Apple beats for Q2; Best non-holiday quarter; Netbook hardware 'junky'

Apple, known for conservative financial forecasts, easily surpassed Wall Street's estimates for the second quarter, reporting net income of $1.21 billion, or $1.

Apple, known for conservative financial forecasts, easily surpassed Wall Street's estimates for the second quarter, reporting net income of $1.21 billion, or $1.33 per share, on sales of $8.16 billion. (Statement) Wall Street had been expecting earnings of $1.08 per share on $7.9 billion in sales, according to Thomson Reuters.

The quarter fared better overall than the year ago quarter, which saw revenue of $7.51 billion and net profit of $1.05 billion, or $1.16 per share, and also had the advantage of the launch of the Macbook Air to help boost sales. Gross margin for the second quarter was 36.4 percent, up from 32.9 percent in the year-ago quarter.

Among the quarter's highlights:

  • Apple sold 2.22 million Mac computers, a three percent drop from the year-ago quarter
  • It sold 11.01 million iPods, a three percent increase from a year ago.
  • It sold 3.79 million iPhones, a jump of 123 percent.
  • Revenue from Apple retail stores were down from $1.47 billion to $1.45 billion a year ago, a decline that the company blames on continue weak consumer spending and expansion of other retail outlets carrying Apple products.
  • The company continued to see traction with its online App store, with the company on track to see its 1 billionth download in the coming days.

The company notes that its financial reporting of iPhones, over a period of eight quarters, had an impact this time around. In its press release, the company said:

Unit sales of iPhone 3G continued to be significant in the quarter ended March 28, 2009, with 3.79 million iPhones sold. As a result, the amount of revenue and product cost related to those iPhone sales that the Company deferred for recognition in future periods under subscription accounting was substantial. While the GAAP results provide significant insight into the Company's operations and financial position, management continues to supplement its analysis of the business using financial measures that look at the total sales, related product costs and resulting income for iPhones and Apple TVs sold to customers during the period.

During a call with analysts, the company addressed the issue of netbooks, the popular, low-cost ultra portable PCs that are seen as propping up the industry. Chief Operating Officer Tim Cook said, without mixing words, that Apple is not interested in the netbook arena "as it exists today." The software, he said, is poor. The hardware is "junky" and netbooks at this time are "not something that we would put the Mac brand on quite frankly."

Asked to dive deeper on the success of the iTunes App store, company executives would not separate the number of paid apps versus free apps downloaded. Cook did note, however, that the combined 37 million iPhone and iPod Touch devices in circulation provides "an enormous platform for developers to develop on." Sales of iPod Touch devices doubled year-over-year.

Finally, asked about the exclusive contract with AT&T as a service provider for the iPhone and the lost sales by customers who are either unhappy with AT&T's service or tied to another provider, Cook said he believes AT&T is "the best wireless provider in the U.S." and that the company does not plan to change partners. He further noted that the iPhone, from the beginning, was designed to be a phone for the whole world and that GSM technology - as opposed to CDMA technology used by Verizon - was, and continues to be, the best route to go.

Looking ahead to the end of the current quarter, the company projected revenue in the range of about $7.7 billion to $7.9 billion and eps of about $.95 to $1.00. Wall Street consensus for the third quarter is revenue of $8.26 billion and EPS of $1.11. Again, it's important to remember that Apple always tends to forecast conservatively.

The current quarter is also expected to see the launch of iPhone upgrades, which will include new and long-anticipated features such as copy-and-paste and MMS support. In June, the company will host its worldwide developer's conference.

Apple CEO Steve Jobs announced just before the January Macworld event that he would take a medical leave of absence through the end of June, though there have been reports noting that Jobs is still working on special projects from home. It is unclear if he will be returning in time for WWDC.

Also see: Analyst: Declines in Mac, iPod sales isn't so bad

Shares of Apple were down slightly in regular trading, closing at $121.51, but were up as much as 4 percent in after-hours trading.