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Apple Reports Record Sales and Profits for Q1 2010

Apple posted financial results for the company’s first fiscal quarter of 2010 today, racking up revenue of $15.68 billion and a quarterly profit of $3.38 billion, or $3.67 per diluted share. However, it’s important to note that this is the first quarter in which the results incorporate the revenue from the current quarter’s iPhone sales, instead of spreading the income over the device’s expected two-year lifespan, as the company has done in the past.

Oh, who are we kidding? Apple still made a huge amount of money on record sales of Macs and iPhones, marking another best quarter ever. The year-ago figures – which are particularly relevant because Q1 is Apple’s holiday sales quarter – were $11.88 billion in sales and $2.26 billion in profit, meaning that sales revenue increased by 32 percent and profit increased by 50 percent. Sales to the education market were up an impressive 16 percent year over year, setting new December records. The company ends the quarter with $39.8 billion in cash and securities, an increase of $5.8 billion over the previous quarter.

While 2009 did not witness such dire worldwide economic conditions as 2008, consumers dramatically retracted their spending, businesses restricted information technology budgets, and small businesses found it difficult to obtain routine financing. Computer sales took an unprecedented dip with negative growth, making Apple’s increase in sales even more remarkable.

Apple was also able to increase, not just maintain, its overall profit margin, making a 40.9 percent gross return last quarter compared to 37.9 percent a year ago. Margin is a good measure of desirability: Apple can hold its prices while reducing cost of manufacture and see sales actually increase. Most computer makers have suffered from the race to the bottom for commodity computer gear, which has led to ever-shrinking margins.

During a conference call with analysts following the release of the quarterly results, Apple Chief Operating Officer Tim Cook was both coy and playful when analysts asked questions trying to tease out more detail about Apple’s planned announcement in San Francisco later this week. “I wouldn’t want to take away your joy of surprise on Wednesday when you see our latest creation,” Cook said in response to one question.

Mac Sales — The iPhone may be getting more attention than the Mac these days and account for a larger percentage of Apple’s sales, but don’t count the Mac out yet. In Q1 2010, Apple sold 3.36 million Macs, which was up 33 percent from the 2.5 million that Apple sold in the year-ago quarter. That’s once again a record number of sales, and the sales growth is twice the market rate, according to Cook. He also noted that half of Mac buyers in Apple’s retail stores are purchasing a Mac for the first time.

Although laptops continue to outsell desktops (accounting for 63 percent of all Mac sales), the new iMac models that appeared in late 2009 increased the desktop percentage from 28 percent in the year-ago quarter to 37 percent now. On the downside, the net sales per Mac sold dropped by 6 percent, from $1,412 a year ago to $1,324 in this quarter, which means that Apple is earning less per Mac than they did last year.

Mac sales are also strong internationally, with increases of 100 percent in China; 40 percent or more in France, Italy, Switzerland, and Spain; and 70 percent in Australia.

The Mac accounted for $4.45 billion of Apple’s sales, compared to $3.34 billion for the iPod and a whopping $5.58 billion for the iPhone. The iTunes Store and other music-related products and services added $1.16 billion to the bottom line; peripherals and other hardware contributed $469 million; and software and services chipped in $631 million.

iPhone and iPod Sales — Apple sold 8.7 million iPhones during the quarter, up from 7.4 million during the previous quarter, and double the 4.3 million iPhones sold in the year-ago quarter. Cook and Peter Oppenheimer (Apple senior vice president and chief financial officer) noted that 70 percent of Fortune 100 companies are currently deploying or testing deployments of the iPhone, a blatant rebuff to analysts who claim that the iPhone isn’t suited for corporate environments.

Following a trend of the past several quarters, the total number of iPods sold, 21 million, declined 8 percent compared to the year-ago quarter. However, despite the company not breaking out revenue or unit sales of specific models, Apple did say that sales of the iPod touch were up 55 percent from the previous year, and that the iPod still boasts 70 percent of the market share of MP3 players.

Our guess is that the iPod has reached a point where many of those likely to buy an iPod already have one, and the technology (in the core iPod line) hasn’t changed enough to cause people to replace older models. That said, the iPod touch is clearly the bright spot here, causing Apple’s net sales per iPod sold – dollars per unit – to increase to $162 from $148 in the year-ago quarter.

The biggest change regarding iPhone sales – which also affected the Apple TV – is a change by the U.S. Financial Accounting Standards Board that establishes practices in how firms record and report revenue and expenses. The old standards required that revenue from the initial price of products with expected routine software upgrades be accounted for on a subscription basis.

Under the old standards, instead of the sale being recognized and included in a report for the quarter in which an iPhone or Apple TV was purchased, Apple divvied up the revenue and associated costs over 24 months or 8 quarters. The standards change allowed Apple to assign a dollar value to the software upgrades – $25 for the iPhone and $10 for the Apple TV – and account for all revenue and expense except that amount in the quarter in which a device was sold.

Apple filed revised statements with the SEC for previous years back to Q1 2007 in order to provide – sorry – apples-to-apples comparisons for year-over-year differences that use the same underlying financial assumptions.

This doesn’t change the amount of money made by Apple at the end of each day, but it does make it easier to read Apple’s quarterly filings and understand how much the firm made on current products sold. Apple also said it would no longer release a separate set of numbers – called non-GAAP (Generally Accepted Accounting Principles) – because the GAAP numbers are now good enough.

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