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Apple still a money-making machine owing to huge sales of iPod touch and Macbooks

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Apple's just posted its quarterly earnings and gave analysts a positive pause. Although iPhone slightly disappointed and Mac desktops fell on the lack of iMac, Mac mini and Mac Pro refreshes, it was new unibody Macbooks and iPod touch that saved the day. Despite slightly contracted annual U.S. iPod sales, the music player is conquering international markets while the iPod touch emerged as the cornerstone of iPod's success story. We also learned that Jobs remains in charge and even if he steps down, Apple can rely on its pool of "wicked smart" talent.

Apple beat most analyst's expectations with its quarter earnings posted earlier today. The depressed economy hurt iPhone and Mac desktop sales but high-end products that are often deemed as overpriced, didn't falter amid decreased consumer spending and a gloomy economy outlook. Just take a look at some key stats: The $10.17 billion revenue, up from $9.6 billion a year ago, beat Wall Street's $9 - $10 billion guidance, with nearly half sales (46%) coming from international markets. The company remains a money-making machine, even in tough times.

Apple kept up a 34.7% gross margin, the same as a year ago, thanks to a more favorable component pricing, lower than expected transportation and warranty, in addition to favorable adjustments related to prior quarter supply chain.

All this helped move net quarterly profits to a record $1.61 billion, up from $1.58 billion a year ago. The performance earned Apple over $3.6 billion in cash during the quarter, increasing total cash reserves to $28.1 billion with zero debt. Some of this money will go towards opening 25 planned retail stores in fiscal 2009 with about half of those internationally. Apple labels its retail stores as "amazingly productive." The $1.78 earnings per share reported for the quarter exceeded both analysts' $1.39 consensus and Apple's own guidance from the previous quarter that fell in the $1.06-$1.35 range. Positive news sent Apple shares up 8.6% to $89.99 in after-hours trading.

Mac

Mac sales grew 9% annually. In the first three fiscal 2008 quarters Apple already eclipsed the 7.1 million Macintosh units sold in all of fiscal 2007. The 2.52 million units that Apple added in current quarter (compared to the 2.5 million consensus) sent fiscal 2008 Mac sales to nearly 10 million. These results surprised investors frightened by gloomy reports. For instance, NPD said Mac sales remained flat in November while Windows PCs grew 7%, a surprising change given that Macs have been outgrowing Windows PCs for 14 of the last 15 quarters. NPD's explanation for the change blamed long overdue Mac refresh and the lack of sub-$1000 Mac notebook. "For notebooks, there is a little extra value to consumers [to buy Apple]," NPD analyst Stephen Barker told Reuters. Though, Apple greatly surpassed NPD's gloomy outlook.

Similarly, Gartner estimated last week that Apple surrendered its third place in U.S. computer sales to Acer, sliding to 8% down from 9.5% in Q3 2008. Eagle-eyed readers will remember that Gartner's summer report put Apple at the #3 slot, ahead of Acer, in terms of U.S. computer sales. Apple told investors it is "proud" of Mac sales in the context of an overall market contraction during the December quarter. The company did say, however, that Mac desktop sales for the quarter fell to 728,000 units, down from 977,000 a year ago, the lowest figure since Q3 2007.

But at the same time, Apple shipped a record number of Macbooks: nearly 1.8 million units, up from 1.34 million a year ago. Mac notebooks accounted for a whopping 71% of all Macs sold during the quarter and drove Mac sales. Still, the analysts were right: Mac desktops are long overdue for refresh - especially the iMac. Rumored upgrades should include Core i7 processors, Nvidia graphics, DisplayPort interconnect and better storage and memory.

iPod ruled Christmas

iPod results left analysts scratching their heads in a big surprise. The company shipped 22.7 million iPod units in the quarter, a 3% growth, setting a record and exceeding the 18.6 million consensus by a large margin (22%). Apple said the iPod held over 70% of the U.S. music player market during the quarter (Japan: 60%, UK and Australia: 70%, Canada: 50%). Despite the fact that Apple does not break down iPod sales by models, most analysts believe that the iPod touch contributed the most to these figures. Although U.S. iPod sales contracted by 3% annually, international markets pushed iPod sales well into positive territory. Most of sales from non-U.S. markets came entirely between Christmas and New Year.

The touch-based music player mimics iPhone in nearly all aspects but the phone part. It can run App Store programs and games and access the Internet, but most customers purchased the gadget to play games. Apple recently reported that customers have downloaded over half a billion applications from the App Store in the six months since the store opened for business last July.

Although iPod touch costs more than the iPhone 3G, it doesn't come with an obligatory 2-year service contract like the iPhone so the gadget comes down much cheaper than nearly $2,000 that iPhone user ends up paying for the service over 24 months.

iPhone needs a price cut

Apple sold somewhat disappointing 4.4 million iPhone 3G units during the quarter, up 88% annually. The company's total unit sales in 2008 were 13.7 million, beating its self-imposed 10 million target predicted in January 2007. Had Apple accounted iPhone sales directly, not according to subscription-based GAAP rules, it would have added another billion to total revenue. Despite its significance to Apple's bottom line, the iPhone could be in trouble due to tough economical climate.

Everyone but Apple wants $99 iPhone 3G. Analysts told Apple to bring the price down in order to grow its share of the smartphone market but the company disagrees. Apple underscored during earnings call that it will not play in the low-end voice phone business. "That's not who we are, that's not why we're here," Apple told investors. "[Our] goal is not to lead unit sales, but to build the world's best phone."

Some think the iPod touch is to blame for weaker than expected iPhone sales for the quarter, an irony in itself given that analysts typically feared that the iPhone might undercut iPod sales. While Apple might lower the iPhone 3G hardware price to $99, prospective customers might still be put off by pricey service plans. Apple's Tim Cook confirmed that the recession may have changed the perspective for some customers who now deem iPhone 3G as too pricey. The acknowledgment does not necessarily confirm the $99 iPhone 3G but might signal change in Apple's business model and possibly cheaper service plans.

Timothy Cook: Apple has 'wicked smart' people

Apple gave no update about Steve Jobs' health status. Faced with a blatant inquiry from Ben Reitzes of Barclays Capital who wanted to know if Tim Cook is Jobs' successor in case of the worst, the executive avoided direct answer but praised Apple's employees as "wicked smart". "There is an extraordinary breadth and depth and tenure among Apple's executive team," said Cook. "And these executives lead over 35,000 employees that I would all call 'wicked smart'," he said, adding his observation applies to all parts of Apple, from engineering, to marketing, operations, sales, and all the rest."

Chief of finance Peter Oppenheimer added that Jobs remains in charge. "Steve is the CEO of Apple and intends to be involved in major strategic decisions," he said.

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