Apple continues to find new records to break when reporting its quarterly financial results. For the fourth financial quarter of 2009, the company racked up other notable ones: It sold more Macs (3.05 million units) and iPhones (7.4 million) than any previous quarter, contributing to a net profit of $1.67 billion on revenue of $9.87 billion, or $1.82 per diluted share. It also recorded its best quarter of sales to the education market, with 12 percent year-over-year growth.
The results compare to $1.14 billion profit on $7.9 billion revenue from the year-ago quarter, and $1.23 billion profit on $8.34 billion revenue from the third quarter of 2009 (see "$1.23 Billion Profit Highlights Apple's Q3 2009," 21 July 2009). This quarter's revenue is a fraction below Apple's best quarter ever, the first fiscal quarter of 2009, which included 2008 holiday sales (see "Apple Posts $10.2 Billion Revenue for Q1 2009," 21 January 2009.)
Because Apple accounts for iPhone and Apple TV revenue over the course of the devices' estimated lives, the revenue figures don't include all money from actual sales. The non-GAAP (Generally Accepted Accounting Principles) results - money actually coming in - shows a $2.85 billion profit (up from $1.94 billion last quarter) on revenue of $12.25 billion (compared to $9.74 billion last quarter).
Apple's executives were remarkably frank, with both Chief Financial Officer Peter Oppenheimer and Chief Operating Officer Tim Cook expressing honest wishes that Apple had had more inventory of certain products to sell during the quarter, especially the iPhone 3GS. They were also frank about the increased costs in air freight in making sure enough product reached retail sales distribution during the holiday season this year compared to previous years.
International iPhone Expansion -- Apple said that the iPhone would start being sold in China later in October, and that carrier relationships in the UK and Canada were expanding - more than one carrier in each country will now offer the iPhone. China has been a long-anticipated market, with rumors about the iPhone having its Wi-Fi disabled and other feature changes.
Canada and the UK will mark only the second and third smartphone markets in which the iPhone is offered that will have competing carriers selling the device. French regulators earlier this year forced Apple to allow sales through two carriers besides Orange, its original exclusive provider. In the United States, aside from AT&T, only T-Mobile is equipped to support the iPhone, but with a non-standard set of 3G cellular spectrum and its small size, the possibility is remote that T-Mobile would be a good competitive fit against AT&T.
Strong Model Sales -- Cook said that the three-month period was the "quarter of the portable," noting that the firm's record Mac sales were driven by orders placed following the refresh of the MacBook Pro line in June. Nearly three-quarters of Macs sold were laptops. (The sales of 2.4 million Macs in the preceding quarter were also significantly affected by demand for portable Macs.)
To no one's surprise, thanks to the $29 upgrade cost, unit sales of Mac OS X 10.6 Snow Leopard in the first five weeks of availability were double that of Mac OS X 10.5 Leopard during the same duration.
The iPhone sales were noteworthy not only because they represented the most sold in a quarter so far, but because the sales were apparently hard-earned. Cook and Oppenheimer repeatedly mentioned that demand for the iPhone 3GS outstripped supply, with the company catching up in inventory in the late September/early October time frame.
We can't talk about the iPhone without mentioning the App Store, which now boasts 85,000 apps. Apple noted that there have been 2 billion customer downloads, with half a billion of that recorded during the September quarter.
As usual, the firm didn't provide App Store revenue figures, nor a split of downloads between free and paid applications. That distinction will grow fuzzier with in-application subscribers and upgrades, and an App Store policy change to allow free applications to offer in-app paid feature upgrades (see "In App Purchase Enables Free App Feature Unlocking," 16 October 2009).
While iPod sales had a slight year-over-year drop (10.2 million units, an 8 percent decline), Apple noted that 50 percent of buyers were getting their first iPod, including those in the United States, Japan, Australia, Canada, and the United Kingdom. The sales mix also clearly changed with the iPod touch, which increased 100 percent in those comparable periods. Apple didn't break out specific numbers for iPod models, but based on previous incremental sales reporting, it's possible that as many as half of all iPod sales are being racked up by the iPod touch.
The company did point out that several changes in its product mix and pricing announced in late September set the stage for upcoming holiday purchases, such as the drop in price for the least-expensive iPod touch, and the revised iPod nano, shuffle, and classic models.
Retail Store Focus -- Apple shared some specific details about its retail stores, which shows that the brick-and-mortar locations are performing well, boasting record revenue of $1.87 billion. Contributing to that amount was the sale of 670,000 Macs, of which half were purchased by people who were new to the Mac. Average revenue per store was $7.1 million, while the retail segment margin was $410 million, or 22 percent. The stores hosted 45.9 million visitors, engaged in 608,000 personal training sessions, and sold 208,000 One-To-One memberships.
During the quarter, Apple remodeled 72 stores and opened 15 new ones, for a total of 273 stores worldwide. For the first time, more stores opened internationally than within the United States; two new stores are scheduled to open in France, including one at the Louvre. ("Mona Lisa, meet Lisa"?)
Accounting Rule Change Affects Future Reporting -- COO Oppenheimer cited a recent Financial Accounting Standards Board (FASB) rule change that modifies the basis on which iPhone and Apple TV revenue is reported. It will make Apple appear to have greater revenue and profits in the quarters after the company adopts the new rule - assuming, of course, strong iPhone sales and profit margins.
These two products are sold as bundled items that combine hardware and software, and Apple has had to break up initial revenue when a product is sold over a period - 24 months is what the firm decided - to account for software upgrades that change the functionality of the device as initially sold.
The rule change, which must be adopted by firms within a year, will let Apple report much of the revenue up front, and reserve a relatively small portion for upgrades over 24 months. "We do believe a substantial portion of the revenue will be recognized for these products at the time of sale," Oppenheimer said. Citing the complexities in adopting the accounting rule, he did not offer a timeline for when Apple would adopt the change, but noted that it may be earlier than the deadline requires.
This does not, of course, change how much money Apple makes or spends. Rather, it provides a better sense to investors and analysts of Apple's current financial picture without having to perform additional analysis, some of which is impossible based on how Apple currently breaks out categories.
Cook got a little punchy at the end of the call, after analysts had repeatedly tried to pull more specific information about the increased air freight costs. "What's driving the air freight is that I haven't figured out how to move the holiday season," he said, then wrapped up with, "We have to have a little fun on these calls." Cook was apparently being coy about the release, the next day, of new iMac, Mac mini, and MacBook models.