NPD recently reported that Mac sales were down 16 percent in February. If that number holds for the entire quarter, what does the mean in terms of predicted revenue for Apple? The answer is surprising.
Anyone who's prepared a complex spreadsheet knows that effects are seldom linear. And yet, when it comes to headline news and surface thinking, it seems that our brains always tend to think linear. So a drop by 16 percent sounds dramatic. Let's take a close look at Apple's numbers and see what's really happening.
Apple's average selling price (ASP) for Macs right now is very close to US$1,400. That means that for every 100,000 shortfall in Mac sales, Apple loses about US$140M in revenue. How does this fit in with Apple's guidance?
On January 21, Apple's Peter Oppenheimer said the following:
"Our visibility [meaning ability to foresee the future] remains low in the current environment, making our forecasting challenging and we are therefore going to provide a broad range of revenue and earnings guidance for the March quarter. We expect revenue to be between about 7.6 and $8 billion."
Recently, Piper Jaffray's Gene Munster posted a prediction for the March quarter of $7.836B corresponding to 2.188 million Macs sold. So let's look at a variation, mostly down in this recession, about that range, decrementing at $140M per 100K Macs.
Macs sold Revenue ____________________ 2.188M => $7.836B 2.088M => $7.696B 1.988M => $7.556B
Note that I am only looking at Mac sales, and in this recession, one can expect Apple's overall revenue to be down across the board. However, Mac sale are a huge chunk of Apple's total revenue, over $3B, and also the item most likely to suffer from a downturn. Variations in Apple's iPod and iPhone sales, with lower ASPs and strong popularity, thanks to the recent new shuffle, aren't likely to carve big chunks out of the Apple revenue.
So we see that even if Apple only sold 1.988M Macs, the revenue for the quarter would just about equal Peter Oppenheimer's prediction for the low end of the range of $7.6B
What's the Reality?
In the December Quarter, Apple sold 2.524 million Macs. if the NPD report of a 16 percent reduction in sales holds for the entire quarter, Apple will report 0.84 * 2.524 M = 2.12 M. That's well above the low end of Apple's forecast from the chart above and suggests that Mr. Munster's estimate of revenues of 7.8B remain viable and was (will be) a pretty good estimate.
What's the net result here? A reduction in sales of 16 percent in Mac sales sounds like it's time to break out the Vicodin. In fact, even if one folds in expected reductions across the board in other revenue areas, as Mr. Oppenheimer likely did, Apple is very likely to meet its minimum guidance of $7.6B in revenue.
Mr. Oppenheimer said it would be hard to make the forecast, and gave himself plenty of leeway. He knew that Apple couldn't sustain its Christmas quarter Mac sales. As a result, even a 16 percent drop in Macintosh sales falls within expectations and guidance for Apple. Any other conclusion is just hysteria. And what's remarkable is that Apple, despite the forecasting fog, has been pretty good at predicting the effects of the recession on its revenue.