The Mac Comeback Continues as Board Responds to Jobs Charges
Just prior to its quarterly earnings report to analysts on Wednesday, Apple Inc. released some typically astounding figures, and one atypical surprise: Net quarterly profit growth at the end of fiscal second quarter 2007 is now nearly 88% annually, at $770 million on revenue of $5.26 billion.
In other words, Apple is now earning close to double what it earned at this time last year, on revenue that's only just under 21% better. That's a sign of a much stronger company.
Now, for the surprise: You'd think the reason for that strength is the iPod's continued growth. Sure, iPod sales growth is now 24% annually. But the hero of the second quarter is about to make its entrance, and its opening line is, "Hello, I'm a Mac."
Apple shipped 1,517,000 Macintosh computers during Q2 - 36% more than in Q2 2006. This shows that the switch to Intel didn't lead to just a seasonal bump, but a continued growth pattern. How does that compare? At the end of the fourth calendar quarter of last year, the #5 ranked PC supplier on iSuppli's list, Toshiba, shipped 2.45 million PCs worldwide. With Apple at 1.52 million (by Apple's figures), all of a sudden, it's not far behind.
In an attempt to put the bad news behind it early, Apple's board of directors - which includes Google CEO Eric Schmidt and former US Vice President Al Gore - issued a statement in response to former Apple CFO Fred Anderson's claim Tuesday that CEO Steve Jobs okayed an inaccurately dated stock options dispensation for the board.
"We are not going to enter into a public debate with Fred Anderson or his lawyer," the board's statement reads. "Steve Jobs cooperated fully with Apple's independent investigation and with the government's investigation of stock option grants at Apple. The SEC investigated the matter thoroughly and its complaint speaks for itself, in terms of what it says, what it does not say, who it charges, and who it does not charge. We have complete confidence in the conclusions of Apple's independent investigation, and in Steve's integrity and his ability to lead Apple."
3:45 pm ET April 26, 2007 - While a statement on the Jobs investigation was not part of Apple executives’ prepared remarks during their analysts’ call on Wednesday, the first question from analysts was about the board of directors’ statement, and Apple CFO Peter Oppenheimer’s response seemed somewhat prepared anyway:
“The Board put out its statement today to express confidence in what we have said and done. The Board said that Steve [Jobs] cooperated fully with Apple’s independent investigation and with the government’s investigation of stock option grants at Apple. The SEC investigated the matter thoroughly, and its complaint speaks for itself in terms of what it says, what it does not say, who it charges, and who it does not charge, and the Board has expressed its complete confidence in the conclusion of Apple’s independent investigation and in Steve’s integrity and his ability to lead the company.”
That was the only serious discussion of the matter throughout the entire conference, as analysts turned their attention to matters such as gross margin. While the company’s gross margin rose in the last quarter, it rose to only 36% - which is not all that good for a company that, in every other respect, is doing so well. Because Apple doesn’t give a breakdown on gross margin, it’s difficult to say whether the relatively low margin can be blamed on the Mac or on the iPod. And in the future, with AppleTV and iPhone to think about, guessing the breakdown will be even more difficult.
But analysts hunted for clues anyway, as Oppenheimer predicted next month’s gross margin would actually decline to between 27 and 28%. “Looking forward, we are likely to see other factors which will drive gross margin down, such as a different commodity environment or product mix,” he said, referring to that new four-tier product line replacing the current two-tier line. “We do not see the current gross margin levels as sustainable, and don’t want you to count on them.”
Later, though, Oppenheimer revealed some key clues anyway. Lower projected revenue for the next quarter, he said, would be due to seasonal factors. The June quarter is typically down even though that’s when schools tend to purchase new Macs, and the reason for that is because sales to schools drives Macs’ average selling prices (ASPs) down.
For those who think Apple reaps a huge premium on Macintosh sales, there’s your first clue.
Not long afterwards came another one: “The corporate gross margin was over 35%, which exceeded our guidance,” Oppenheimer remarked, “and iPod was key in achieving that result.” If he’s saying what we think he’s saying, Apple’s multi-component deal with Samsung for iPod parts such as flash memory and DSP chips may be paying off. That’s where the margin is.
But compensating for that problem, Apple COO Tim Cook told analysts, was the fact that the overall Mac market growth worldwide is 36% annually, with 36% growth in the US and 38% growth in Europe. The company began the quarter with three to four weeks’ worth of Macs in the channel, and ended the quarter the same capacity, meaning the company is scaling up production to meet demand, and that warehouses and retailers are neither overstocked nor understocked – an almost perfect market situation for a brand that can now be considered once again a principal factor in the global PC market.