Live! From the Apple Q3 earnings call

This was a live blog from Apple’s (AAPL) third quarter 2008 earnings call, posted in reverse order with the newest entries on top. The call is scheduled to be replayed starting at about 8 p.m. ET Monday at the following numbers: (888) 203-1112 (toll free) or (719) 457-0820. Confirmation code: 4120259. A transcript is available here.

6:00 p.m. We’re done. The headline: Led by record Mac sales, earnings were up 31% to $1.19 a share for the quarter on revenue of $7.46 billion, handily beating both guidance and the average of analysts’ expectations. The quote that will catch the eyes of investors in the Q&A was the answer to the question about Steve Jobs’ health.

“Steve loves Apple,” CFO Peter Oppenheimer replied. “He serves as the CEO at the pleasure of Apple’s board and has no plans to leave Apple. Steve’s health is a private matter.”

5:15 p.m. Q&A starts. First question is about future product transition and its effect on revenue growth.

A: Reiterates revenue expectations. Hints again about that product transition he can’t talk about. (Revamped MacBook line?) Q: Asks for additional color (jargon alert!) on overseas sales. Tim Cook points to faster growth in Japan, in Asia Pacific - 53% for Mac in Asia, for example, two-to-three times the market average. European growth was more like five times industry average. France, Germany and Australia grew more than 50%  (this is all Mac sales, I believe).

Q: More store opening in ‘09? Peter Oppenheimer ducks question.

Q: Richard Gardner: How many Best Buy stores? Below target range for Mac inventory? Tim: We added 170 Best Buy stores across the quarter. Plan to be at 670 end of summer. On inventory, still trying to hit target.

Q: Ben Reitzes: Gross margins? Effect of commodity prices or back to school sales? Peter: In June, 180 basis points better than guidance. Primarily driven by better commodity market. In September 31.5 GM because of 1) School promotions 2) Future product can’t discuss (again) 3) Something about how a complicated deal with suppliers was good for Apple last quarter but won’t repeat in this quarter. Tim: DRAM entering stronger demand and we believe prices will go up. Hard drives etc. are in balance.

Peter: For future gross margins: we’re not looking for a margin so high that it creates an “umbrella” for competitors to sneak in and steal market from Apple. Beyond September, expect gross margins about 30% in 2009.

Q: What about Steve’s health? Sorry to ask, but would you address? Peter: Steve loves Apple. He serves as the CEO at the pleasure of Apple’s board and has no plans to leave Apple. Steve’s health is a private matter. (That’s not an answer that will reassure investors.)

Q: Apple TV: Number of video rentals? Tim: Pleased with sales, but remains a hobby because business not nearly as large as those others. (Ducks question).

Q: Charles Wolf: iPod sales in the U.S. vs. International? Peter: iPod sales grew 10% in U.S. and 15% outside. (i.e. You do the math.)

Q: Gene Munster: iPhone good launch. Out of product.  When will channel refill? Tim: Pleased with production ramp. Shipping as fast as we can. Confident enough that we will be launching 20 additional countries on Aug. 22. Still expect to sell in more than 70 countries before the end of the year. Not going to predict when supply will meet demand. Clarifies accounting on iPod touch, which is different than the iPhone.

Q: David Bailey of Goldman Sachs. Drop in gross margin? Why? Peter: Delivering product at price points that our competitors can’t match. What’s the change? A: We have changes in products - new products - and so gross margin will be about 30%.

Q: Guidance again. In past usually guide earnings per share down in this quarter, but it always goes up. So what’s different this quarter? Peter: “We give you guidance that we have reasonable confidence of achieving.” I have guided revenues up 5%, but we see gross margin down, and I’ve given you the three reasons. Q: Is price one of the reasons gross margin is down? No new answer.

Q: A question asked from an iPhone, so questioner has to make sure they can hear her. Q: What are you going to with all that iPhone cash. A: No change in what we do with our cash.

Q: JPMorgan: More focus on margins. More flexible pricing coming along? Maybe not such a high price leader in future? A: Ducked. Q: Buzz about corporate IT houses using iPhone in business? A: Ticks off enterprises writing custom apps. No hard evidence supplied of companies allowing employees to replace BlackBerries with iPhones.

Q: Morgan Stanley: Inventories up? A: Increase related primarily to “buy head” we did with launch of 3G. Q: Profits reinvested into stores to support higher traffic? A: Praises Ron Johnson for the 32 million people who visited Apple Stores this quarter, up 10%. Redesigning some early stores.

Q: Merrill Lynch: Operating expenses: What can and can’t be deferred? A: This is pretty obscure stuff. They lost me.

Q: Will new countries getting iPhone be generally added in blocks of 20. Yes, mostly in blocks. Q: Profits from App Store? A: He compares App Store to iTunes Store. No new info in his answer.

Q: Toni Sacconaghi: How much of your guidance has to do with overall consumer market? A: We’re going to leave economic commentary to others, but we didn’t see any impact on our sales. (i.e. so far, Apple seems to be recession proof). Q: In terms of iPhone ramp, can you confirm that there have been no component problems. If not, why not delay launch so you could avoid frustrating customers? A: Demand has been staggering. Manufacturing is right on schedule. Gives us confidence to launch in 20 more countries in August. Q: Gross margin (again): iPhone is a signficantly higher gross maring product than your others. Shouldn’t gross margin improve in future? A: iPhone is currently a small part of gross margin because of subscription accounting. We’re very happy with the margins.

Q: Cap Markets’ Abromsky: iPhone knockoffs proliferating. Could be crowded fall. What sustainable advantages do you think you have? A: Tim: Software is the key ingredient for a great mobile experience. We believe we are many years ahead of the competition as long as it doesn’t step on our IP (intellectual property). Peter: Cutomers have already downloaded over 25 million applications. (!)

Q: Evidence that you can sustain this kind of growth you had out of the gate? A: Tim: We’re making no prediction. We believe we are growing the market. And that many people didn’t have an idea what a phone could do before we introduced the iPhone. (That’s a good answer.)

Q: Oppenheimer: School sales effect on average sales price? A: Lays out the term of the sale (rebate for iPod). Account for rebate as reduction of revenue. Q: Average sales price clearly lower for iPod due to high number of shuffles. A: Doesn’t answer. There was some cannibalization from the iPhone, but repeats what Steve Jobs said: if there’s going to be cannibalization, we’d rather it be by the iPhone.

Q: Shaw Wu: Looks like Japan business regressed after the last two quarters, why? And why is iPod sales price down? A: Pleased with Japan subsidiary. Grew at 40% this quarter, better than the rest of the quarter. In the PC industry, Mac was up four to five times higher than industry. As for iPod, ASP, it was down becaue of Shuffle price decrease. The school sales will have its impact later in the summer.

End of Q&A

Start of official remarks

5:02 p.m. Oppenheimer. Highest June quarter revenue and earning in the company’s history. Points to 38% growth in revenue. and record Mac sales. Operating margin 18.6%, which he describes as higher than expected. Sales in stores up 32% (I think). Traffic numbers in the millions. Mac product. Extremely pleased to have shipped 2.5 million Macs. Desktop sales up 49%, sales of portables up 37%. year for year. Thrilled with the momentum of the Mac business. Now all time highs in college and K-12. 3 to 4 weeks inventory.

Music: iPod sales grew 10% domestic, higher abroad. Led by shuffle. Gained share internationally-  70% in U.S., over 50% in U.K. Double digit share in the rest. What else are they buying?

More than 5 billion songs sold. No numbers of TV or movie sales.

Shipped 717,000 iPhones. $419 million in rev. but none of that is post March 6 hardware revenue. Off to great start with iPhone 3G. Selling in 22 countries (France on board now?). App Store currently offers more than 900 apps, more than 20% free.

Apple Stores. More than half of Mac sold to customers who hadn’t owned a Mac before. Opened eight stores in the quarter. 216 stores at tend of quarter. Increased revenues of 33% per store. On track to end the year with 242 stores.

Gross margins. 34.8%, I believe. (Better check that; confirmed). Operating expenses’s $1.21 billion. Tax rate lower than guidance. Huge pile of cash that hasn’t been recorded from iPhone sale.

Expects Gross margin down to 31% in September quarter, in part because of new product introduction he can’t talk about yet. (Planting the seeds of a million rumors there.)

5:00 p.m. We’re starting. Nancy Paxton introduces Peter Oppenheimer and Tim Cook. The usual warning.

4:58 p.m. CNNMoney: “Apple beats estimates but guides lower” (link)

4:55 p.m. Silicon Valley/San Jose Business journal describes Mac sales as a new record and points out that $1.19 EPS beat the $1.07 analysts on average expected.

4:52 p.m. Reuters is lumping Apple with American Express and Sandisk as companies whose results “disappointed investor.” Seems a bit early to make that call.

4:48 p.m. Apple shares are down more than seven points in after hours trading.

4:46 p.m. Macs sold in the quarter: 2,496,000. That’s a chunk of hardware, and it’s probably where the bulk of that revenue came from.

4:40 p.m. For the quarter, Apple sold 11 million iPods and 717,000 iPhones. The company expect Q4 earnings per share of $1 on revenue of $7.8 billion. (Looking for Mac numbers.) Those iPod numbers are a tad higher than expected. The iPhone numbers are lower. The expectations seem to be unusually conservative, given all the iPhones they’re selling and all the Macs they will sell in back-to-school specials.

4:37 p.m. The numbers are coming over the wires. Earning of $1.07 billion, or $1.19 a share on revenue of $7.46 billion. Revenue rose 38% year to year.

4:36. p.m. The 8-K has been filed. Result shortly.

4:34 p.m. After a few hiccups, we’re patched into the conference call. The background music sounds like Mozart to me. We put it to Shazam, a free program from the App Store that correctly identified a couple Beatles songs and an Elton John. Shazam tells me it’s Jelly Roll Morton’s London Blues. Hmm.

4:23 p.m. While we wait, here are the Street’s expectations for sales of Apple’s main product lines, from Munster’s latest report.

• Mac: 2.2 million
• iPod: 10.3 million
• iPhone: 730,000

4:19 p.m. Still waiting. Reviewing the guidance numbers for this quarter that Apple issued three month ago: Earnings per share of $1 even on revenue of $7.2 billion. At the time this was considered less conservative than the guidance issued in January.

4:09 p.m. Nothing from Apple or on the wires yet.

3:59 p.m. Apple shares rebounding at the close and have just passed into green territory. Go figure.

3:54 p.m. Piper Jaffray’s Gene Munster and Bernstein’s Toni Sacconaghi both issued reports to their respective clients this afternoon. Munster predicted that strong Mac and iPod sales “may drive upside to June quarter results” and reminded readers that Apple’s guidance is conservative. Sacconaghi also expects Apple to beat earnings on strong sales, but thinks gross margin is “unlikely to show significant upside.” (Do these guys ever see downside?)

3:35 p.m. For the record, Apple is expected to report net income of $972.6 million, or $1.08 per share, on sales of $7.4 billion, according to Thomson Financial’s survey of analysts. In the same period last year the company earned $818 million, or 92 cents a share, on sales of $5.4 billion.

3:30 p.m. The company should issue a press release with its quarterly earnings when the market closes at 4 p.m. — and not a moment too soon. A New York Post piece revisiting question about Steve Jobs’ health this morning (blind sources “worried,” no real news) set the theme for today’s Apple coverage on the business wires, and the stock has been taking a beating almost since the opening bell. We were expecting a bumpy ride, but we weren’t expecting this.