World of Apple

Bloomberg has recently revealed that Apple has been steadily increasing its ownership interest in UK company Imagination Technologies, tripling its ownership interest from the end of 2008 to 9.5% at present. Imagination Technologies is a graphics manufacturer of products that are used in smartphone, including the iPhone (and the Palm Pre). Intel is also a significant investor at over 16%. Amid speculation that either company might be planning a takeover, Imagination and Intel has both denied that there is any such intention. Apple, of course, has been silent. As some analysts have noted, this may be simply an investment for both companies which is typical business practice.

Following yesterdays news that the North Carolina General Assembly had approved a tax break for an unnamed company who was believed to be Apple it has now been finalised by Governor Perdue.

In an official announcement it was revealed that Apple had selected North Carolina as the location for a new data centre which will see the company invest $1 billion over a nine-year period.

Gov. Bev Perdue today announced that Apple has selected North Carolina as the location for a new data center. The company is expected to invest more than $1 billion in the project over nine years.

“North Carolina continues to be a prime location for growing and expanding global technology companies,” said Perdue. “We welcome Apple to North Carolina and look forward to working with the company as it begins providing a significant economic boost to local communities and the state.”

It is expected that the data centre will employ 50 full-time employees and the legislation requires that the average wage exceed that of the county.

On Monday the General Assembly approved changing North Carolina state tax laws in the hope that Apple will invest $1 billion into the area. The Senate voted 40-8 in favour of the changes.

The bill will now go to Governor Beverly Perdue who is expected to pass it into law with no qualms.

The bill itself names no company as the beneficiary of the tax break but a story last week pinpointed Apple as the company that would be building a data centre in a rural area of the state.

Apple today has submitted to the SEC (Securities and Exchange Commission) a correct Form 10-Q that it originally filed on Thursday April 23. The original filing incorrectly reported the voting percentages for shareholder-submitted proposals because abstentions were counted as “No” votes. Very shortly after the original filing, the company learned that these votes had been incorrectly tallied and an internal investigation confirmed the mistake was due to human error, which Apple regrets. Today’s amendment correctly reports the voting results.

As a result of the corrected vote count, Shareholder Proposal No. 5 Regarding Advisory Vote on Compensation, known as “Say on Pay,” was approved with a majority of votes cast.

Proposed at this years annual shareholder meeting by the AFSCME Employees Pension Plan, a public health union which holds over 21,000 Apple shares, the resolution will give all company shareholders an advisory vote on executive pay packages.

Following the release of Apples fiscal second quarter 2009 financial results the company held a conference call to answer questions from industry analysts and members of the media. Present during the call were CFO Peter Oppenheimer, COO Tim Cook and treasurer Gary Whistler.

• Apple began and ended the quarter with between 3-4 weeks of inventory.
• Quarter was a tough comparison year over year because of 51% y/y growth during last year’s Q1 because of MacBook Air launch. Positive about Mac sales.
• Over 70% market share in MP3 players says NPD.
• Very excited about iPhone OS 3.0 this coming Summer.
• All iPhones sold on or after March 17th until iPhone 3.0 is released this summer will be recognised over 24 months.
• $1.47 billion in revenue from retail stores, 438,000 Macs sold through stores with “about half” new to Mac.
• Opened one store during the quarter taking the total to 252.
• Retail customers increased 33.7 in the year ago quarter to 39 million.
• Avg revenue store $5.9 million compared to $7.1 million year ago quarter.
• Cash in back is $28.9 billion at the end of March quarter.
• Apple is very excited about their product pipeline
• International sales accounted for 46 percent of the quarter’s revenue
• Company paid about $1.3 billion in taxes in the March quarter
• Tim Cook on netbooks: “For us, it’s about doing great products. When look at netbook, cramped keyboard, terrible software, junky hardware, very small screens, just not a consumer experience. Not something that we would put the Mac brand on, quite frankly. It’s not a space, as it exists today, that we’re interested in or that customers will be interested in long term. But do look at the space and see how customers respond to it. People who want a small computer that does browsing and email might want to buy an iPod touch or an iPhone.”
• Apple has interesting ideas in the netbook space.
• Hours away from sale of billionth app on App Store.
• Platform of iPhone and iPod touch is at 37 million units.
• Cook: Apple views AT&T as a very good partner, very happy with relationship and do not have plans to change it.
• Verizon is CDMA. GSM works for the world. That’s why AT&T works better for Apple right now.
• iPhone in Brazil, India and Russia but not China. Apple “working on it”.
• Peter Oppenheimer: “We look forward to Steve Jobs returning at the end of June.”
• Apple is very focused on the iPhone product plans.
• Apple considers Wal-Mart a key partner for sales of both iPhone and iPod.
• iPhone 1.83 million units in inventory at end of quarter.
• 21 million iPhones sold to date.
• On Palm Pre, “It’s difficult to comment of products that aren’t shipping.”
• No update on new campus construction, Cook: “We’re very busy on constructing new products.”
• Sakes of iLife and iWork exceeded expectations.
• Cook: “We think that Apple’s innovation in iPhone is leading industry by years. We think competition is great - as long as companies invent their own stuff.”
• Conference call ended.

Key stats

• Q209 revenue: $8.16 billion vs. $7.69 billion market consensus (6% y/y growth)
• Q209 EPS: $1.33 vs. $1.09 consensus
• Q209 Mac shipments: 2.2 million vs. 2.1 million consensus (3% y/y decline)
• Q209 iPod shipments: 11.0 million vs. 10.0 million consensus
• Q209 iPhone shipments: 3.79 million vs. 3.3 million consensus (most later adjusted to 3.7 million)

Apple today announced financial results for its fiscal 2009 second quarter ended March 28, 2009. The Company posted revenue of $8.16 billion and a net quarterly profit of $1.21 billion, or $1.33 per diluted share. These results compare to revenue of $7.51 billion and net quarterly profit of $1.05 billion, or $1.16 per diluted share, in the year-ago quarter. Gross margin was 36.4 percent, up from 32.9 percent in the year-ago quarter. International sales accounted for 46 percent of the quarter’s revenue.

In accordance with the subscription accounting treatment required by GAAP, the Company recognizes revenue and cost of goods sold for iPhone and Apple TV over their estimated economic lives. Adjusting GAAP sales and product costs to eliminate the impact of subscription accounting, the corresponding non-GAAP measures* for the quarter are $9.06 billion of “Adjusted Sales” and $1.66 billion of “Adjusted Net Income.”

Apple sold 2.22 million Macintosh computers during the quarter, representing a three percent unit decline from the year-ago quarter. The Company sold 11.01 million iPods during the quarter, representing three percent unit growth over the year-ago quarter. Quarterly iPhone units sold were 3.79 million representing 123 percent unit growth over the year-ago quarter.

“We are extremely pleased to report the best non-holiday quarter revenue and earnings in our history,” said Peter Oppenheimer, Apple’s CFO. “Apple’s financial condition remains very robust, with almost $29 billion in cash and marketable securities on our balance sheet. Looking ahead to the third fiscal quarter of 2009, we expect revenue in the range of about $7.7 billion to $7.9 billion and we expect diluted earnings per share in the range of about $.95 to $1.00.”

Apple has today reminded members of the media and financial industry that it will announce it’s fiscal Q209 results on Wednesday, April 22, 2009, 2:00 p.m. PDT/5:00 p.m. EDT.

The conference call can be streamed online live at www.apple.com/quicktime/qtv/earningsq209/ and will also be available for replay for approximately two weeks.

Ever accurate “amateur analyst” Andy Zaky has given his usual breakdown of what he believes Apple will reveal for the past financial quarter.

During the Q109 conference call Apple announced that looking forward to the second fiscal quarter results the company would expect “revenue in the range of about $7.6 billion to $8 billion and we expect diluted earnings per share in the range of about $.90 to $1.00.”

Apple is usually very conservative in its predictions but Zaky predicts that Apple will announce “$1.19 in EPS on $8.318 billion in revenue on a GAAP basis” and “On a non-GAAP basis, I expect Apple to earn $1.59 in EPS on $8.798 billion in revenue.”

Zaky also predicts that Apple could have sold about 10.5 million iPods, 2.45 million Macs and 3 million iPhones during the second fiscal quarter of 2009.

Analyst Shaw Wu for Kaufman Brothers has increased his price target on Apple from $120 to $152 on Monday.

In Wu’s report the analyst argues that Apple is bucking the trend, up 45% since November compared to the NASDAQ at 20% and S&P500 up 7%. Additionally Wu gave some reasons for further Apple growth; WWDC is coming up in June where Apple is expected to release iPhone OS 3.0 and unveil new iPhone hardware, Mac sales are improving due to refreshes across the board and finally Wu describes “The potential for a new form factor, perhaps Apple’s answer to the netbook, with a large screen iPod touch-Mac hybrid.”

Apple is set to reveal fiscal Q2 results on Wednesday April 22 and seems to be causing a flurry of changes across analysts. Last week Barclays analyst Ben Reitzes raised his price target for Apple to $143 from $113.

Monday also saw Caris & Co.’s Robert Cihra raise his target to $150 from $120.

As journalists are not officially allowed to enter the shareholders meeting and attendees are not permitted to have communication devices details of the meeting often trickle through several hours after the close of the meeting.

According to a detailed account by Prince McLean both a shareholder and blogger for AppleInsider the meeting was dominated by politics but also gave way to a happy birthday rendition and some questions for the executive team.

Both McLean and the Associated Press are reporting that Tim Cook fielded a question on Steve Jobs’ plans in which Cook assured investors, and shareholders that Steve Jobs plans to return to the company in June.

The investor had pressed for details about when the board of directors knew Jobs planned to step away from his daily duties. Apple director Arthur Levinson responded only by saying that since Jobs announced Jan. 14 that he needed to go on leave, “nothing has changed.”

Also despite the ban on communication devices some members of the Investor Village’s AAPL Sanity board posted a live blog from the event.

Here’s what they filed (all times EST):

12:04 Cheddarmuff: Just waiting to go in to the meeting. Hanging out with idannyb in the hall. Another solid apple shareholder.

No sign of Goldman yet… more to come later.

12:21 idannyb: Cheddarmuff and I are in the meeting now … Music playing and shareholders filing in. Reuters cornered us to ask a few questions. Apple rep tried to give the reporter the bums rush.

12:46 Cheddarmuff: They separated the media from the shareholders. Not sure who we will and won’t see at this point.

Agenda

1 welcome and intro’s
2 admin (quorum, etc)
3 present board nominees
4 stmts to shareholders and presentation of shareholder proposals
5 other
6 vote
7 q and a

Mgmt team just came in. Phil, johnny, tim

Gore is here.

12:51 Cheddarmuff: Andrea Jung from Avon is here

Looks like most of the mgmt team is here (no Steve of course).

About to begin.

12:54 idannyb: The BOD have taken seats
Gore and Andre Jung (Avon) + full Apple ex mgmt team (sans SJ) -TC, PO, jonny Ive, Ron J., Phil S.
TC….
Starting intros

12:54 Cheddarmuff: Tim talking

Dan cooperman general counsel.

Whole board is here. Tim said no jobs due to medical leave.

1:05 Cheddarmuff: “I am not a crook ” Shelton is not a fan of al gore. Already some drama and comedy (cracking jokes about this being like the academy awards…board election)

1:08 idannyb: Environmental activist now railing about Apple environmental sustainability. Calling out Gore

1:10 Cheddarmuff: Talking about political spending proposal. UAW rep talking

Hp, dell are better than apple at disclosing information.

1:21 Cheddarmuff: Starting to interesting…I like Sheldon, keeps it interesting. Just called the people proposing socialists.

Now talking about climate change.

There was one attempt to talk about jobs health that was shot down quick. Bet there will be more in the Q&A

1:23 idannyb: AFLCIO made a speech on universal health care … Tried to bring up SJ health. Cooperman cut him off
Another shareholder railed over “socialist” AFLCIO… Used profanity and then left the mtg.

Another environment activist took tv mike blasted Gore… Wants AAPL to get greener

1:32 Cheddarmuff: About to move toward q and a. Should be interesting.

1:40 idannyb: Proxy stuff over
TC PO and DC now on stage
Apple has increase rev 4xs in 4 yrs
$8 billio to $32 billion… Income growth even better
Mac and iPod share growing
iPhone 13.7 million iphone’s in 2008
Macbooks very green
iTunes team sold more of something than Walmart
iPhone in 70 countries
App Store success is staggering
Retail opened a store per week
Best experience
Top notebook provider to education in US
T Cook is on a roll!

1:44 idannyb: AFLCIO hitting hard on SJ health
Art Levenson responding.. Nothing new disclosed
We have met all disclosure

1:46 Cheddarmuff: First question about disclosure of Jobs health quoting 10b-5 rules. Saying company should correct bad data

Arthur levinsom responding…jobs still involved. Succession plan has regularly discussed. No disclosure about health or plan.

Next person is complimenting company for beautiful products. Wishes Steve well. Singing happy birthhday to Steve..EVERYONE singing.

[1:51 Reuters is reporting that the shareholders voted to re-elect the company’s slate of directors and voted down several shareholder-sponsored resolutions regarding executive pay, sustainability and healthcare reform. (link)]

1:52 Cheddarmuff: Next person asking why there isn’t more diversity in exec team.

Tim- we take diversity very seriously.

Next person… Long preamble and complaining that apple is getting out of macworld.

Tim- I have very fond memories of Macworld. Where we are now with retail investment blows macworld out of the water. Also we can announce press conferences whenever we want now which is better for the company.

1:57 idannyb: TC responding to “keep macworld” speech… Spoke eloquently about Apple stores, Apple reaching so many customer and platform build of iphone and app store

1:59 idannyb: Far more responses being delivered by BOD members

2:04 idannyb: Too many soap box agenda driven questions this year…
No core shareholder vaule Qs
Tempted to grab a mic but mtg winding down

2:22 Cheddarmuff: Meeting over. I got to talk with Tim Cook after the meeting…a very nice guy. We overheard a discussion with Peter as well.

Got to talk with Jim Goldman on the way out. Nice guy.

# # #

At today’s annual shareholders meeting the entire eight member board was re-elected despite concerns over the way it handled Steve Jobs’ health issues and four proposals were voted down.

The eight board members include; Al Gore Jr. (chair of Alliance for Climate Protection, Generation Investment Management, and Current TV), Steve Jobs (Apple’s CEO), Andrea Jung (CEO of Avon), Arthur Levinson (CEO of Genentech), Eric Schmidt (CEO of Google), Jerome York (CEO of Harwinton Capital), Bill Campbell (CEO of software maker Intuit), and Millard “Mickey” Drexler (CEO of retailer J. Crew).

In addition shareholders also voted down four proposals put forward by investors who have a large enough share in Apple to suggest major changes in company operation.

The proposals can be seen in the proxy documents starting on page 39 (document page 41).