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Live blog of Apple's third-quarter 2008 earnings call

Check back for updates as Apple executives explain what lifted the company to record Mac sales between April and June.

Tom Krazit Former Staff writer, CNET News
Tom Krazit writes about the ever-expanding world of Google, as the most prominent company on the Internet defends its search juggernaut while expanding into nearly anything it thinks possible. He has previously written about Apple, the traditional PC industry, and chip companies. E-mail Tom.
Tom Krazit
8 min read

If you've ever wondered what a corporate earnings call is like, but can't get away with listening to one for an hour at work, come back here for live coverage of Apple's third-quarter earnings call starting at 2 p.m. PDT. Here's a post with the basic numbers--they were good--and here's a link to Apple's Webcast if you want to listen along.

1:57 p.m. - The pre-call music on an earnings call is not as much fun as at Macworld or WWDC. The financial analysts must need soothing classical music to calm their nerves.

2:08 p.m. - The prepared remarks are beginning, preceded by the usual disclaimers that effectively say, "Everything we're about to tell you could change." Peter Oppenheimer, chief financial officer, and Tim Cook, chief operating officer, are on the call.

After going through the basic numbers, Oppenheimer goes into a prepared speech on the company's performance. Revenue growth this year was much better than last year. Retail store sales grew 58 percent compared with last year, and traffic in the stores was up as well.

The Mac accounted for 61 percent of Apple's total revenue, and it was the best Mac quarter in Apple's history, Oppenheimer said. Desktops were up 49 percent, while notebooks were up 37 percent compared with last year. The education business, the main catalyst during the company's third quarter, was also strong.

iPod Shuffle growth led iPod shipments, which of course was prompted by the price cut in February. Oppenheimer said Apple is gaining share internationally with the iPod, and holding serve in the countries that have been selling iPods for a long time. On the iTunes front, more than 5 billion songs have been sold.

2:12 p.m. - The iPhone, of course, didn't have the greatest quarter, but that was expected. iPhone revenue wasn't recognized during the quarter for any iPhone sold after March 6 because the company announced the iPhone 2.0 software that day. The iPhone 3G is off to a good start, Oppenheimer said. More than 25 million applications have been downloaded from the App Store already.

Apple's retail stores sold 476,000 Macs and, as has been the case for the past several quarters, half of those were sold to people who had never owned a Mac before. The average revenue per store was $6.8 million during the quarter, with well over 200 stores open during the quarter. The Beijing store opened last weekend, and Switzerland and Germany are coming soon.

Gross margins were improved; that was a big topic last quarter. Some of that was from a one-time benefit related to a contractor manufacturer that I didn't quite catch, but component prices were also better during the quarter than Apple had expected, Oppenheimer said.

2:15 p.m. - Apple expects record iPhone shipments this coming quarter, as the iPhone 3G gets going. Margins will go down, however, because of the impact of the free iPod promotion for students, and a mysterious "new product introduction" that Oppenheimer said he couldn't get into today.

"We just reported the strongest quarterly Mac sales in Apple's history," Oppenheimer said in wrapping up his prepared remarks. The question-and-answer session is about to start, that's open only to the financial analyst community, and should run until about 3 p.m. PDT.

2:20 p.m. - The first question is, of course, about the mysterious new product introduction. An analyst wants to know if the margin hit related to that product also will affect revenue, since Apple's revenue guidance is below expectations as usual. Oppenheimer dodges the question, which is his job. Another question about emerging market sales gets a bit more of a response from Cook, who says Europe and Japan grew higher than the overall figure during the quarter.

Citigroup wonders about the Best Buy store relationship, as well as Mac inventories, which the analyst thinks are a little light. Cook says 170 Best Buy stores were added during the quarter, around 570 in total, with 600 Best Buys expected to carry the Mac by the end of the quarter.

The margins usually get a fair amount of scrutiny, and the next question tackles that issue. This quarter was a little better than Apple had guided driven by what Apple is calling a "one-time true-up" with a contract manufacturer. I have no idea what a true-up is. Most commodities were soft during the quarter as well, Cook says, and they expect that to get back to a more normal pattern in the current quarter.

Everyone so far wants to know if the new product introduction will involve price cuts, and Oppenheimer is being careful to dance around the issue to avoid giving away the nature of the new product. One likely candidate is the iPod Touch.

2:26 p.m. - The question comes up about CEO Steve Jobs' health. "Steve loves Apple. He serves at the pleasure of the Apple board, and he has no plans to leave Apple. His health is a private matter." That won't do anything do dampen the speculation about Jobs' health, for sure.

2:30 p.m. - A question comes up about Apple TV, which Cook once again refers to as a "hobby," downplaying expectations for huge volumes but saying the company is pleased with the shipments so far.

iPod sales grew 10 percent in the U.S., and 15 percent outside the U.S., according to Oppenheimer.

iPhone 3G supply comes up. Cook says that response has been "stunning," repeating much of the opening statement about the iPhone 3G. There are "stockouts," Cook acknowledges, but says he's pleased with the production ramp and says Apple is "shipping units as fast as we can." Cook says that on August 22 the iPhone 3G will launch in 20 additional countries, and another 30 or so will follow by the end of the year.

Gene Munster asks why the iPod Touch gets a different accounting treatment than the iPhone, which I've never understood. Oppenheimer says that iPhone users get free software upgrades, while iPods and Macs don't. Well, OK then.

2:38 p.m. - It sounds like pricing moves are going to happen in one way or another during the upcoming quarter, but Oppenheimer keeps fending off questions from analysts trying to get a better picture: "We are going to be delivering state-of-the-art new products that our competitors are not going to be able to match."

One analyst asks about the guidance. Apple almost always guides conservatively. "We give you guidance we have reasonable confidence in achieving," Oppenheimer said. "I have guided revenue up 5 percent this quarter from where we ended the June quarter. We are confident in our business." The issue is the gross margin going down from the current levels, which were better than expected, and now the analysts seem to be trying to figure out why it's going down again.

2:45 p.m. - More margin questions again. This analyst wants to know if Apple will have a more flexible pricing structure. Oppenheimer likes Apple's pricing, and discusses the range of pricing with the iPod, saying they are as competitive today with the Mac as Apple has ever been in Oppenheimer's 12 years with the company.

An iPhone-in-the-corporation question leads into a Mac-in-the-corporation question. Cook notes that one-third of the Fortune 500 participated in the iPhone beta program, and says that companies like Oracle, Genentech, and The Southern Co. are deploying iPhones inside their corporations. It sounds like AT&T is going to do the heavy sales lifting in the enterprise for the iPhone.

A marginal margin question comes up about the iPhone 3G, given that the iPhone revenue is recognized over a two-year period, but iPhone expenses are recorded as they happen, for things like marketing or research and development. Oppenheimer says the launch event expenses for the iPhone 3G are within the company's guidance for the upcoming quarter.

Another margin question concerns the App Store, and whether that's profitable. Oppenheimer says the App Store is like the iTunes Store, in that it's not a great profit generator even though it contributes revenue. The idea is like with the iTunes Store that having the store promotes the hardware.

2:50 p.m. - Can the U.S. consumer continue to keep Apple's stores humming if they run out of money? Oppenheimer declines to comment on the overall health of the economy as it unfolds over the rest of the year, but says Apple didn't really see a drop-off related to consumer health. "We're certainly aware of the economic environment, and we've considered it along with other factors in preparing our guidance," he says.

The next question is about the iPhone 3G stockouts, and whether or not they were caused by some sort of component problem, and if not, why Apple didn't wait until it had more units on hand to launch with more supply. Cook says the demand has been "staggering," and that the ramp is right on schedule. He points out that 20 additional countries are coming, but the question comes back that since demand far outstripped supply, why launch now? Cook says they are confident in the supply, without directly answering the question about components.

2:55 p.m. - A question comes up about iPhone competition, and how the rest of the mobile industry is starting to come out with similar phones. Cook says, "We think that software is really the key ingredient for a great mobile experience, and we think we are years ahead of the competition in this area." Oppenheimer also points to the App Store as a way that Apple will be able to fend off competitors.

Cook notes that they don't mind competition so long as companies aren't ripping off Apple's intellectual property, and says that Apple will be "very aggressive" in defending its iPhone patents. He reiterates the 10 million iPhones in 2008 prediction, and thinks that Apple is growing the entire market because the iPhone is making more people want a smartphone as opposed to a generic mobile phone.

The $400 price was a problem for iPhone sales, Cook said. Half the people Apple surveyed said they would have bought an iPhone prior to the iPhone 3G, but they thought the price was too much.

One analyst wants to know how the free iPod promotion for students buying Macs affects the accounting for iPods. That's a rebate, and Oppenheimer says that's accounted for as a reduction in revenue. iPod selling prices were lower during the quarter because of the increase in unit shipments of the $49 iPod Shuffle.

3:00 p.m. - Oppenheimer thinks there was some iPod cannibalization from the iPhone, but repeats what Apple has said in the past: they'd rather cannibalize themselves then have somebody else do it for them.

The Japan business has been a pain in Apple's side for a while now, and one analyst wants to know if that's in line with the company's expectations. Cook says he's happy with their performance so far, since the revenue growth rate has been better than the overall company and the Japanese market has been somewhat flat. Apple picked up Mac share in Japan, and significant iPod share, he said. "It's quite the turnaround from how we were doing in 2006," Cook said.

That will wrap things up for today. Apple's stock is getting hammered in after-hours trading on the low guidance, presumably, but the numbers for the past quarter are hard to argue with.