Sure, Apple Computer (AAPL) sold a lot of iPods in the September quarter. But unlike in past periods, when surging sales of the iconic digital-music player grabbed headlines, this time around, the Mac was the belle of the earnings ball.
In fact, Apple sold more of its Macintosh computers—1.61 million—than in any other quarter. Mac sales were clearly the high point of the quarter and the year, accounting for $2.2 billion, or 45%, of revenue. Apple had made a point to emphasize the Mac following the transition to using chips from Intel (INTC) from using chips made by IBM (IBM) and Freescale Semiconductor (FSL). Apple completed the switch when it released the MacPro earlier this month.
Niche Player No More
"They delivered in spades," Piper Jaffray analyst Gene Munster says of Apple's Mac sales. "It's a sign that Apple has turned the corner from being a niche player to being a player that is starting to make a run at bigger players."
Indeed, Apple came within spitting distance of overtaking Gateway (GTW) as the third-biggest U.S. computer maker, according to Gartner figures released on Oct. 18, the same day as Apple's results. Last quarter, Apple sold a mere 38,000 fewer units than Gateway, which trails Hewlett-Packard (HPQ) and Dell (DELL).
And within Mac sales, portables were far and away the favored product of Mac buyers. Apple sold 986,000 of its MacBook and MacBook Pro notebook computers, which accounted for $1.3 billion, or 27%, of revenue at an average price of $1,363 per unit during the period. Desktop sales, at 624,000 units, were slower, in part because the Mac Pro was the last Mac in Apple's lineup to include an Intel chip, accounting for $869 million, or just less than 18%, of revenue. Desktop prices sold for an average price of $1,392.
Not that the iPod played the shrinking violet by any means. Apple sold 8.7 million units, more than 2 million more than a year earlier. That was welcome news, considering some recent analyst reports pointing to the prospect of worse-than-expected iPod sales. Indeed, the iPod showed its continued importance to Apple's bottom line, making up $1.5 billion, or nearly one-third, of sales.
In all, the company turned in a 62-cent per share profit, beating a consensus estimate of 51 cents. Apple's profit was $546 million, compared with $430 million a year ago, on sales of $4.8 billion compared with $3.6 billion a year earlier. It also finished the year with more than $10 billion in cash and short-term investments, nearly $2 billion more than a year ago. Apple's stock jumped $3.37, or 4.5%, to $77.90 in extended trading on Oct. 18.
The retail division also pulled its share of the weight, turning in sales of $936 million and clocking more than 20 million visitors to its 165 stores around the world. Chief Operating Officer Tim Cook said internal surveys found that 50% of those who bought Macs in the retail stores described themselves as "new to the Mac."
Also aiding Apple's retail efforts is a trial with Best Buy (BBY), which by the end of the quarter was selling Macs in 50 stores, up from 7 at the beginning of the period.
"If it succeeds, and expands across all of Best Buy, it could increase Apple's retail footprint by 10%," says Munster. "That will dramatically boost the U.S. go-to-market strategy with the Mac. I bet a year from now they're in half of Best Buy's stores."
The quarter also capped a fiscal year when Apple sold 5.3 million Macs and 39 million iPods, recorded $19.3 billion in sales, and stacked up a $1.9 billion profit. Applying that rate across the board to Apple's stores, Cook said that means each store added 1,000 new Mac users during the quarter.
But looking ahead, Apple said sales in the all-important first fiscal quarter, which includes the forthcoming holiday season, will be $6 billion to $6.2 billion. That's in line with the expectations of analyst Shaw Wu at American Technology Research in San Francisco, who says consensus forecasts of $6.5 billion are too optimistic.
"They Guide Conservative"
Munster says Apple's just being conservative. "They guide conservative every quarter," he says. "The only way to get value out of Apple's guidance is to take what they say and then increase it by 8 percent." Applying Munster's argument to Apple's official guidance for the December quarter suggests sales could be as high as $6.5 billion.
Apple said its results are preliminary, pending the final outcome of an internal investigation into the backdating of stock options that it says could result in the restatement of certain historical results from 1997 to 2002. It's not yet clear how large the restatement will be.
No hints emerged on any future Apple products, including the long-rumored iPod-wireless phone hybrid, which has been the subject of persistent rumors for about two years now (see BusinessWeek.com, 10/19/06, "Another Music Phone? Yawn…"). Apple execs were equally mum on any plans for another long-rumored addition to the iPod family of products that has been the subject of speculation, given the looming fifth anniversary of the original iPod launch on Oct. 23.
Minor Virus Outbreak
News of Apple's record-breaking results emerged on the same day it disclosed that some of its recently shipped iPods contained a virus that can affect computers running Microsoft's (MSFT) Windows operating system. The company says that less than 1% of iPods shipped since Sept. 12 are affected by the virus, and that fewer than 25 people have reported problems relating to it.
The iPods contracted the virus, known as the RavMonE.exe virus, from Windows PCs at the site of the iPod's contract manufacturer, which presumably would be Foxconn, also known as Hon Hai Precision Industry. The company says commercial antivirus software from companies like Symantec (SYMC), McAfee (MFE), and Microsoft can eliminate the virus.
But even the slight pall of the options mess and the iPod virus outbreak couldn't dull the shine of another record quarter and fiscal year for the Cupertino (Calif.)-based computer maker.