Apple Digest: Apple Earnings Call Q2 2011 (Review) *CEO Steve Jobs: We’re thrilled to deliver our best quarter ever* AAPL

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Apple reported calendar Q2 2011 financial results on July 19, 2011

Apple Earnings Soar to All-Time High in Q2!: Astounding financial performance & position!

Apple Financial Summary Q2 2011 Apple + Financial Performance = Superlatives! Previous Apple financial performance records were broken one after another in this latest calendar Q2 2011. Apple has set the bar unbelievably high for itself and the technology sector. Apple reported records: total revenues, net income, earnings per share, cash flow per share, operating margin, and net margin plus near-record gross margin. Financial performance continues onwards and upwards. Financial position is legendary; total assets are now $106.76 billion, including $76.16 billion in cash and investments.

Apple Income Statement Q2 2011 Apple reported record total revenues of $28.57B, record net income of $7.31B, and record earnings per share of $7.79. These are yet again stellar financial performance results! From the prior calendar Q1 2011, total revenues were up +16%, net income up +22%, and earnings per share up +22%. From the prior calendar year Q2 2010, these were up +82%, +125%, and +122%, respectively. All are incredible increases QoQ and YoY! Margins also increased in calendar Q2, which may be the most impressive result. For calendar Q2 2011, gross, operating, and net margins were 41.73%, 32.83%, and 25.58%, respectively. For the prior calendar Q1 2011, these were 41.42%, 31.92%, and 24.27%, respectively. Cash flow from operations was an astounding, and record, $11.84 per share. Apple generated an astonishing $11.1 billion in cash for the quarter!

Apple Balance Sheet Calendar Q2 2011 Total assets increased a staggering +12.49% QoQ to a record $106.76 billion from the prior quarter of $94.90 billion. The capital to assets ratio (total stockholders' equity divided by total assets) is a rock solid 64.95%. The current ratio (current assets divided by total assets) dropped to 43.93%, which continues very liquid. More current assets have been allocated to long-term marketable securities, a noncurrent asset. Apple is very liquid with strong capital. Apple has over $28B in cash, cash equivalents, and marketable securities. Add long-term marketable securities of $47.7B and Apple's cash and investment reserves are a mind-boggling $76+ billion!

Apple Q2 2011 Earnings Conference Call

"We’re thrilled to deliver our best quarter ever" Steve Jobs, Apple Co-Founder and CEO was not present at the conference call but did issue a statement: “We’re thrilled to deliver our best quarter ever, with revenue up 82 percent and profits up 125 percent,” said Steve Jobs, Apple’s CEO. “Right now, we’re very focused and excited about bringing iOS 5 and iCloud to our users this fall.””

Apple Management Present at the earnings conference call were Peter Oppenheimer, Senior Vice President and Chief Financial Officer, Tim Cook, Chief Operating Officer, and Barry Whistler, Treasurer. Apple Co-Founder and CEO Steve Jobs was not present and is on medical leave of absence.

CFO Peter Oppenheimer "We're thrilled to report the highest quarterly revenues and earnings in Apple history" Peter Oppenheimer, Senior Vice President and Chief Financial Officer presented a product report and reviewed the Q2 2011 financial results, which are also reviewed on the Apple Financial Performance page. "We also set a new all-time quarterly record for iPhone and iPad sales and a new June quarter record for Mac sales and we're extremely pleased with the momentum of our business."

Products Report: “We sold every iPad we could make" Peter Oppenheimer reviewed the Apple product line:

Mac Products and Services Mac sales of 3.95 million units, which was 14% YoY growth, more than IDC’s 3% estimate for the (PC) market overall. 20th consecutive quarter Apple has outperformed the overall PC market. Sales were strong across all geographic regions, including 57% YoY growth Asia-Pacific. We ended with 3-4 weeks of Mac channel inventory. Mac OS X Lion scheduled to ship to customers tomorrow.

iPod Sold 7.5 million iPods, compared to 9.4 million in the year ago quarter. Lower YoY sales but ahead of expectations. iPod share of the USA market for mp3 players remains at over 70% and continues to be top selling mp3 player in most countries we track. Continue with 4-6 weeks of iPod inventory.

iTunes iTunes store generated strong results with almost $1.4 billion quarterly revenues and 36% YoY increase, thanks to strong sales of music, videos, and iOS apps. iTunes is the #1 music retailer in the world with 225 million accounts. Customers have downloaded over 15 billion songs.

iPhone Sold record 20.3 million iPhones in the quarter, compared to 8.4 million in the prior year quarter, a 142% increase YoY. More than double IDC’s 67% estimated growth rate of the global smartphone market for the June quarter. iPhone handsets and accessories sales were $13.3 billion during the quarter, which is 150% increase YoY. iPhone on 228 carriers in 105 countries. Adoption of iPhone within the enterprise continues to increase. Ended quarter with 4-6 weeks of iPhones inventory.

iPad “We continued to be thrilled with its incredible momentum”. Sold 9.2 million iPads, 183% YoY growth, and with distribution in 64 countries. “Customer enthusiasm has been tremendous for iPad 2 and we're working hard to get it into the hands of customers as quickly as possible.” Demand and interest in the corporate environment continues to be strong. iPad and accessories revenues were more than $6 billion. Ending channel inventory 1.05 billion, which is below target range of 4-6 weeks.

Cumulative iOS Devices Combining iPhone, iPad, iPod Touch, cumulative iOS device sales were just under 222 million for the June quarter. iOS 5 will launch this fall.

iCloud In June, we also provided a preview of iCloud, our set of free new services that work seamlessly with applications on the customer's iPhone, iPad, iPod touch, Mac or PC to automatically and wirelessly store content in the cloud, as well as push it to all the users' devices. We think customers will love using iCloud and we look forward to its release in the fall.

App Store “App Store continues to be incredibly successful.” Over 425,000 apps and well over 15 billion downloads to date.

Apple Retail Stores "Generated record results". Apple stores retail revenue $3.5 billion, a 36% increase YoY. Growth driven primarily by iPad, iPhone, and Mac sales. About 50% of store Mac sales were to customers who had never owned a Mac before. Average international store volume exceeded "very productive" average USA store volume. Average of 325 stores open during quarter with average quarterly revenue of $10.8 million, an increase YoY of 20% in store revenues. Retail segment margin $828 million. Store traffic continues to be very strong. Record 73.7 million store visitors in quarter, an increase of 22% YoY. Personal setup program for customers off to a great start.

Gross Margin Oppenheimer concluded with gross margin was 41.7%, which was a 370 basis points higher than guidance (38.0%). This difference was a result of 3 approximately equal factors: a stronger mix of iPhone; lower commodity and other costs, which included some one-time items; and leverage on the higher revenue. Operating expenses were $2.54 billion and included $232 million in stock based compensation expense. OI&E was $172 million and the tax rate for the quarter was 23.5%.

Outlook for Calendar Q3 2011 Oppenheimer stated the outlook for the September quarter: total revenues $25 billion, earnings per share $5.50, and gross profit margin 38%.

Conclusion Oppenheimer finished, "We're extremely pleased with our record revenue and earnings and the tremendous customer response to our products. Through the first 3 quarters of fiscal 2011, we have generated $35 billion in year-over-year revenue growth translating to a 78% increase. At the same time, we have generated over $9.5 billion in year-over-year earnings growth, representing a 99% increase. We remain very excited about our new product pipeline and we look forward to releasing the Mac OS X Lion tomorrow and bring in the wonderful new features of iOS 5 and iCloud to customers this fall."

Question and Answer Session

Peter Oppenheimer (Senior Vice President and Chief Financial Officer), Tim Cook (Chief Operating Officer), and Barry Whistler (Treasurer) were present for the Q and A session.

Lower September Outlook

(Katy Huberty, Morgan Stanley) Lower September revenues, but end up reporting 20%+ beat
(CFO) September is education-buying season, expect increased sales of iPhone and iPad, lower sales of iPod

(CFO) Includes future product transition we are not going to talk about today [Editor: presumably iPhone 5 and/or lower priced iPhone]

iPad 2 Cannibalization

(COO) Some customers choose to purchase iPad instead of Mac and even more choose to purchase iPad over Windows PC

(COO) We were still selling every unit (iPad 2) we could make during the quarter and that was the situation as we ended the quarter

China Sales; Asia Pacific 250% YoY

(COO) Greater China is Mainland China, Hong Kong, Taiwan

(COO) We're just scratching the surface right now, incredible opportunity for Apple there

Gross Profit Outlook 38%

(CFO) 2/3 of decline to be driven by different product mix

(CFO) 1/3 of decline to be driven by lower sequential revenue, cost of future product transition, full quarter of back to school promotion
(COO) Lower component costs are helping, but some one-time benefits in current gross profit margin
(COO) One time benefits in warranty and phone support area, and some settlements

Patent Disputes

(COO) We want people to invent their own stuff and we will defend our portfolio
iPhone Sales Drivers

(COO) Added 42 carriers in 15 countries, goal of a total of 225 carriers in 100 countries was achieved

(COO) Real sequential improvement was emerging and developed markets

(COO) China was a big part of it, Brazil and Mexico drove Latin America, Middle East increased
(COO) We're playing in both the prepaid and postpaid markets worldwide

Android Activations and Competition

(COO) Large YoY and sequential increases in Android activations difficult to estimate, compared to iOS
(COO) Over 222 million cumulative iOS devices activated, sold, iOS numbers very straight forward
(COO) Our App Store is largest by far
(COO) iPad 2 competitors, other tablets not getting any traction to speak of
(COO) We've paid over $2.5 billion to iPad 2 developers so far
(COO) iPhone is ranked #1 in every consumer stat (survey)
Apple TV
(COO) Continues to do well, but I don't want to mislead, we still call it a hobby here, don't want anyone to conclude it's another leg of the stool, it's still hobby status
Contract Manufacturing and Retail Diversification
(COO) Non-Apple Retail Channel: iPhone sold through carriers, 115,000 points of sale, plus through retail, Apple stores, Apple online store, through companies that have a direct sales force, selling to enterprise, selling by our own sales force. Channel is well diversified.
(COO) Manufacturing and Suppliers: can't get into this in any detail
iPad 2 Manufacturing
(COO) Supply of iPad 2 improved dramatically during the quarter, more supply-demand balance
Mac Sales: Slowing Growth
(COO) Some iPad 2 cannibalization, as noted above
(COO) Some delay in purchasing until new Mac OS X Lion launched
(COO) MacBook Pro main driver of Mac sales, but this quarter revamped iMac launched

About Apple

Apple's Mission Statement and described in press releases, "Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and has recently introduced iPad 2 which is defining the future of mobile media and computing devices."

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