Apple yesterday Webcasted their Q2 2006 financial results conference call. Second-quarter profit rose 41 percent even after iPod and Mac shipments fell from a record holiday season. Net income rose to US$410 million, or 47 cents a share, from US$290 million, or 34 cents, a year earlier. Sales increased 34 percent to US$4.36 billion, compared with growth that averaged 65 percent in the prior five periods. Shipments of iPods fell to 8.5 million units from 14 million in the previous (holiday) quarter marking the first time in more than three years that iPod shipments haven't increased over the previous quarter. Mac shipments also fell to 1.1 million from 1.25 million over the holidays as Apple switched to Intel processors.
Several questions from analysts referenced the "Intel pause" which Apple mentioned was a result of two factors: 1. Customers delaying the purchase of Intel Macs until universal versions of key applications are available (read: Adobe Creative Suite and Microsoft Office) and 2. Customers waiting for unannounced product (read: new video iPod, iBook replacement). Apple went on to say that retail store employees were not discouraged from telling customers to wait for Intel hardware. Apple spent US$120 million for a new data center and purchased the first of several properties for a second campus in Cupertino that is about 10 minutes away from One Infinite Loop. They are in the process of acquiring 50 acres for the second campus and expect to complete it in four years. Apple currently leases 30 buildings scattered around Cupertino and wants to consolidate into two campuses. March NPD data indicates that iPod market share has increase to 78% from 71%. Apple's international iPod market share is as follows (as of February 2006): UK 40% Japan 54% Canada 45% Australia 58% Germany 21% (up 10%) France 11% (up 4%) The company is focused on expaning international iPod market share by increasing advertising and points of distribution in Italy, Spain, China and Korea. Apple has 141 retail store now and is planning to open 40 new retail stores in fiscal 2006, approximately 30 will be located in the U.S. Analysts questioned Apple on the iBook replacement with respect to the back-to-school buying season. Apple reiterated that they don't comment on unannounced product but when pressed they indicated that they traditionally see "an uplift in late June" but that the back to school buying season occurs "principally in July to September." The company refused to comment further on their plans for the G4 iBook into the back-to-school season or on price reductions that will be necessary to move them if the Intel replacement isn't ready. iPod gross margins were "above 20%" on the last call and are "above 20%" again. Apple won't say more than that and doesn't comment on the iPod sales mix (nano versus video, etc.) Apple was able to take advantage of flash memory price drops by reducing the price of the iPod shuffle to US$69 and US$99 and by offering an entry-level iPod nano 1GB at US$149. The Boot Camp announcement was the result of a lot of customer requests. Most questions about it were answered with "It is in beta, we put it out there to get feedback." Apple elaborated only to say that they have "no desire to sell or support Windows" and that Boot Camp makes the Mac more appealing. Downloads are "substantial" but Apple's not releasing a download number. Apple wouldn't comment about adding virtualization to Mac OS 10.5 (Leopard). PowerMacs are most affected by the pro application delay and when an analyst said that Adobe won't be ready until 2007, Apple quickly corrected him saying that Creative Suite will be universal in their "next release." Apple went on to say that casual Photoshop users will be satisfied with Rosetta and that pro users will not. Apple admitted that the pro app delay is affecting Mac sales and that they are working closely with Adobe to get the Creative Suite update out as soon as possible. When asked if Apple expects an additional pause in June they wouldn't predict beyond the current quarter. Reiterating their stated goals: 1. Get all hardware on Intel by the end of year. 2. Get all software applications universal (noting that their video, audio and consumer apps are already ported). 3. Work with developers on #2. Currently there are 1500 universal applications available and 50% of the top 500 will be universal by the end of April according to the company. When asked about the DRM law proposal in France, Apple said:
We believe that the French implementation of EU copyright directive will result in state-sponsored piracy and if this happens, we believe legal music sales will plummet just when legitimate alternatives to piracy are winning customers over. we believe that the french legislation is not good for anyone.