Apple Released Q2 Financials--Beats Analysts' Estimate by 10 Percent

Apple announced its financial results for the second quarter ending April 1, 2006. Revenue topped $4.36 billion with a net quarterly profit of $410 million, or $.47 per diluted share. As we noted yesterday. the Thomson First Call consensus estimate of polled analysts was $0.43. Q2 of 2006 is the second best quarter in the history of Apple. This year's Q2 results compare to revenue of $3.24 billion and a net profit of $290 million, or $.34 per diluted share, in the year-ago quarter. Apple's sales gross margin was 29.8 percent, equivalent to the year-ago quarter. Sales outside the U.S. accounted for 43 percent of the second quarter’s revenue.

Apple shipped 1,112,000 Macs and 8,526,000 iPods during the second quarter, representing 5 percent growth in Macs and 69 percent growth in iPods over the year-ago quarter. Desktop Macs (Power Macs, eMacs, iMacs, Mac minis and Xserves) increased 4 percent and portables (iBooks, PowerBooks and MacBook Pros) increased 7 percent. Apple does not provide a further breakdown of Mac or iPod sales.

"We've generated over $10 billion in revenue and almost $1 billion in earnings in the first half of fiscal 2006," said Steve Jobs, Apple's CEO. "Our transition to Intel processors is going very well, and our music business just experienced another quarter of outstanding growth."

Revenue from the retail Apple Stores increased 11 percent. In a Q&A conference call, Apple executives stated that the retail Apple Stores and iTunes Music Store operated in the black during Q2. New-to-Apple sales increased to 50 percent. Apple expects to open 40 new stores in 2006 (6 already opened) with about 30 being in the US.

Apple paid the final $508 million installment on prepaid flash RAM from Samsung. It spent $120 million to acquire a new data center in a second campus being developed in Cupertino, CA, 10 minutes from the first.

Sales are seasonal, usually declining in Q2 from the holiday season of Q1. But the sales decline was also due to a shipping delay in the MacBook Pro, purchasing delays waiting for Intel-based Macs to come out and the loss of one week in the quarter to Q1 due to where the quarters break this year according to Apple executives.

Still Apple's gross margin was excellent. According to Apple's Tim Cook, Senior VP, and Peter Oppenheimer, CFO, it was buoyed by lower than expected costs of LCDs and flash RAM; software sales being better than expected, especially iLife '06; and expected price reductions to clear our Power PC Macs were not needed much. On the latter, Oppenheimer said "...we used very little of it."

In answer to a question about sales of Intel-based Macs, Cook stated that "Sales of Intel-based Macs accelerated across the quarter." But Apple apparently has no backlog of orders at present according to other statements made during the call.

Responding to question about the adoption rate of Boot Camp, Apple's tool to allow installation and booting of Windows XP on Intel-based Macs, the executives replied that Boot Camp is a beta product. It's not supported and they will not release the amount of downloads accordingly.

As for the immediate future, i.e. Q3 ending June 30, Oppenheimer said:

"Looking ahead to the third quarter of fiscal 2006, we expect revenue of about $4.2 to $4.4 billion."

[Bill Fox]