After only delivering 125,000 flat panel iMacs up to the time of the
Tokyo keynote, Apple shipped another 95,000 in the last ten days to
bring the quarter in on target. The guidance figures from Fred
Anderson, Apple's CFO, in January gave expectations of sales of $1.5bn
and profits of $0.11 per share. Both of these were met, and they
slightly exceeded the consensus of analysts estimates, from
Thomson/FirstCall, of $1.46bn and $0.10. That Apple did everything
possible to bring in these figures without stuffing the channel
should increase confidence in the shares.
However profit was down to $40m from $43m last quarter because of
reduced margins (now 27.4%). Cash and short term investments were
maintained at $4.3bn and expenses at $381m.
Macs
Shipments were 813,000, up 8% from last quarter and 4% year on year.
Apart from the 220,000 flat panel
iMacs, Apple also sold 152,000 CRT
iMacs, 141,000 iBooks (185,000 last
quarter), and 89,000 PowerBooks (116,000
last quarter).
There has been no noticeable fall off in iMac sales since the recent
price increases, and Apple will continue to airfreight iMacs until the
backlog is cleared.
iPod
Sales dropped to 57,000 from 125,000 last quarter. Apparently this
was less of a drop than the rest of the MP3 market experienced
(-71%).
As discussed previously (Time to Update
the iPod?), the iPod risks becoming another Newton. For it to be a
success, Apple needs to reduce the price of the 5 GB entry level
model and increase the devices (camcorders, etc.) it backs up and the
software (Final Cut Pro, etc.) it works with. Until then, the user base
will stay small and it will be a distraction rather than a serious
contributor to the bottom line.
OS X
Over 3 million Macs have been sold with OS X installed, but no
figures are available for the number of users. Apple hopes that the
release of Photoshop 7 will help drive acceptance in the professional
market.
Retail
Sales were strongly up from $48m to $70m at Apple's Retail Stores,
reducing the quarterly loss from $8m to $4m. An average of 27 stores
were open, with two more open by quarter end. After taking a breather
to reevaluate retail, Apple expects to open another 20 by December
31.
Investors should remember that the stores received at least 10% of
the 125,000 flat panel iMacs up to the time of the Macworld Tokyo
keynote. As these needed little selling and would have been largely top
end models - at an average selling price of $2,000 (including extra
software, RAM, etc.) - these could account for sales of $25m.
As Fred says, Apple has taken many successful decisions in
establishing the retail stores: placing them in high traffic upscale
smalls, making them solution centers, emphasising service, and
appointing knowledgeable staff. This has led to an average of 5,000
visitors per store per week, and 99% of visitors being willing to
recommend them to their friends.
However the stores still need to average approximately $4m sales per
quarter to break even. For this they need people who are used to and
comfortable with closing sales on, what for most people, are major
purchases. When Apple accepts this, the retail stores will have the
success they clearly deserve.
The store within a store in CompUSA
will also be strengthened, as another 50 outlets will have Apple
personnel. Apple has seen marked sales increases from the 150 outlets
already staffed in this way and equivalent success from trials in
Europe where it will also look to rollout the program.
Going Forward
Guidance for this quarter is earnings flat ($0.11 per share) to up
on sales of $1.6bn.
One of Apple's strengths over the past few years has been Fred's
managing of investor expectations. Bad surprises quickly kill shares,
and investors have long memories. So with Fred's emphasis that the
earnings figure is very conservative, it is clear there is upside
potential.
He expects the iMac backlog to be cleared by the end of May, with
production to be less than 5,000 per day for the 90 day quarter.
Margins will be reduced by the need to airfreight ($35 per unit), the
still increasing cost of flat screens (another $10 per screen has been
allowed for), and the still high cost of DRAM. Any decreases in these
costs will quickly feedback into the margins, but this also leaves
Apple more exposed to flat panel costs than other PC manufacturers.
In education, June was the best quarter last year, instead of the
usual September (last July saw the poorly managed changeover to Apple's
in house team). However, Apple continues to see deferrals of major
contracts because of funding constraints caused by the economy. So a
major question for investors is how much budget constraints will affect
education purchases this quarter as these would usually give a strong
boost to figures for the iBook and higher margin CRT iMacs.
Government sales last year saw strong growth of 50% from an
admittedly small base. With the the increased security and connectivity
of OS X, further strong double digit growth is expected this year,
and 50% wouldn't surprise Fred.
Retail is expected to have a profitable quarter this year. However,
given the size of the improvement needed and my comments above, I do
not expect this before Q4 at the earliest.
So what should we expect in this quarter? An increase in Mac
shipments to above 900,000 will largely come from clearing the backlog
of flat panel iMacs. As many of these will be the lower priced models
at old prices (hence reduced margins), they won't do much for
profitability, but 400,000 of these seems reasonable. With education
market purchases, CRT iMacs should at least be at the current level of
150,000. Similarly, portables should manage to reach this quarter's
total of 230,000. Power Mac sales will
probably decrease considerably, unless Apple is able to release
powerful new models before Macworld in July.
In the longer term, Apple is targeting gross margins of 28%. This
should be readily achievable as soon as it no longer needs to
airfreight all iMacs. It is also looking for increased profit from
increased sales rather than by increasing the margins. Combined with
the commitment to increasing R&D and the targeted purchase of
external software and software companies, this should be good for both
Apple users and Apple investors. 
