Hands-On Report--Apple Beats Analysts Consensus Earnings Esimate in 2006 Q1 by Posting Record Fiscal Quarter

We listened to Apple's webcast conference call with financial analysts following the release of Apple's Q1 financial report. Mostly, the questions posed by analysts are deftly deflected by Apple's CFO Peter Oppenheimer and COO Tim Cook since they seek details on individual products, business segments, future actions or future products. Apple never comments on these things and has even gotten more general in recent years in the categories in which it presents information. Still, there were some interesting tidbits divulged beyond Apple's actual financial report but first here the report for Apple's first 2006 fiscal quarter (10/1-12/31/05).

Apple reported a $565 million net profit on revenue of nearly $5.8 billion, the best quarter of any in Apple's history. That converts to $0.65 earning per share beating by some 7% the most recent finanacial analysts consensus estimate of $0.61, less of a beating than usual. Apple's gross margin dropped slightly from 28.5% to a still very healthy 27.5%. And Apple has now packed away some $8.7 billion in cash and short-term investments, quite a feat after pre-paying some $0.7 billion for future NAND flash RAM. A $0.5 billion final pre-payment installment is due in the current quarter. Research and development expeditures increased 48% over the first quarter last year to $182 million.

Apple sold over 1.25 million Macs, i.e. 667,000 as desktops and 587,000 as portables. As we all know, Apple sold over 14 million iPods. That's up 20% and 207% respectively over the same quarter last year. Revenue from other music-related things was up 177%, Peripherals and other hardware up 7% and software & other up 53%. Retail store revenue was up 91% and revenues from all three world regions (Americas, Europe and Japan) were up respectively 65%, 47% and 91%.

Some interesting tidbits from the slightly less than an hour-long conference call are:

• iPod inventories were lower than desired due to higher than expected demand and the most constrained iPod remains the 4GB iPod nano.
• Apple had 83% of the legal music download market.
• 11 new retail Apple stores opened to total 135 and 40 more will open in 2006, mostly in the U.S. but also Canada, the UK and Japan.
• The week following Christmas was a "big" sales week.
• There was a definite "pause" in Mac sales due to an anticipation of Macworld announcements.
• Can not pin the sales "pause" on either the pro or consumer line.
• The ordering response to Intel Macs has been "strong."
• MacBook Pros shipping in February may not be able to meet the demand during the second quarter. [Order now!]
• Selling iMac G5s and 15" PowerBook G4's only while supplies last.
• Price protection, if any, for clearing remaining iMac G5's and 15" PowerBook G4's was factored into the lowered revenue projection for the second quarter. [Hmm..maybe some discounts coming?]
• Gross margin for iPods was over 20%.
• Apple now has 35,000 iPod retail outlets world wide.
• Apple's music business operated above the break-even mark.
• R&D will continue to climb as Apple invests in its future.
• Apple is pleased with the strong response for its new iPod remote/radio tuner and may have trouble meeting demand.

If you want to listen to a QuickTime re-broadcast of the conference call, go to this Apple Web page. It's also available as a podcast.

Apple forecast the second quarter earnings to be down (as usual in Apple's business cycle) to $4.3 billion. Still, it's a pretty hefty number.

Following the release of the report, Apple's stock declined in after-hours trading. Perhaps this was due to the lowered second quarter expectation. However, if realized it would still be the second best quarter in Apple's history as analyst Shaw Wu pointed out. [Bill Fox & Dana Baggett]