Updated at 3:45 p.m. PST following the conference call, with changes throughout.
Apple's first quarter hit on all cylinders, as the company continued its financial run on the strength of its Mac business. But anyone looking for reassurance about the overall health of the economy later this year didn't get it from Apple.
The company posted revenue Tuesday of $9.6 billion for its first fiscal quarter, which ended December 29. That's better than the $9.5 billion expected by financial analysts, and Apple also gave them good news with its earnings-per-share number of $1.76, better than expectations of $1.62 per share. That translates to net income of $1.6 billion, up 58 percent from last year.
Mac sales were up 44 percent compared with last year, as Apple continued its resurgence in personal computers. But investors will wonder if the iPod gravy train is coming to an end, as Apple's iPod sales of 22.1 million iPods was well below Wall Street expectations of 24.7 million. That's just 5 percent unit growth compared with last year, but iPod revenue was up 17 percent, so perhaps Apple sold more high-end iPod Touches than iPod Nanos or Shuffles as a percentage of its mix during the quarter.
Apple executives supported that argument during a conference call with financial analysts after the release of the company's earnings. Apple gained iPod share internationally, but iPod units sales in the U.S. were flat, said Tim Cook, Apple's chief operating officer.
While not specifically addressing the missed Wall Street target for iPod unit sales, Cook did say that iPod unit sales met the company's own expectations. And the iPod Touch is off to a good start, he said, which accounted for overall iPod revenue growth that matched last year's first-quarter revenue growth.
"This was the most expensive iPod we've introduced in some time," said Peter Oppenheimer, Apple's CFO. The company thinks the iPod Touch really belongs in a different category than the broader music player market, saying the iPod Touch has a chance to "become the first mainstream mobile Wi-Fi platform." Nintendo and Sony might have minor quibbles with that statement, but Oppenheimer's point was that you can't necessarily use years of iPod sales to chart the progress of the iPod Touch.
On the Mac front, Apple enjoyed another spectacular quarter, with Mac unit growth of 44 percent and revenue growth of 47 percent compared with last year. "The Mac business is on fire," Cook said, and the increases were led primarily by the new iMac desktops Apple introduced last August. Apple estimates that 19 percent of the Mac installed base is running Leopard, Mac OS X 10.5, and Leopard generated $170 million in revenue for Apple during the first quarter it went on sale, compared with the $100 million that Tiger, Mac OS X 10.4, generated for Apple in 2005.
CEO Steve Jobs already tipped the company's hand on iPhone shipments at Macworld, noting that Apple had sold 4 million iPhones as of his keynote speech. Apple sold 2.3 million iPhones during its first quarter, and Cook reiterated Apple's goal of shipping 10 million units during 2008.
In other business, Apple plans to double the number of Best Buy stores that are selling Macs within the next six months, going past an analyst prediction earlier this month that it would pull that off by early 2009. Apple sold 504,000 Macs through its own retail stores, up 64 percent from last year's first quarter, and just like last quarter, 50 percent of those buyers were new to the Mac, Cook said.
All in all, it adds up to a very solid first quarter for Apple. Even the disappointing iPod sales sold had a silver lining, since Apple took in 17 percent more revenue on only 5 percent unit growth. But the guidance will not help assuage a shaky stock market.
Apple is notorious for providing conservative guidance below Wall Street's expectations, but it guided well below expectations with predictions of $6.8 billion and 94 cents a share. Lots of companies would kill for that kind of performance, but Wall Street wanted more of Apple, with expectations of $7 billion in revenue and earnings per share of $1.09.
Analysts asked several times whether Apple foresaw a slower second quarter based on the economic environment, and perhaps wisely, Oppenheimer declined to attach his name to a negative forecast that could send stocks plunging Wednesday.
"We'll leave the economic forecasting to others. I am confident in our business, our strategy, and our products," Oppenheimer said. He may be right to be confident, but if average consumers pull back substantially on their spending, we're all going to feel it. Apple shares fell 11 percent in after-hours trading.
While the raw numbers from AMD's latest earnings call are as gory as we've seen from the chipmaker this year, the bigger picture is more favorable.
AMD took steps toward--but fell just short of--profitability during its fourth quarter. On a net loss basis, the number is staggering: AMD reported a loss of $1.8 billion. However, the few Barcelona shipments that did go out during the fourth quarter helped AMD fall just short of profitability after you factor out a few one-time charges.
AMD Chairman and CEO Hector Ruiz
(Credit: AMD)The net loss number reflects a charge AMD was forced to take after determining that it had some "impairment of goodwill." That's fancy accounting speak for "we overpaid for ATI Technologies by $1.6 billion." It actually could have been worse; after it bought ATI, AMD earmarked $3.2 billion to account for goodwill, which is essentially the amount of money a company spent on another company beyond what it was really worth.
In 2006, AMD paid $5.4 billion for ATI, meaning that when they accounted for the acquisition, AMD's accountants determined that ATI's hard assets were only really worth $2.2 billion. Companies can carry the difference on their books as an asset called goodwill that is intended to quantify the value of intangible assets--things like a brand name and happy employees. But goodwill has to be written off over time, and if a company determines at some point that the acquired brand name is actually worth far less than $3.2 billion, for example, they've got to acknowledge that with a write-off.
Luckily for AMD, however, you don't have to take that kind of hit every quarter. The health of AMD's ongoing processor and graphics businesses are much more important to its future and the future of executives such as CEO Hector Ruiz and president and chief operating officer Dirk Meyer. And on that basis, AMD made strides in the fourth quarter, reducing its net loss excluding the charge to $97 million.
On an operational basis, AMD lost only $9 million. You know you've had a bad year when financial analysts are congratulating you on only having lost $9 million before interest and taxes. Still, AMD said it shipped a record number of processors during the quarter, and the processor division itself posted an operating profit.
Barcelona, the bane of AMD's existence in 2007 but the key to its 2008, is getting out to customers, Meyer said. The revised version of the quad-core server chip that fixes the TLB bug is out of AMD's fabs, and the company is getting ready to release engineering samples to its customers over the next couple of weeks, he said. Barcelona will help AMD improve its average selling prices and revenue, although it probably won't make an impact on AMD's bottom line until the second quarter, when the majority of the shipments finally takes place.
AMD shipped nearly 400,000 Barcelona processors during the quarter. Processor-related revenue was up 11 percent compared with the third quarter, but down compared with last year's fourth quarter. Gross margin improved by 3 points compared with the third quarter, and by 8 points compared with last year's fourth quarter, but that's still not high enough for AMD to break even.
"We have got to return to profitability as soon as we can," Ruiz said, reiterating AMD's plans to be a profitable business in the second half of this year. A healthy Barcelona chip will certainly help that bottom line, as server processors are the most profitable segment in the division. AMD also has new notebook chips on tap for the first half of the year that could help boost the bottom line if they arrive on time and without incident.
The company's near-term outlook wasn't great, but nobody's feeling that great about the first half of the year right now. AMD expects first-quarter revenue to decline within normal seasonal patterns; the chip business always sees a decline in revenue going from the holiday-season fourth quarter to the cold and dreary first quarter.
Also, AMD still isn't ready to outline its manufacturing plans. The company has made vague references to an "asset light" strategy, which turned into an "asset smart" strategy as soon as rumors started flying that AMD might be ditching its expensive chip fabrication plants. Of course, the rumors have been fueled by near silence from AMD executives on the plans, which likely involve a greater reliance on chipmaking foundries to manage spikes and drop-offs in demand.
Hopefully for AMD, this was the bottom. Barcelona is a year later than expected, but it should stabilize the company at this point. Now, all AMD needs to do is pull off the ambitious Fusion project scheduled for 2009, and it might once again become a persistent thorn in Intel's side.
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