Higher GM Should Offset Concern about Any Q2 Revenue Shortfall

  • Posted: 11 February 2009 02:23 PM

    Looking at the accelerating shrinkage of the overall consumer electronics market, it appears possible that Apple may struggle to meet analysts’ average estimate of FY09Q2 revenue (~$8.0B) and perhaps even its own conservative forecast ($7.6B - $8.0B).

    However, sharply dropping prices of Apple’s component costs and its unique ability to maintain product pricing control suggest that?in spite of a likely revenue crunch?Q2 earnings will beat the Street EPS estimate ($1.08) and significantly exceed its own forecast ($0.90 - $1.00) . If Apple can accomplish this, hopefully the market would reward Apple’s continuing ability to increase profits in such a disastrous worldwide economic decline, although recent history demonstrates that this is not a given.

    My question is this: Do any AFB members have insight into how big the declines in Apple’s component costs have been in the last few months and how this might translate into GM appreciation?

         
  • Posted: 11 February 2009 02:35 PM #1

    Hannibal - 11 February 2009 06:23 PM

    Looking at the accelerating shrinkage of the overall consumer electronics market, it appears possible that Apple may struggle to meet analysts’ average estimate of FY09Q2 revenue (~$8.0B) and perhaps even its own conservative forecast ($7.6B - $8.0B).

    However, sharply dropping prices of Apple’s component costs and its unique ability to maintain product pricing control suggest that?in spite of a likely revenue crunch?Q2 earnings will beat the Street EPS estimate ($1.08) and significantly exceed its own forecast ($0.90 - $1.00).

    Apple’s gross margin can actually decline, and Apple will earn at least $1.43.

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    Posted: 11 February 2009 06:30 PM #2

    Hannibal - 11 February 2009 06:23 PM

    Looking at the accelerating shrinkage of the overall consumer electronics market, it appears possible that Apple may struggle to meet analysts’ average estimate of FY09Q2 revenue (~$8.0B) and perhaps even its own conservative forecast ($7.6B - $8.0B).

    However, sharply dropping prices of Apple’s component costs and its unique ability to maintain product pricing control suggest that?in spite of a likely revenue crunch?Q2 earnings will beat the Street EPS estimate ($1.08) and significantly exceed its own forecast ($0.90 - $1.00) . If Apple can accomplish this, hopefully the market would reward Apple’s continuing ability to increase profits in such a disastrous worldwide economic decline, although recent history demonstrates that this is not a given.

    My question is this: Do any AFB members have insight into how big the declines in Apple’s component costs have been in the last few months and how this might translate into GM appreciation?

    I would caution on the statement about rapidly dropping component cost.  2008 saw huge drop in component cost, but prices have stabilized at least on the spot market in Feb. 

    A bullish trend was seen in the memory spot markets in the first trading week after the Lunar New Year holidays(January 23-30), with the DRAM pricing being supported by the news of Qimonda filing for insolvency and the NAND flash pricing supported by disciplined supply, inSpectrum explained.

      Here

    Contract prices are different then spot so I have no idea what Apple is paying since they have a large pre-paid contract with several suppliers.  I’m sure they have a cost competitive price.

    As far as revenue,  The Iphone deferred revenue will allow Apple to meet their target EPS .  Apple will recognize 1.165B 2 Qtr 09 vs 204 M 2 Qtr 08 Assuming 55% GM and 30% tax rate that 41c in EPS guaranteed with zero sales.  If you subtract out the 41c then things would need to fall off the cliff compared to last quarter to reach the .90 -1.00.

         
  • Posted: 11 February 2009 06:43 PM #3

    pats - 11 February 2009 10:30 PM

    I would caution on the statement about rapidly dropping component cost.  2008 saw huge drop in component cost, but prices have stabilized at least on the spot market in Feb. 

    A bullish trend was seen in the memory spot markets in the first trading week after the Lunar New Year holidays(January 23-30), with the DRAM pricing being supported by the news of Qimonda filing for insolvency and the NAND flash pricing supported by disciplined supply, inSpectrum explained.

      Here

    Contract prices are different then spot so I have no idea what Apple is paying since they have a large pre-paid contract with several suppliers.  I’m sure they have a cost competitive price.

    As far as revenue,  The Iphone deferred revenue will allow Apple to meet their target EPS .  Apple will recognize 1.165B 2 Qtr 09 vs 204 M 2 Qtr 08 Assuming 55% GM and 30% tax rate that 41c in EPS guaranteed with zero sales.  If you subtract out the 41c then things would need to fall off the cliff compared to last quarter to reach the .90 -1.00.

    Intelligent, logical analysis of Apple’s component pricing.  If I may add, the components Apple is receiving today, were bought at least 9 months ago.  The prices we are seeing today are spot market, not best “contracted” prices.  Unless Apple has grossly under-estimated sales, they will not have to buy higher cost spot components.

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  • Posted: 11 February 2009 07:00 PM #4

    pats - 11 February 2009 10:30 PM

    I would caution on the statement about rapidly dropping component cost.  2008 saw huge drop in component cost, but prices have stabilized at least on the spot market in Feb. 

    A bullish trend was seen in the memory spot markets in the first trading week after the Lunar New Year holidays(January 23-30), with the DRAM pricing being supported by the news of Qimonda filing for insolvency and the NAND flash pricing supported by disciplined supply, inSpectrum explained.

      Here

    Contract prices are different then spot so I have no idea what Apple is paying since they have a large pre-paid contract with several suppliers.  I’m sure they have a cost competitive price.

    As far as revenue,  The Iphone deferred revenue will allow Apple to meet their target EPS .  Apple will recognize 1.165B 2 Qtr 09 vs 204 M 2 Qtr 08 Assuming 55% GM and 30% tax rate that 41c in EPS guaranteed with zero sales.  If you subtract out the 41c then things would need to fall off the cliff compared to last quarter to reach the .90 -1.00.

    If I understand correctly, the deferred revenue accounting method is going to help out quite a bit come next earning.

         
  • Posted: 11 February 2009 08:02 PM #5

    alice - 11 February 2009 11:00 PM

    If I understand correctly, the deferred revenue accounting method is going to help out quite a bit come next earning.

    Yes.  Better yet, the amount it helps each quarter is growing rapidly.  By January earnings 2010 that “help” will amount to more than 80? per share.

    The last time Apple earned just 80? was Q2/07 (87?).  Think about it, in a year’s time, Apple’s deferred earnings will almost equal Q2/07’s total EPS.

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    Posted: 11 February 2009 09:15 PM #6

    alice - 11 February 2009 11:00 PM
    pats - 11 February 2009 10:30 PM

    I would caution on the statement about rapidly dropping component cost.  2008 saw huge drop in component cost, but prices have stabilized at least on the spot market in Feb. 

    A bullish trend was seen in the memory spot markets in the first trading week after the Lunar New Year holidays(January 23-30), with the DRAM pricing being supported by the news of Qimonda filing for insolvency and the NAND flash pricing supported by disciplined supply, inSpectrum explained.

      Here

    Contract prices are different then spot so I have no idea what Apple is paying since they have a large pre-paid contract with several suppliers.  I’m sure they have a cost competitive price.

    As far as revenue,  The Iphone deferred revenue will allow Apple to meet their target EPS .  Apple will recognize 1.165B 2 Qtr 09 vs 204 M 2 Qtr 08 Assuming 55% GM and 30% tax rate that 41c in EPS guaranteed with zero sales.  If you subtract out the 41c then things would need to fall off the cliff compared to last quarter to reach the .90 -1.00.

    If I understand correctly, the deferred revenue accounting method is going to help out quite a bit come next earning.

    If we look at the current deferred earnings on Apple’s balance sheet we have 4.66B which will be recognized over the next year without selling a single additional Iphone/ATV.  That equates to about $2 in EPS if the share count stays around 902 M.  I’m am also of the belief that Iphone sales will slow this quarter but will still probably be double last year so 3.4-4M.  This adds about another 10c to EPS.  The rest of Apples business has to earn about .57c to meet the consensus earnings.  My own analysis is 1.46 EPS based on flat Ipod sales flat desktop and 20% growth of laptop.
    Pat

         
  • Posted: 11 February 2009 11:05 PM #7

    pats - 12 February 2009 01:15 AM

    If we look at the current deferred earnings on Apple’s balance sheet we have 4.66B which will be recognized over the next year without selling a single additional Iphone/ATV.  That equates to about $2 in EPS if the share count stays around 902 M.  I’m am also of the belief that Iphone sales will slow this quarter but will still probably be double last year so 3.4-4M.  This adds about another 10c to EPS.  The rest of Apples business has to earn about .57c to meet the consensus earnings.  My own analysis is 1.46 EPS based on flat Ipod sales flat desktop and 20% growth of laptop.
    Pat

    I really like your EPS estimate.  I’m at $1.47.

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  • Posted: 12 February 2009 12:49 AM #8

    I know it’s tough to take Apple guidance on GM very seriously, given history and last quarter’s miss by 420   pts, but should we still ignore Peter’s and Tim’s comments in totality?

    They guided GM down to 32.5% because:

    (1)the impact of the stronger US dollar.
    (2)The favorable supply chain adjustments and settlements from the December quarter are not reoccurring
    (3) and the sequentially lower revenue as we have seen in past years.

    The other notes include the component pricing, “it will still be positive, but the falls from where we were are not going to be like they were in the Q1 time frame”.

    What GM are you modeling into your numbers?

    I too think we may be very shocked on the drop in consumer spending this quarter. It’s nice we can finally be happy about the deferred revenue situation providing some smoothing when we actually can use it. It still makes me wonder about the guidance, the deferred effect is guaranteed, prudence can’t play a part in that contribution. I think if you asked Peter how long it takes him to drive to work, he’d say “I’d guess 8 hrs—I assume there is a 3 car pile-up at every intersection along the way, but at least I’m never late”

         
  • Posted: 12 February 2009 01:17 AM #9

    cranium - 12 February 2009 04:49 AM

    I know it’s tough to take Apple guidance on GM very seriously, given history and last quarter’s miss by 420   pts, but should we still ignore Peter’s and Tim’s comments in totality?

    They guided GM down to 32.5% because:

    (1)the impact of the stronger US dollar.
    (2)The favorable supply chain adjustments and settlements from the December quarter are not reoccurring
    (3) and the sequentially lower revenue as we have seen in past years.

    The other notes include the component pricing, “it will still be positive, but the falls from where we were are not going to be like they were in the Q1 time frame”.

    What GM are you modeling into your numbers?

    I too think we may be very shocked on the drop in consumer spending this quarter. It’s nice we can finally be happy about the deferred revenue situation providing some smoothing when we actually can use it. It still makes me wonder about the guidance, the deferred effect is guaranteed, prudence can’t play a part in that contribution. I think if you asked Peter how long it takes him to drive to work, he’d say “I’d guess 8 hrs—I assume there is a 3 car pile-up at every intersection along the way, but at least I’m never late”

    A stronger US dollar will have no impact on gross margins.  Apple’s products are manufactured primarily in China, which fixes the exchange rate of the RNB to the US$ (the RNB does not float with the market).

    I used 33.6% Gross Margins in my estimates, with a decline of 4.6% in computer revenue, 48.8% in iPod revenue, and 23.7% increase in iPhone revenue (effect of deferred revenue accounting), all resulting in an overall decline in Revenue of 15.6%.  Also, I increased effective tax rate to 30.7%.

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  • Posted: 12 February 2009 01:46 AM #10

    Gregg Thurman - 12 February 2009 05:17 AM
    cranium - 12 February 2009 04:49 AM

    I know it’s tough to take Apple guidance on GM very seriously, given history and last quarter’s miss by 420   pts, but should we still ignore Peter’s and Tim’s comments in totality?

    They guided GM down to 32.5% because:

    (1)the impact of the stronger US dollar.
    (2)The favorable supply chain adjustments and settlements from the December quarter are not reoccurring
    (3) and the sequentially lower revenue as we have seen in past years.

    The other notes include the component pricing, “it will still be positive, but the falls from where we were are not going to be like they were in the Q1 time frame”.

    What GM are you modeling into your numbers?

    I too think we may be very shocked on the drop in consumer spending this quarter. It’s nice we can finally be happy about the deferred revenue situation providing some smoothing when we actually can use it. It still makes me wonder about the guidance, the deferred effect is guaranteed, prudence can’t play a part in that contribution. I think if you asked Peter how long it takes him to drive to work, he’d say “I’d guess 8 hrs—I assume there is a 3 car pile-up at every intersection along the way, but at least I’m never late”

    A stronger US dollar will have no impact on gross margins.  Apple’s products are manufactured primarily in China, which fixes the exchange rate of the RNB to the US$ (the RNB does not float with the market).

    I used 33.6% Gross Margins in my estimates, with a decline of 4.6% in computer revenue, 48.8% in iPod revenue, and 23.7% increase in iPhone revenue (effect of deferred revenue accounting), all resulting in an overall decline in Revenue of 15.6%.  Also, I increased effective tax rate to 30.7%.

    Stronger dollar does impact GM because of selling price in international markets, such as Europe and Canada. Look at the Euro - down from 1.65 to 1.25. The supply market is contracted in US dollars, so a stronger dollar doesn’t benefit on the cost side to offset on the price side. That’s the reason for the hedging program Apple does. Typically exposure is covered 6 months out, so I would expect any impact to be minimal, but not negligible. Apple typically re-prices products at the end of the hedged period to compensate for the move in currency.

    I?m modeling corporate gross margin to rise to 37% from 34.7% in Q1. This increase is a function of revenue mix as my model assumes product level gross margins remain constant.  Given that iPod sales carry relatively low margins, the decrease from 33% of revenue in Q1 to an estimated 15% of total revenue for Q2, has a sizable impact on overall GM. In addition, iPhone sales were 12% of Q1 total revenue, and I estimate iPhone will rise to 19% of revenue in Q2.

    Hence, the seasonal shift in revenue mix has a compound effect on GM. High margin iPhone revenue has a greater impact on overall GM since its contribution (as a percentage) increases due to declines in other product segments such as iPod and Mac, coupled with an increase in absolute dollar terms from more deferred revenue recognition. In addition, low margin iPod revenue (as overall percentage) will decline, which reduces its drag on corporate margins.

    While I don?t foresee any significant GM movement for iPhones sold in this quarter, gross margin on deferred revenue recognized in Q2 will be higher. The last two reporting periods, Apple disclosed the deferred costs associated with subscription accounting that it is recorded on the balance sheet. Current deferred revenue and current deferred cost can be used as a proxy for the gross margin on the deferred revenue amount to be recognized in the upcoming quarter. At the end of Q4, GM on current deferred revenue/expense was 45%, yet at the end of 1Q09, the implied gross margin rose to 49%. Being that iPhone?s projected share of gross income is above 25%, a 4% increase in iPhone GM results in a 50 bps increase to overall GM.

    Software revenue should have a slight gross margin impact. Software is by far, the highest margin segment. The cost to develop and produce the products have been expensed in early periods, thus the only costs are the packaging and installation DVD. Apple introduced new versions of iWork and iLife this quarter, which on the margin, should considerably boost segment sales. However, this segment accounts for less than 10% of total sales, which is partially offset by its very high GM that should provide 20-30 bps of upside.

    As mentioned earlier, conservative sales projections for relatively lower margin products such as iPod and Macs enlarge the overall impact of higher margin segments such as iPhone and software. Thus, if Mac and iPod sales estimates increase (or come in above forecast), there will be a dilutive impact to gross margins. However, to state the obvious, EPS will increase even though corporate gross margin drops. Specifically, if my iPod unit forecast were to rise 3M units to 11M from 8M, gross margin would fall 50 bps to 36.5%,

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  • Posted: 12 February 2009 02:22 AM #11

    Gregg Thurman - 12 February 2009 05:17 AM
    cranium - 12 February 2009 04:49 AM

    I used 33.6% Gross Margins in my estimates, with a decline of 4.6% in computer revenue, 48.8% in iPod revenue, and 23.7% increase in iPhone revenue (effect of deferred revenue accounting), all resulting in an overall decline in Revenue of 15.6%.  Also, I increased effective tax rate to 30.7%.

    Stronger dollar does impact GM because of selling price in international markets, such as Europe and Canada. Look at the Euro - down from 1.65 to 1.25. The supply market is contracted in US dollars, so a stronger dollar doesn’t benefit on the cost side to offset on the price side. That’s the reason for the hedging program Apple does. Typically exposure is covered 6 months out, so I would expect any impact to be minimal, but not negligible. Apple typically re-prices products at the end of the hedged period to compensate for the move in currency.

    I?m modeling corporate gross margin to rise to 37% from 34.7% in Q1. This increase is a function of revenue mix as my model assumes product level gross margins remain constant.  Given that iPod sales carry relatively low margins, the decrease from 33% of revenue in Q1 to an estimated 15% of total revenue for Q2, has a sizable impact on overall GM. In addition, iPhone sales were 12% of Q1 total revenue, and I estimate iPhone will rise to 19% of revenue in Q2.

    Hence, the seasonal shift in revenue mix has a compound effect on GM. High margin iPhone revenue has a greater impact on overall GM since its contribution (as a percentage) increases due to declines in other product segments such as iPod and Mac, coupled with an increase in absolute dollar terms from more deferred revenue recognition. In addition, low margin iPod revenue (as overall percentage) will decline, which reduces its drag on corporate margins.

    While I don?t foresee any significant GM movement for iPhones sold in this quarter, gross margin on deferred revenue recognized in Q2 will be higher. The last two reporting periods, Apple disclosed the deferred costs associated with subscription accounting that it is recorded on the balance sheet. Current deferred revenue and current deferred cost can be used as a proxy for the gross margin on the deferred revenue amount to be recognized in the upcoming quarter. At the end of Q4, GM on current deferred revenue/expense was 45%, yet at the end of 1Q09, the implied gross margin rose to 49%. Being that iPhone?s projected share of gross income is above 25%, a 4% increase in iPhone GM results in a 50 bps increase to overall GM.

    Software revenue should have a slight gross margin impact. Software is by far, the highest margin segment. The cost to develop and produce the products have been expensed in early periods, thus the only costs are the packaging and installation DVD. Apple introduced new versions of iWork and iLife this quarter, which on the margin, should considerably boost segment sales. However, this segment accounts for less than 10% of total sales, which is partially offset by its very high GM that should provide 20-30 bps of upside.

    As mentioned earlier, conservative sales projections for relatively lower margin products such as iPod and Macs enlarge the overall impact of higher margin segments such as iPhone and software. Thus, if Mac and iPod sales estimates increase (or come in above forecast), there will be a dilutive impact to gross margins. However, to state the obvious, EPS will increase even though corporate gross margin drops. Specifically, if my iPod unit forecast were to rise 3M units to 11M from 8M, gross margin would fall 50 bps to 36.5%,

    Nice analysis.  My earnings estimate ($1.47), based on gross margins of 33.6%, should go up if your gross margin analysis is correct.  That can’t make anybody unhappy.

    Increasing gross margin on my model increases EPS to $1.79.

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    Posted: 12 February 2009 06:27 PM #12

    The type of analysis of Gross Margins, relative product weights in the income mix, deferred revenue and all the other components discussed above make for an informed projection of earnings that is the most valuable info to be found on AFB (and far more accurate than the overall analysts of Apple).

    If you short these guys (our AFB number crunchers, who deserve our great thanks for sharing) 10% and use that as a guide for actual numbers and draw your investment conclusions from there you will be on solid ground.  Not that the market can’t tank like it did in the fall and overwhelm everything, but given a relatively stable economy (hmmmm) we are looking at a company that continues to grow and is grossly undervalued.  Note: this would give a 2nd Qtr 09 EPS of around 130, around a 10% beat of the street analysts.

    Apple’s beat of earnings projection this past quarter was nearly in line with Amazons (surprise of 28% vs 35%) and better in some aspects: yet Amazon shares gained twice as much percentage wise than Apple.  We are still working off the Steve Jobs health effect.  Amazon has a PE in the 40’s, Apple about 20.  Given Apple’s now proven resilience to the recession and its deferred revenue stream there is no good reasoning (that I know of) that we should be trading at 1/2 the PE of Amazon (anybody?).  I suppose you could pose that the other way around and question the PE of Amazon, but it seems to be holding up at the moment….

    While I am in no way qualified to make the type of estimates as those posting above, armed with their work and a grasp of the strengths and potential of Apple’s business I can feel relatively confident that we are going to see a long term appreciation of the stock price, probably seeing 180 in 1.5 years minimum.

    Thanks to all who contribute to this type of discussion.

         
  • Posted: 12 February 2009 07:44 PM #13

    Gregg Thurman - 12 February 2009 06:22 AM
    turleymuller - 12 February 2009 05:17 AM
    cranium - 12 February 2009 04:49 AM

    I used 33.6% Gross Margins in my estimates, with a decline of 4.6% in computer revenue, 48.8% in iPod revenue, and 23.7% increase in iPhone revenue (effect of deferred revenue accounting), all resulting in an overall decline in Revenue of 15.6%.  Also, I increased effective tax rate to 30.7%.

    Stronger dollar does impact GM because of selling price in international markets, such as Europe and Canada. Look at the Euro - down from 1.65 to 1.25. The supply market is contracted in US dollars, so a stronger dollar doesn’t benefit on the cost side to offset on the price side. That’s the reason for the hedging program Apple does. Typically exposure is covered 6 months out, so I would expect any impact to be minimal, but not negligible. Apple typically re-prices products at the end of the hedged period to compensate for the move in currency.

    I?m modeling corporate gross margin to rise to 37% from 34.7% in Q1. This increase is a function of revenue mix as my model assumes product level gross margins remain constant.  Given that iPod sales carry relatively low margins, the decrease from 33% of revenue in Q1 to an estimated 15% of total revenue for Q2, has a sizable impact on overall GM. In addition, iPhone sales were 12% of Q1 total revenue, and I estimate iPhone will rise to 19% of revenue in Q2.

    Hence, the seasonal shift in revenue mix has a compound effect on GM. High margin iPhone revenue has a greater impact on overall GM since its contribution (as a percentage) increases due to declines in other product segments such as iPod and Mac, coupled with an increase in absolute dollar terms from more deferred revenue recognition. In addition, low margin iPod revenue (as overall percentage) will decline, which reduces its drag on corporate margins.

    While I don?t foresee any significant GM movement for iPhones sold in this quarter, gross margin on deferred revenue recognized in Q2 will be higher. The last two reporting periods, Apple disclosed the deferred costs associated with subscription accounting that it is recorded on the balance sheet. Current deferred revenue and current deferred cost can be used as a proxy for the gross margin on the deferred revenue amount to be recognized in the upcoming quarter. At the end of Q4, GM on current deferred revenue/expense was 45%, yet at the end of 1Q09, the implied gross margin rose to 49%. Being that iPhone?s projected share of gross income is above 25%, a 4% increase in iPhone GM results in a 50 bps increase to overall GM.

    Software revenue should have a slight gross margin impact. Software is by far, the highest margin segment. The cost to develop and produce the products have been expensed in early periods, thus the only costs are the packaging and installation DVD. Apple introduced new versions of iWork and iLife this quarter, which on the margin, should considerably boost segment sales. However, this segment accounts for less than 10% of total sales, which is partially offset by its very high GM that should provide 20-30 bps of upside.

    As mentioned earlier, conservative sales projections for relatively lower margin products such as iPod and Macs enlarge the overall impact of higher margin segments such as iPhone and software. Thus, if Mac and iPod sales estimates increase (or come in above forecast), there will be a dilutive impact to gross margins. However, to state the obvious, EPS will increase even though corporate gross margin drops. Specifically, if my iPod unit forecast were to rise 3M units to 11M from 8M, gross margin would fall 50 bps to 36.5%,

    Nice analysis.  My earnings estimate ($1.47), based on gross margins of 33.6%, should go up if your gross margin analysis is correct.  That can’t make anybody unhappy.

    Increasing gross margin on my model increases EPS to $1.79.

     

    There is still good amount of upside in my estimates since I wanted to approach with forecasting unit assumptions like Apple management does guidance guidance, So I expect to ratchet those up in a couple weeks, I hope. Not much visibility, plenty volatility. I estimate for the high-end of EPS range could come in at $1.45-$1.50. 

    The model EPS is very sensitive to Mac unit sales variability with EPS delta of ~6 cents per 100K units. 1 million unit variance from the baseline iPod sales assumption impacts EPS by 2-3 cents. iPhone sales have very little impact on earnings in the current period due to nearly all revenue being deferred. 

    APPLE Q2 2009 (March)
    Revenue:  $7.74B     vs   $7.51B     (+3%)
    EPS       $1.25     vs   $1.16     (+8%)
    Cash EPS   $1.52     vs.  $1.26     (+21%)

     

    MAC SEGMENT-
    Units:      2.2M (?09)    vs.    2.29M (?08)    (-4%)
    ASP:        $1400     vs   $1526       (-8%)
    Revenue:  $3.08B   vs   $3.49B     (-12%)

    iPOD SEGMENT:
    Units:      8M     vs   10.6M     (-25%)
    ASP     $150     vs   $171     (-12%)
    Revenue:  $1.2B     vs   $1.8B     (-34%)

    iPHONE SEGMENT:
    Units:      3M     vs   1.7M     (+76%)
    Revenue:      $1.5B     vs   378K     (+285%)

    The major unknown is Mac desktops. When will new models arrive?  What impact is channel drawdown having, and whether there will be channel fill this quarter, as well as any sell thru. Where my GM estimate could be affected is iTunes revenue. Lower GM, and with App store, gift cards, and huge Dec sales of iPod touch, there are several factors that could cause a very big revenue quarter, iTunes always has a good Mar Q. But if its huge and overall revenues soften, then the lower iTunes segment GM drags on overall GM.

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  • Posted: 13 February 2009 12:46 AM #14

    Great posts Turley! I really think it’s important the people understand that GM is a number that does not stand alone and shouldn’t just get plugged into a model independent of it’s relationship to other factors. A huge increase in iTunes sales is obviously a good thing, yet it will pull down GM.

    Another important point you made is clear is how little the impact of current iPhone sales is to earnings. I’m not feeling good about iPhone numbers this quarter, but this fact means I’m not in tears about it. Finally the time comes where I’m not in a tirade about the subscription accounting! Was there any anecdotal evidence of how popular the iPhone gift cards were? Did Gene Munster report anything from his ‘store checks’?

    I must admit I’m very pessimistic on the Mac numbers this quarter. The initial burst from the new Macbooks will be starting to wane, the consumer is gravely wounded (they’ve just got their holiday bills, got their year-end investment statements, and have either witnessed a friend lose their job or are worried about their own), and the desktops are 3 months older than they were last quarter. I approve of Apple maintaining their Mac pricing models, I just think that until the public gets more optimistic on the economy and we see the new desktops, we will be startled by this quarter’s numbers. This is the area where I am worried I will be shedding a few tears.

    As a very small consolation, I bet the mass redemption of iTunes gift cards will set records here (and yes, be a bit of a drag on the GM).

    On the positive side, once we start getting all the new product announcements rolling, I think we’ll be in for a fine ride this year once we get past this one rough quarter.

         
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    Posted: 13 February 2009 09:56 AM #15

    cranium - 13 February 2009 04:46 AM

    Great posts Turley! I really think it’s important the people understand that GM is a number that does not stand alone and shouldn’t just get plugged into a model independent of it’s relationship to other factors. A huge increase in iTunes sales is obviously a good thing, yet it will pull down GM.

    Another important point you made is clear is how little the impact of current iPhone sales is to earnings. I’m not feeling good about iPhone numbers this quarter, but this fact means I’m not in tears about it. Finally the time comes where I’m not in a tirade about the subscription accounting! Was there any anecdotal evidence of how popular the iPhone gift cards were? Did Gene Munster report anything from his ‘store checks’?

    I must admit I’m very pessimistic on the Mac numbers this quarter. The initial burst from the new Macbooks will be starting to wane, the consumer is gravely wounded (they’ve just got their holiday bills, got their year-end investment statements, and have either witnessed a friend lose their job or are worried about their own), and the desktops are 3 months older than they were last quarter. I approve of Apple maintaining their Mac pricing models, I just think that until the public gets more optimistic on the economy and we see the new desktops, we will be startled by this quarter’s numbers. This is the area where I am worried I will be shedding a few tears.

    As a very small consolation, I bet the mass redemption of iTunes gift cards will set records here (and yes, be a bit of a drag on the GM).

    On the positive side, once we start getting all the new product announcements rolling, I think we’ll be in for a fine ride this year once we get past this one rough quarter.

    Cranium do you care to put a number to your Mac pessimism?

    When I model for units I look at the trend from previous quarter and then take my view of the economy and what I expect Apple to do. 
    Looking at Q2 2008 numbers Apple sold 856K desktops and 1433K laptops.  Last Qtr with the release of the new laptops. Laptops were up 34% and desktops declined 25%  If we use these trends then unit wise laptop 1863K and desktop 642K 2505 total units vs 2289 2008.  What has Apple done since last quarter.  In my mind I am looking at 3 things.  Significant upgrade of the white macbook, release of the 17” macbook pro and I think they will release new consumer desktops end of Feb/early Mar.  As far as the macro economic for computers people are still in the delay purchase mode but if Apple releases compelling new hardware, then I think Apple will maintain a sales growth rate comparable to last qtr.  I am modeling 1720K for laptop and 856K desktop, but my desktop number assumes release of the Imac and Mac Mini and channel fill for the new models.