Apple Q2 Results Blow Past Forecast Thanks to iPhone, iPod Shipments

By Joe Wilcox  |  Posted 2009-04-22

Apple Q2 Results Blow Past Forecast Thanks to iPhone, iPod Shipments

For months, analysts and pundits have speculated about how the economy would affect Apple sales. Today the company answered with fiscal second-quarter results. After the market closed on April 22, Apple announced earnings of $8.16 billion, up from $7.51 billion a year earlier. Net profit grew from $1.05 billion a year earlier to $1.21 billion, or from $1.16 to $1.33 earnings per share. Gross margins were 36.4 percent.

The Wall Street consensus had been $7.96 billion revenue and earnings of $1.09 a share. In January, Apple forecast revenue between $7.6 billion and $8 billion for its fiscal second quarter, with earnings per share ranging between 90 cents and $1 per share. Estimated gross margins: 32.5 percent. So Apple forecast a revenue gain but an earnings decline.

"We are extremely pleased to report the best non-holiday quarter revenue and earnings in our history," Apple Chief Financial Officer Peter Oppenheimer said in a statement. "Apple's financial condition remains very robust, with almost $29 billion in cash and marketable securities on our balance sheet."

Looking ahead, Apple forecasts between $7.7 billion and $7.9 billion in revenue for the fiscal third quarter, with earnings per share ranging between 95 cents and $1 a share. In the comparable 2008 quarter, Apple reported revenue of $7.46 billion and $1.07 billion net quarterly profit, or $1.19 per share.

During the fiscal second quarter, Apple shipped 2.2 million Macs, with units down 3 percent year over year. The company shipped 11.01 million iPods, up 3 percent year over year. Shipments of iPhones reached 3.7 million. Earlier April 22, AT&T revealed that 1.6 million iPhone 3Gs had been activated during the first calendar quarter, suggesting that about 2 million units are still unsold in the channel.

Mac Analysis

The question hanging over Apple during the recession: Could the company maintain Mac shipments at its current prices, which are substantially higher than those of PCs? For example, according to NPD Group, the U.S. retail average selling price for a Mac in February was $1,500 compared with $555 for a Windows PC. For notebooks, the Mac laptop ASP was $1,512 compared with $560 for a Windows laptop. The cheapest MacBook sells for $999, while an iMac starts at $1,199.

Before the recession, Apple easily maintained higher pricing while clocking huge sales growth and market share gains. Twelve months ago, Apple's U.S. retail share reached 14 percent, with notebook sales up close to 60 percent year over year, according to NPD. By September, Apple's retail share had topped 20 percent in units and approached 40 percent in revenue.

But the recession has acted as gravity pulling against Apple's earlier gains. Apple's U.S. share of the PC market reached 9 percent in the third quarter of 2008, according to Gartner. But Mac market share declined to 8 percent in the fourth quarter and to 7.4 percent in the first quarter of 2009.

Meanwhile, at U.S. retail, Windows PC sales are way up, while being way down for Macs, according to NPD Group. In February, U.S. retail Windows PC unit sales rose 22 percent year over year compared with a 16.7 percent Mac sales decline. Windows PCs posted modest 1.4 percent revenue growth, compared with a stunning 23.3 percent Mac revenue decline.

Apple Pricing and Competitors


Based on an eWEEK analysis, Windows PCs also benefit from Microsoft's "I'm a PC" ads. By September, the U.S. economy had officially reached a crisis state, with consumer spending dropping in nearly every category over the subsequent five months. Around the same time, a big sales surge in netbooks started, in the fourth quarter doubling sales from all the rest of 2008, according to IDC. But something else happened in September: Microsoft launched the first wave of "I'm a PC" commercials as part of its "Life Without Walls" campaign. The campaign has effectively shown Windows PCs' value and lower pricing compared with Macs.

The question for Apple is what to do about pricing. "They really need to get a $799 product out there," said Stephen Baker, NPD's vice president of industry analysis. "But I think it would be too cannibalistic to be below $799." The concern: erosion of the Mac brand and pricing associated with it.

But today's results suggest that despite share erosion, Apple can still stand fast on pricing. Compared with the PC industry, Mac shipments are weaker. But comparing Mac sales now and past Mac sales, Apple is doing well in tough economic times. Still, sequentially, Mac notebook shipments fell 22 percent and revenue by 25 percent.

iPhone analysis

Analyst consensus for iPhone shipments was 3.3 million units, so the quarter-on-quarter decline was anticipated; Apple shipped 4.363 million units during its fiscal first quarter, or about 2.2 million sold when accounting for inventory in the channel. But current iPhone shipments come against a difficult competitive backdrop. Research In Motion's BlackBerry line is doing much better than the iPhone. BlackBerry is second to Nokia in terms of worldwide smartphone market share. Earlier in April, RIM announced bang-up fiscal fourth-quarter results, with 25 million total BlackBerry subscribers, adding 3.9 million in a single quarter.

RIM's big advantage is distribution. BlackBerrys are available through all major U.S. carriers, while Apple has only AT&T. The U.S. smartphone market grew 69 percent year over year in 2008, accounting for about 20 percent of all handsets sold, according to Gartner. By comparison, worldwide, smartphones accounted for 11 percent of all cell phone sales in the fourth quarter and 12 percent for the year.

Globally, BlackBerry smartphone market share rose to 16.6 percent from 9.6 percent a year earlier. During the same time period, iPhone share increased to 8.2 percent from 2.7 percent. For the broader handset market, iPhone market share was 0.9 percent, according to Gartner.

Looking ahead, Apple is banking heavily on the release of the next-generation iPhone, which is expected in summer 2009. While good for the company's bottom line, particularly through services agreements, iPhone will remain a bit player in the broader handset market. On April 6, Barclays Capital's Ben Reitzes raised his iPhone shipment estimates, based on rumors of ramped-up production, from 13.3 million units to 17.4 million units in 2009. He predicts 22 million units will be shipped in 2010. Market leader Nokia shipped more than five times as many handsets in first calendar quarter as Apple is expected to ship for all of 2009.

Joe Wilcox is editor of Microsoft Watch.

Rocket Fuel