or coffee machine,' Rubinstein argued. 'It works the same way with the iPod, the digital camera or mobile phone: it is important to have specialized devices.'
"Strange words, considering that Apple’s iPod group was already working on what would become the iPhone. Stranger still, when you look back and see that Apple publicly announced Rubinstein’s upcoming 'retirement' less than three weeks after that interview. I think you can safely surmise that Ruby, who had been with Jobs for more than 15 years at both NeXT and Apple, wasn’t on the same page with his boss." (link)
At the unveiling of the Pre at the Consumer Electronics Show three weeks ago, Rubinstein introduced the device by first talking about how he retreated with his family to Mexico after he left Apple to lick his wounds — a surprisingly personal way to launch a new cellphone. (You can watch him here in the Palm-supplied video that shows us more of Rubinstein than we ever saw in his years at Apple.)
Once at Palm, it didn't take Rubinstein long to start raiding his former employer for engineering and marketing talent — including senior vice president for product development Mike Bell (a 16-year Apple veteran), director of software Chris McKillop (of the iPhone and iPod team), and spokesperson Lynn Fox (out of Apple PR).
So did Palm, in fact, rip off Apple's intellectual property? Patent attorneys could be arguing that question for years to come. Meanwhile, Palm partisans have begun laying the groundwork for their defense, leaking to reporters a white paper prepared by Microsoft's Bill Buxton that traces the history of multi-touch back to IBM's Type and N-key Rollover. (link)
Meanwhile, the exuberance with which the tech press initially greeted the Pre (it won Best in Show and rave reviews, for example here and here) is being tempered by the sour reaction of Apple partisans. Perhaps the sourest of the lot is Daniel Eran Dilger's long screed in Roughly Drafted Magazine, in which he repeatedly refers the still-unreleased Pre as a "demo" and compares it to a "bald man's combover." (See The Emperor's New Phone.)
The Pre is scheduled to go on sale in the first half of 2009. A price point has not been announced, although outsiders have speculated that it will be somewhere between $249 and $399. The iPhone retails for $199 (8GB) and $299 (16GB).
