Apple Reports $1.67 Billion Profit for Q4 2009, Most Profitable Quarter Ever

Apple today announced financial results for the fourth fiscal quarter (third calendar quarter) of 2009. Apple posted revenue of $9.87 billion and net quarterly profit of $1.67 billion, or $1.82 per diluted share, compared to revenue of $7.9 billion and net quarterly profit of $1.14 billion, or $1.26 per diluted share, in the year-ago quarter. Gross margin was 36.6 percent, compared to 34.7 percent in the year-ago quarter, and international sales accounted for 46 percent of the quarter's revenue. The numbers represent the most profitable quarter in Apple's history and include record-breaking Mac and iPhone quarterly sales.

Using non-GAAP data, which eliminates subscription-based accounting for the iPhone and Apple TV, Apple would have had $12.25 billion revenue and $2.85 billion of net income. The subscription-based accounting used for Apple's official results parcels out income from iPhone and Apple TV sales over a 24-month period from the date of sale, whereas the non-GAAP results count the entire revenue from these sales in the quarter they were made.

Apple shipped 3.05 million Macintosh computers during the quarter, a unit increase of 17 percent over the year-ago quarter. The company also sold 10.2 million iPods during the quarter, representing 8 percent unit decline over the year-ago quarter. Quarterly iPhone unit sales reached 7.4 million, up 7 percent from the year-ago quarter.

"We are thrilled to have sold more Macs and iPhones than in any previous quarter," said Steve Jobs, Apple's CEO. "We've got a very strong lineup for the holiday season and some really great new products in the pipeline for 2010."

Apple's guidance for the first quarter of fiscal 2010 includes expected revenue of $11.3 billion to $11.6 billion and earnings per diluted share of $1.70 to $1.78.

Apple will provide live streaming of its Q4 2009 financial results conference call at 2:00 PM Pacific, and GeekWebGuides will update this story with coverage of the conference call highlights.

Conference Call Notes- CFO Peter Oppenheimer, COO Tim Cook, and Treasurer Gary Wipfler present
- Thrilled with record-breaking results, particularly given economic conditions
- Second-highest revenue ever, highest profit ever
- Macs: Record Mac sales by over 440,000
- Sales growing faster than overall market in 19 of last 20 quarters
- Portable sales up 35% year over year, 74% of Mac product mix
- Back to school performance strong: highest sales ever for U.S. education segment
- Response to Snow Leopard has been tremendous
- Total iPod sales down slightly, but 50% of iPod customers buying first iPod
- iPod touch sales up 100% year-over-year
- MP3 player market share still over 70%
- Strong sales at iTunes Store, customers loving iTunes 9
- iPhone sales: almost 7.4 million in quarter, a new record
- Pleased that iPhone tops J.D. Power business and consumer satisfaction surveys
- iPhone in China begins later this month, great opportunity
- Expanding carrier relationships in U.K. and Canada
- Retail stores: highest revenue, margin, and Mac sales ever
- Retail store revenue $1.87 billion, up from $1.72 billion
- 50% of retail store sales to first-time Mac owners
- Opened or remodeled ~100 stores over the past year
- Total gross margin up to 36.2%: Due to solid Snow Leopard sales, lower iPod transition costs than expected, smaller than expected component costs rise
- Cash and short-term marketable securities total $34 billion
- New accounting standards will allow adjusting revenue recognition for iPhone
- Only the value of the future software updates will be deferred, not entire hardware amount
- Don't yet know what portion of revenue will be able to be immediately recognized
- Must begin new accounting by first quarter of fiscal 2011, but is a complicated transition and we are not prepared to adjust our reporting standards yet
- Thrilled with results: For the 2009 fiscal year, $36.5 billion revenue, $5.7 billion profit
- Looking forward to new products in 2010

Q&A

Q: Factors involved in guidance for next quarter. Why is sequential jump so far below previous years? Why gross margin low?
A: Gross margin will decline for the following reasons: 1) New products have lower gross margins, with greater value to customers, 2) More lower-margin iPod sales in holiday quarter, 3) More air freight costs, 4) Higher component costs.

Q: Channel inventory for iPhone? Any supply constraints?
A: iPhone 3GS was low in inventory in most countries, did improve markedly in September and balance reached in most countries by September or early October. Have 2.4 million units in channel, up 585,000 from previous quarter. We'd like to have had more.

Q: Any thoughts on China iPhone expectations?
A: Thrilled to be launching on October 30th. About 1,000 points of sale, and will expand. Prices and plans already announced, with a wide range, including free phones at high plan price points. There were a lot of 2G and 3G iPhones that went into China, so there's obviously a large market there. No predictions on sales volumes though.

Q: Any thoughts on the economy?
A: We focus on Apple, and leave everything else to economists.

Q: How does iPhone pricing changes in countries that go from exclusive to non-exclusive?
A: Pricing is confidential, but we don't expect wholesale price changes when shifting to non-exclusive, although final customer pricing may changes.

Q: Forecasts of seasonality in iPhone sales? Why is tax rate projected to increase?
A: Very few September-to-December quarters to look at for the iPhone, so difficult to say. We're new at this. We've been surprised by iPhone 3GS demand. 64 countries right now, with plans for a few more: China, hopefully Korea, new carriers in UK and Canada. Tax rate was lower than expected this quarter due to high foreign sales. We expect it to come back in line with usual rates.

Q: Increased competitive intensity for iPhone in the holiday season...how do you maintain momentum and differentiation?
A: We feel great with how we concluded the year. Almost 21 million iPhones total for fiscal year. 85,000 apps in the App Store. Strong product pipeline. We feel very confident. People are still trying to catch up to the original iPhone, and we've long since moved past that.

Q: Mix of iPhone 3GS versus 3G?
A: Demand for 3GS did exceed expectations, so we did adjust our component orders accordingly. Obviously an intense appetite for Apple's latest technology.

Q: Mac business channel inventory and product mix?
A: Last quarter was the "quarter of the portable", up 35% over year-ago quarter. A result of the new line-up introduced in June, strong back-to-school sales, and Snow Leopard push. Channel inventory around 3-4 weeks, similar to beginning of quarter. Inventory changed less than 15,000 units over the course of the quarter.

Q: Snow Leopard installed base?
A: Snow Leopard upgrades were more than double those of Leopard over the first five weeks. We were pleasantly surprised.

Q: Any comments on long-term gross margin trend?
A: For the December quarter, we're guiding to about 34%. Don't want to forecast further out than that. Component costs are rising. We're committed to cutting-edge technology at price points our competitors can't match.

Q: If wholesale iPhone prices between exclusive and non-exclusive arrangements are the same, what are the benefits of iPhone exclusive agreements?
A: Level of innovation is easier with single carriers in some cases. Visual voicemail is an example. Also, exclusive carriers can be more motivated to make certain changes and enhancements to support the devices.

Q: Thoughts on retail store initiatives? International growth?
A: Strong results from remodeled stores...72 stores were remodeled this fiscal year and customers like the improvements. International stores seeing excellent performance.

Q: Will research and development costs rise due to expected 2010 product introductions?
A: Don't want to say too much. We've been investing in our future right along and have managed operating costs very well. We're being careful with money, making good choices, but continuing to invest confidently.

Q: Very strong average selling prices (ASPs) in iPhone and Mac. Usually down in this quarter due to back-to-school promos, so what's going on?
A: iPhone ASP just over $600 comes from high sales of 3GS and rebalancing channel inventory to support that demand. On Mac side, ASPs were up on the portables side. Very strong sales of the MacBook Pro line. Best back-to-school sales ever. Sequentially a small benefit to performance of the U.S. dollar as well.

Q: iPhone supply issues due simply to supply and demand or also component constraints? More air freight costs?
A: Demand outstripped supply, so that was the primary driver. That's a nice problem to have. But because of that, it did create some component shortages. Silicon is usually hardest to come by, but we were able to solve the bulk of these issues. Air freight issues not necessarily due to iPhone, but due to rushing products for holiday seasonality. Can't be specific about the products driving the increased cost this year though.

Q: Mac retail points of sale and performance?
A: Just under 13,000 worldwide channel outlets. Mac grew much stronger internationally than domestically this quarter, particularly in Europe. Spain very strong, Germany, France, Switzerland, Italy 30-40+% growth.

Q: Any more details on capital expenditures?
A: In fiscal, we spent a little under $400 million on retail stores, $1.1 billion in total. Spending capital on facilities, infrastructure, and manufacturing. We've not been terribly capital intensive.

Q: Mac unit sales expected to be flat sequentially?
A: We don't give product-specific forecasts, but September quarter saw 50,000 education units from the state of Maine and strong educational promotions in general. Also Snow Leopard, and with every new OS, there is some pent-up demand. Also, demand for the new portables got the quarter off to a strong start.

Q: Can you forecast what iPhone sales would have been if you had been able to meet demand?
A: Hard to say. We were short just about everywhere throughout much of the quarter, but it's tough to say what would have happened.

Q: Still on track for 80 countries for iPhone by end of year?
A: Over 80 for the iPhone 3G, and we're at 64 for the 3GS. We expect to be in over 80 for the 3GS by the end of the year.

Q: Any thoughts on consumer versus enterprise for iPhone? Effect of Exchange support in Snow Leopard on the Mac side in the enterprise?
A: Enterprise sales very strong for iPhone. iPhone being deployed or piloted in well over 50% of Fortune 100. Similar results in Europe and the Financial Times 100. Over 350 higher education institutions have approved iPhones for their faculty, staff, and students. Also happy with government sales. As for Snow Leopard, I don't have any stats, as it's still very early. It clearly makes it very simple for Windows users.

Q: Updates on large government agencies using iPhone?
A: No specific updates, but we're very happy.

Q: Any thoughts on Mac education sales? You've been cautious about state budget issues, so what drove sales?
A: Individual student sales really helped our sales. On the institutional side, we're still worried about state funding issues. Little stimulus funding happening. Institutional increase of 12% was due to the order from the state of Maine.

Q: Projected air freight increase: what's driving that?
A: I can't be more specific than working to move units into position for the holidays.

- End of Call