At about 2 p.m. Pacific Time, Apple executives began to recap the company's second quarter. This is a record of the call with updates as they came. You can also check out the numbers here. The Mac had a stellar quarter, and the iPhone and iPod divisions made solid contributions.
2:01 p.m. PDT: We're waiting for Apple executives to come online to discuss their second-quarter earnings, which they'll probably enjoy. If you haven't seen the numbers yet, Apple's revenue increased by 43 percent compared to last year, while profits were up 36 percent. You know this is a different kind of Apple event when the preview music is classical, rather than Green Day or U2. Things should be getting under way shortly.
2:07 p.m.: Peter Oppenheimer, Apple's chief financial officer: "We are very pleased to report the highest March revenue in Apple's history." This was driven by solid performances for all three major businesses, and the gross margins were better than expected. Oppenheimer singles out a couple of points: the 43 percent growth rate in revenue is twice what Apple did in last year's second quarter. All geographies were strong, and retail store sales were very strong, with traffic up 57 percent. Half of all Macs sold in the retail stores were to new Mac users, which is a similar percentage to what they've said the last few quarters.
2:08 p.m.: Turning to the Mac, Oppenheimer notes the shipment total is just shy of the record set last quarter, which is generally the most active quarter of the year. Apple's growth is outpacing the market, he said. iMac demand was strong, and the updated Mac Pro did well. Portables were even better, and he calls the MacBook Air launch successful. Customers responded well to the product, he said, but doesn't provide numbers.
2:10 p.m.: On the music side, Apple sold 10.6 million iPods, a 1 percent growth rate from last year. I think that's the smallest iPod growth in company history. Oppenheimer singles out the iPod Touch as having grown strongly, and thinks the SDK will help sales. iPod Shuffle sales were down, but picked up following the price cut during the quarter. Apple's share of the U.S. MP3 market was 73 percent, and the company gained share outside the U.S.
2:11 p.m.: iTunes sales were strong, and he reminds everyone that the iTunes store emerged as the leading music retailer during the quarter. Apple is expanding video content internationally.
2:13 p.m.: Oppenheimer reiterates, again, the goal of selling 10 million iPhones during 2008. Total iPhone revenue was $378 million during the quarter, when Apple expanded into Austria and Ireland. The developer response to the SDK has been tremendous, with 200,000 developers downloading the kit. One-third of the Fortune 500 has inquired about iPhone applications, he said. All revenue from iPhones sold on or after the March 6 date will be deferred until the iPhone 2.0 software is delivered in June, he said, which allows Apple to offer that upgrade for free under accounting rules.
2:14 p.m.: Retail performance was excellent, with a 74 percent jump in revenue. The stores did 580,000 one-hour training sessions during the quarter, Oppenheimer said. About 45 stores will open in fiscal 2008, and Apple still likes their retail stores, he said.
2:15 p.m.: Gross margins were up as commodity prices fell, he said. Flash memory prices, in particular, have fallen through the floor. Apple ended the quarter with $19.4 billion, and the company is generating piles of cash.
2:17 p.m.: Oppenheimer goes through the company's outlook, which, in usual fashion, was a little lower than Wall Street's expectations, but not as much as some had feared amid the current economic environment. "We're extremely proud of our growth and performance in the March quarter," he said. "We remain very confident in our business, and are very excited about the products in our pipeline." With that, we turn to Q&A. I'm setting the over/under on "great quarter" comments at six.
2:20 p.m.: Lehman Brothers: "Nice revenue and performance." Lehman wants to know about gross margin, noting it was good, but wondering if it could have been better. Apple Chief Operating Officer Tim Cook steps up for the first time, saying the commodity pricing in DRAM and flash markets hit historic lows. That's not going to change in the upcoming quarter. LCDs are in balance between supply and demand, as are hard drives and optical drives. Oppenheimer is asked why gross margin declined from the first quarter, and he says it's because Leopard is now in its second full quarter, which means sales start to trail off. The Shuffle price change also contributed.
2:22 p.m.: Lehman continues to ask about the iPhone, asking about the supply concerns. He wants to know if the segment can grow sequentially given the inventory issues. Tim Cook says that they are confident on the 10 million for the year, but the shortages came about because Apple thought iPhone shipments would decline coming off the fourth quarter. Lots of phones are still being bought at Apple stores, where they are intended to be unlocked, he said. That number of unlocked phones is "significant," but Cook says he can't figure out exactly how many have been unlocked.
2:24 p.m.: FTN Midwest wants to know about the channel, specifically the mix between direct and indirect. Oppenheimer says the direct sales were 51 percent of Apple's mix, up from 49 last quarter. Cook says the Best Buy relationship is still going well and expanding. Educational buying was up 35 percent, and the current quarter is a big one for K-12 sales, Cook says. That's the highest growth rate Apple has seen in eight years, and Apple surpassed Dell in portables among the higher education crowd.
2:30 p.m.: RBC Captial: Can you qualify the reasons for the delay in the start of revenue recognition for the iPhone and the 2.0 release? Oppenheimer says they are doing this because they announced new features that will be included for free for customers who purchased iPhones after March 6. Wait, does that mean those who bought an iPhone prior to March 6 will have to pay? That doesn't sound right. I'm not sure he said that correctly, but I'll check later.
2:31 p.m.: All the discussion around the revenue is to satisfy accounting rules about establishing a value for upgrades, which threw Apple for a loop last year with a Wi-Fi upgrade. Cook declines to comment on whether a 3G iPhone will boost sales, but does say they have more geographies in mind. Oppenheimer likewise declines to comment on the broader economic environment, despite doing so at Apple's shareholder meeting in March.
2:31 p.m.: Goldman Sachs wants to know if Apple has set a date for the iPhone 2.0 software delivery, and Oppenheimer declines to take the bait.
2:33 p.m.: Morgan Stanley wants to know about margins, since the margins are down year on year for the first time since 2006. Does Apple need to reinvest outside the U.S. to boost those margins? Oppenheimer notes that they guided for a 32 percent margin, and produced 32.9, so they beat their own expectations.
2:36 p.m.: Citigroup also asks about gross margin. Financial analysts obsess about gross margin. He notes that Leopard revenue and the Shuffle price cut only affected gross margins by a point each, while commodity prices are way, way down. Did the timing of when you bought the memory procured in December mean it was more expensive, meaning there will be an upside in the current quarter? Oppenheimer goes through the Leopard numbers again, saying it's the best-selling release in Apple's history, but the sequential declines were a little bigger than they thought. He also says iTunes was a bigger mix of the business, and that carries a lower gross margin.
2:38 p.m.: Cook discusses the commodities picture, saying that they did get benefits in DRAM and NAND flash areas from the price cuts. The analysts want to know why gross margin declined so much, even though they knew it was coming, perhaps because they assumed Apple was being conservative. Citigroup wants to know if the costs will get lower in the current quarter, and Cook says no, although it will stay around the low levels it currently occupies.
2:42 p.m.: Bear Stearns rattles off about four different questions that I didn't catch. Oppenheimer says the consumer business was great in both March and December, with Mac shipments leading the charge. All customer segments did well in the current quarter. The other question was about taxes; it had been forecast at 32 percent, but is going down to 31 percent. On iPhones, Apple sold 1.7 million iPhones during the quarter, and deferred the revenue of any iPhones sold after March 6 until it delivers the new software in June. Apple's treasurer reassures Bear that the company isn't exposed to any kind of shady investments in risky securities.
2:44 p.m.: Piper Jaffray asks again about iPhone revenue. The revenue and product costs for iPhones sold after March 6 are being delayed, but Apple continued to record other costs, like engineering, as usual. Piper asks if Apple will charge for the iPhone 2.0 software for older phones, and Oppenheimer confirms they will not. I thought that was weird. The people who bought after March 6 might have bought the iPhone because of the new software, which means Apple has to defer their revenue until that software is delivered.
2:48 p.m.: Cross Research has a few questions. First, what's up with iPhone price moves in Europe? Do you bear the cost? Cook says the carriers can price the iPhone as low as they want, but he doesn't comment on whether Apple assumes some of that hint. He punts on a question about whether Apple will keep a 2.5G iPhone after the 3G model comes out. And where are Macs particularly strong? Cook says all geographies are strong: the Americas were up 52 percent, Japan was up, and Asia-Pacific as well. The professional business was up with a revamped Mac Pro. MacBook Air shipments were initially constrained, but Apple was in balance by the end of the quarter.
2:51 p.m.: Bank of Montreal pipes up. Does the SDK revenue recognition start the minute the iPhone 2.0 software ships? Oppenheimer says it does in the sense that Apple will parcel it out over 24 months, but that doesn't mean it will automatically record the three months of revenue deferred on an iPhone sold in March once that software arrives. Another gross margin question is evaded by Oppenheimer, who says gross margin is a tough thing to compare year on year.
2:51 p.m.: American Technology Research, who cut their expectations prior to Apple's release, asks about the P.A. Semi acquisition. Oppenheimer reads the same statement that Steve Dowling gave to Forbes regarding that acquisition.
2:53 p.m.: The next analyst wants to know about Mac shipments and their seasonal nature going into the next quarter. Oppenheimer says Apple generally sees a sequential increase in shipments as the educational customers start buying. The September quarter goes up further from there, on average, as the college kids start buying. The other question is about iPhone unlocking and carrier activation, and Oppenheimer repeats Cook's statement that estimating the exact number of unlocked iPhones is very difficult. "Our view is this gives a clear interest in demand globally for the iPhone."
2:56 p.m.: Sanford Bernstein asks about iPhone demand and supply when it comes to Europe. If supply was down so much in the U.S., why are European carriers slashing prices? Why couldn't you move phones from Europe to the U.S? Cook says the stockouts were confined just to Apple stores, and it was because people were buying to unlock and export them for sale. Inventories are now low among channel partners as well. Why couldn't you balance demand? Cook says that's because once the units have shipped to a carrier, the ability to move them to another carrier is low. "We sold more than we thought we would."
2:58 p.m.: The analyst pushes on the iPhone unlocking question, noting that Apple had given out a number before and should know the tendencies better with more experience in the market. Cook repeats his statement that it's significant, but they can't put a precise number on it, so they don't want to just toss one out. He turns to Macs, wondering why Mac prices declined on a sequential basis, and Oppenheimer says that's because there was a product transition during the quarter (with new notebook configurations) and because the mix changed between MacBooks and MacBook Pros.
2:59 p.m.: Needham and Company wants to know about MacBook Air demographics, and how many Windows users purchased one. Cook doesn't know about the Windows users, but says the Air appealed to a wide variety of users and that the cannibalization of other portable units was very small.
3:00 p.m.: That's it. We'll sort through the numbers, I'll ice my wrists, and we'll sum everything up in a nice little package later today. Thanks for reading.