Apple's report card less important than crystal ball
Will the strong Mac growth outlined by Apple COO Tim Cook continue amid times of economic turmoil?
(Credit: James Martin/CNET News)Apple's fourth quarter should have survived the economic chaos currently rounding the globe, but what Wall Street will care about Tuesday afternoon is its outlook on the future.
Despite a few more product glitches than usual, it's been business as usual at Apple during the past three months: strong Mac growth and steady iPod sales, with the added bonus of soaring iPhone sales this time around. But the company finds itself in a much different economic environment than last time Apple held an earnings conference call in July.
Will consumers who just watched the value of their retirement savings plunge by 30 percent or more still want to load up on high-end consumer electronics equipment this holiday season? Analysts seem to believe the company's hot streak is likely to continue so long as Apple products remain in the good graces of the public, but no company is immune from the effects of a prolonged recession.
Wall Street analysts expect Apple to have recorded $8 billion in revenue and earnings per share of $1.11 for its fourth fiscal quarter, which would represent increases of 29 percent and 10 percent, respectively. As we did last quarter, let's take a look at Apple's three main businesses and their performance during the July to September quarter, then examine what might lie in store for Apple as 2008 comes to a close.
Apples for the students
The fourth quarter of Apple's fiscal calendar is almost always one of its strongest for Mac sales, as it takes advantage of the back-to-school shopping season. The Mac brand is extremely strong among the collegiate set, as Apple COO Tim Cook outlined last week at the company's notebook event.
Even without the new MacBook and MacBook Pros, Apple enjoyed an excellent quarter for Mac sales, according to recent market share results. Piper Jaffray's Gene Munster thinks a repeat of the free-iPod-for-students promotion of past years probably helped, and he expects Apple to have sold 2.8 million Macs during the quarter, as compared with Wall Street expectations of 2.5 million units. Last year during this period, Apple sold 2.1 million Macs.
The unibody chassis developed for Apple's new MacBooks could ding its margins.
(Credit: James Martin/CNET News)None of the new notebooks will contribute to Apple's fourth quarter, which ended a few weeks earlier. But the decision to adopt the unibody chassis on all new MacBooks and MacBook Pros could prove to be a more expensive proposition at first, until the process becomes old hat. The research and development costs to get that production process up and running took place in the past quarter, which might have dinged Apple's margins by the point or two that CFO Peter Oppenheimer warned was coming last July.
No static at all
Well, given the reception problems experienced by many iPhone 3G owners, perhaps that's not the best title for this section. But despite the bugs that required an all-hands-on-deck approach to the 2.1 software update, iPhone sales took off during the past quarter, with analysts expecting Apple to have sold as many as 5 million units.
The lower acquisition price of the new iPhone as well as the global reach appear to have Apple well on its way to hitting its 10 million shipment goal for 2008. In fact, some bloggers believe the company has already reached that milestone. Whatever the number, it's clear the iPhone is becoming a huge part of Apple's fortunes more than a year after it was introduced, and while rivals like Research In Motion are preparing an offensive for later this year, the iPhone is now well-established in the market.
The song remains the same
The "funnest ever" iPods were probably unveiled too late in the quarter to make much of a difference to Apple's iPod sales during the quarter, although the tag line made copy editors around the world cringe in horror. Expect mostly the same iPod story as the last several quarters have shown: modest unit growth, modest revenue growth, as iPod saturation mixes with a switch from lower-priced iPods to higher-priced units like the iPod Touch.
In a future age
In July, Apple itself said it expected revenue of $7.8 billion and earnings per share of $1, but like death and taxes, an underpromise-overdeliver approach to guidance from Apple is a given. The worst effects of the stock market crash came in the last few weeks of Apple's quarter, so the economic environment is unlikely to have too big an impact on the current quarter, especially given the health of the Mac and the iPhone during the period.
Analysts are likely to pepper Oppenheimer--with little success--regarding his expectations for the current quarter. Apple's guidance will be a key driver behind those questions; everyone knows the company's guidance will likely come in below the $10.6 billion in revenue and $1.66 in earnings per share that analysts are expecting for the company's first fiscal quarter, because Apple has done that almost every quarter for the past several years.
But how far below those expectations is Oppenheimer willing to go? That number will either be spun as an indication that Apple thinks it can weather the storm better than the Web 2.0 crowd--which is probably a given anyway--or that Apple is in trouble as consumers keep the wallets wedged in their pockets.
As I said earlier, no company that depends on consumer spending is immune to the effects of a prolonged recession. Some will do better than others, however, and Apple appears to be in better shape than some of its competitors.
Business spending on IT is quick to plunge during a recession, and Apple depends on that sector for very little of its revenue. The Mac and the iPhone are perhaps the two most profitable segments of the company's business and both are growing faster than the market itself as they take market share from the competition. Apple has the headroom to sustain its recent growth for at least a quarter or two even if the economy slows, because it's still drawing from a huge pile of potential switchers for growth.
That is, of course, assuming the economy doesn't get even worse.
Tom Krazit writes about the ever-expanding world of Internet search, including Google, Yahoo, online advertising, and portals, as well as the evolution of mobile computing. He has written about traditional PC companies, chip manufacturers, and mobile computers, spending the last three years covering Apple. E-mail Tom. 
People at cnet must be smoking something good. RIVALS? There is simply no other phone like the iphone. Ther are no rivals. There are other options, but no rivals.
said the blind apple fan boy
Another Apple zombie spews out his mindless crap.
For your information, Noika sells over 500 million cell phones every single year, and makes huge profits selling them, and has 40% of the cell phone market on the entire planet. How many cell phones does Apple sell?
Sorry to burst your bubble, but Job's precious phone is not unique. It hasn't added any features to the traditional smart phone, just given it a new interface so the idiots among us can use it. I've had every feature the iPhone (or should I say JobsPhone?) offers since 2005 and then some. Don't even get me started on their treatment of software developers. Adding a multitouch screen and slapping an Apple logo doesn't make the phone revolutionary, just overpriced.
You arrogant ignoramus.
You just made his case for him. You don't have to be geeky to use it. That's a MUCH bigger market.
Funny you should say that considering the only people i really see with macs are Under 20 and in college.. or in a school where they got em' for free.
How many have been sold
When combined with the synergy that Steve Jobs is able to generate for Apple products, there is really no measure of dubiousness, as to why Apple can progress mostly unscathed. Creating the concept of an "iLife" was really a remarkable marketing ploy, that has done a lot for Apple's social image. I can't walk around my campus without seeing every other person listening to some sort of iPod. At least 2 out of five people who bring laptops to class on my University campus, happen to have a Mac.
BTW i work for Apple doing iphone tech support, so don't say i don't have experience with them
BTW i work for Apple doing iphone tech support, surely you jest...
Anyway it doesn't matter if you don't buy a Mac, the fact that thousands do matter.
- by solitare_pax October 21, 2008 3:17 AM PDT
- It doesn't matter if you are selling computers or chain saws - the economy is going to hit everyone's spending habits, and it will get worse before it gets better.
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(21 Comments)I suspect Apple will benefit from iPod users wanting to consolidate their celphone and ipod gadgets into one (even though other phones offer music storage capacity) and from switchers looking for more bang for their buck after dumping yet another bargain-basement PC box.