Apple’s Q2 Success Seen Through All Segments

P robably more than any quarter in recent memory, the details of Apple Computeris on-going successes appear to be just as important as the bottom line of a US$46 million net profit for the fiscal second quarter. From handheld music players to walk-in, retail stores, the PC maker with the smallest market share is having big time success.

"The profit numbers are quite impressive," Merrill Lynch analyst Steven Milunovich told The Mac Observer, Wednesday. "To increase your net revenue from the [year-ago] quarter ($14 million) more than three times is something to be proud of."

To be exact, revenue for Apple March-ending quarter was $1.909 billion - up 29% year-over-year - representing the third consecutive quarter of double-digit revenue growth and Appleis strongest March quarter in four years.

On a conference call with analysts, out-going Apple Chief Financial Officer and Executive Vice President Fred Anderson said the companyis quarterly growth was not an accident.

"Revenue growth is being driven by a much more diversified portfolio of hardware, software and service products than we have delivered in the past, as well as expanded distribution through the channel, and our online and retail stores," he said. "It is clear that the investments that we have made over the past few years in research and development and in our retail initiative are paying off," Anderson said.

iPod to the rescue

And it will come as no surprise that Appleis successful gems - the iPod and iPod mini - were a big part of the Q2 success.

"CPU sales were okay, but not that strong from the last quarter," Milunovich said. "So strong iPod sales really helped to improve the financial picture."

In-coming CFO Peter Oppenheimer told analysts that Apple sold 807,000 iPod and iPod mini units in Q2, accounting for about half of the companyis 29% revenue growth, on $264 million in sales. Mr. Oppenheimer said he expects iPod and iPod mini gross margins to stay at 20% for Q3.

For more details on Appleis quarterly iPod performance, see TMOis companion report, For Apple, Success Is Spelled ii-P-o-di.

CPU Concerns?

While Appleis quarterly results showed iPod success, however, its traditional computer products showed primarily dismal growth quarter-to-quarter. Unit sales of Macintosh computers over the quarter grew just 5% from a year ago, compared with a 15% increase for the PC industry overall, according to independent research securities firm, Fulcrum Global Partners.

Apple sold over 749,000 Macs worldwide, or 5% more than the year-ago quarter. Breaking the numbers down for the quarter, the company sold 217,000 iMacs (15% less than the year-ago quarter), 201,000 iBook units (up 51% over the year-ago quarter), 174,000 Power Mac systems (up 11% from the year-ago quarter) and 157,000 PowerBook professional laptops (a decrease of 5% from last year). 48% of all Macs sold were portables.

While the company sold more Power Macs than last year, the goal of 200,000 Power Mac systems to be sold in the quarter was not achieved. It was, however, the second biggest quarter for iBook in the companyis history.

Mr. Oppenheimer played down the falling CPU numbers, saying the company is focused on "growing revenue, not world-wide market share."

Retail store sales picking up

Mr. Oppenheimer said Appleis 78 retail stores are looking strong, with revenue of $266 million for the quarter. He said each store is averaging $3.5 million in revenue, up from $2.6 million year-over-year.

"(Senior Vice President of Retail) Ron (Johnson) is really focused on growing the top and bottom line of our retail initiative," Oppenheimer said. "He is really trying to drive productivity into our existing stores and is focused on opening new stores that will be profitable in the first year."

The company said it opened five new stores during the quarter and will open 10 additional stores before the end of the calendar year, for a total of about 88 stores. The plan, said Mr. Oppenheimer, is to open 25 stores each year for the foreseeable future. He said 5.7 million people visited Apple Stores in Q2, or 5,800 visitors per store per week. The companyis only other planned flagship store in London will open by yearis end, the company said.

Other highlights of the analyst conference call included:

In terms of geographical breakdowns, sales were down across the world. In the Americas, sales were $361 million (down 4% from Q1), $187 million in Europe (down a whopping 22% from Q1), $76 million in Japan (down 1%), $55 million in combined Asia Pacific and FileMaker subsidiary sales (off 10%).
Revenue in the Japanese sector was off 21% from a year ago - the only geographic segment with a revenue loss compared to Q2 of 2003. Cook said he was not happy with results in Japan and will be working closely with the Japanese division to improve conditions. Cook said a lack of a Japanese version of Quark XPress was much to blame for poor Japanese sales.
Despite having 78 retail stores open worldwide, Appleis retail sales (including itis online store) were off 10% from Q1 to $70 million.
Educational CPU sales were up 10% year-over-year, driven primarily by higher education sales - up 40%. K-12 sales were flat from year-to-year.
13% of its sales are to small and medium sized business, up from 5% a year ago and 10% sequentially.
Apple has $4.594 billion cash on hand, making the company fully debt-free.
In terms of components, memory price climb during the quarter, while flat-panel prices dropped.
Final results from the Pepsi iTunes promotion will be announced close to the one-year anniversary of the iTunes Music Store on April 28.
The company said Panther sales are continuing to improve, as are sales of the iLife media suite (400,000 copies sold).
G5 Xserve system started shipping the last week of the March-quarter, due to a shortage of G5 processors from its manufacturer, IBM. "IBM is working very, very hard" to bring supply demand in balance, Oppenheimer said, and expects to catch up with demand this quarter.

Looking forward, Anderson said the company expects its fourth consecutive quarter of year-over-year, double-digit growth again in the third-quarter. He said revenues are expected to reach $1.925 billion, and earnings per share of 12 cents or 13 cents. Gross margins will be flat sequentially at about 28%.