July 24, 2007 4:00 AM PDT

Apple investors await iPhone numbers

All the products that Apple sold for 90 days last quarter won't get nearly the attention Wednesday as the one that was on sale for two days.

It's earnings time again for Apple. For the past several quarters, company shareholders have enjoyed a pleasant afternoon and it's not expected to be any different this time around on Wednesday afternoon after the close of the stock market. Wall Street analysts are predicting a 21 percent rise in revenue to $5.3 billion and a 34 percent increase in profits to 72 cents a share for Apple's third quarter.

Mac sales grew faster than the industry average in the second quarter, which is usually a slow quarter for everyone in the PC industry. But all eyes will be on what the company has to say about the iPhone, which went on sale during the last two days of the quarter, June 29 and 30.

"The quarter, it's a total sleeper. But the iPhone makes it one of the most anticipated quarters from Apple," said Gene Munster, an analyst with Piper Jaffray.

Analysts are waiting for Apple to disclose iPhone data for those two days even though few expect those numbers to make a meaningful difference to the company's overall performance. Still, official word from Apple would help narrow the speculation over the initial weekend's iPhone haul, which has been put at anywhere from 200,000 units to 700,000 units.

Apple will break out iPhone units and revenue in its earnings report, said Shaw Wu, an analyst with American Technology Research. Don't expect the actual revenue reported to match up with the unit sales, he cautioned.

The company has already said that it doesn't plan to recognize all the revenue from the sale of an iPhone at the time it was sold. Instead, it will spread out the revenue gained from an iPhone over 24 months.

This subscription-based accounting method allows Apple to roll out upgrades and fixes over time without having to charge customers an additional fee. This prevents a repeat of the Wi-Fi fee controversy: since Apple recognized all the revenue from sales of MacBooks and MacBook Pros with hidden 802.11n chips at the time they were sold, it had to charge users a $1.99 fee to unlock that performance, to establish a value for the upgrade under accounting rules.

But as a result, iPhone revenue won't line up exactly with unit sales during a given quarter. The revenue category will also include revenue from iPhone accessories and a revenue-sharing plan with AT&T that Munster believes could add as much as $11 per month for each iPhone sold to Apple's revenue.

"The quarter, it's a total sleeper. But the iPhone makes it one of the most anticipated quarters from Apple."
--Gene Munster, analyst, Piper Jaffray

The exact details of the arrangement between Apple and AT&T have not been disclosed, but Piper's Munster thinks it's a key part of Apple's future iPhone business.

"That sums up what's different about the iPhone, this is a revenue share that's pretty unique. They are really changing the rules of the game, and how much is of big interest for long-term (investors)," Munster said.

The iPhone sales game is really more about charting growth for the second half of Apple's year and beyond, once iPhone hype starts to recede, supply starts to firm up and new models are introduced. The two segments that pay the bills at Apple--Macs and iPods--are still of interest to Apple shareholders.

The iPod delivers the most revenue for Apple of any of those segments. American Technology's Wu is projecting Apple will have sold 9.7 million iPods during the quarter. That's fewer than Apple sold in the first, but the same seasonal trends that affect the PC market are at play with iPods as well, he said. That shipment total would be a 20 percent increase compared with last year.

On the Mac side of the house, the introduction of new MacBooks and MacBook Pros is expected to have helped boost shipments. IDC reported that Mac shipments increased faster than the overall market, and Wu said that he's expecting the most interesting data to come out of the Mac division's numbers.

But, it still comes back to the iPhone, as nearly everything Apple related has for the past few months. Apple's stock has risen about $30, or 50 percent, since its last earnings call. It closed at $143.70 Monday.

The iPhone mania has had much to do with that meteoric rise, which means that early iPhone shipment numbers will be as closely followed as Apple's other metrics, such as iPod and Mac sales. Apple itself has said nothing about expected iPhone sales for the two days it was on sale during its third quarter, only offering projections for 2008.

And the company's projections for the third quarter are less ambitious than the Wall Street figures. When it reported earnings in April, Apple said it would record $5.1 billion in revenue and earnings per share of 66 cents. But that seems to be standard practice at Apple: to provide conservative guidance. And that seems to be what analysts are expecting the company to do again in projecting the second half of the calendar year.

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17 comments

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Only $11?
An extra $11 per iPhone as part of the revenue-sharing plan
with AT&T? Surely that would be $11 per month?

There was a rumor put around by a few blogs before the iPhone
was released that claimed an extra variation would be sold: an
unlocked iPhone for $999.

The extra $400 cost was meant to compensate Apple for the
loss of this revenue sharing from the 2 year contract. The $999
product would have been intended for buyers who wanted to
avoid contracts, international buyers, or buyers preferring to
choose their own carrier (eg, T-Mobile).

(It wouldn't have hurt AT&T because most people would buy the
phone with the contract to get it cheaper, and the other people
wouldn't be able to make use of AT&T service anyway.)

I think this have been a great idea. A great shame Apple didn't
think so.
Posted by dotmike (154 comments )
Reply Link Flag
Its $11 per month
!
Posted by Flytrap (82 comments )
Link Flag
Apple better not do it with attachments.
I demand Apple enable the use of attachments!
Apple also better not charge us to enable the use of attachments.
Posted by inachu (963 comments )
Reply Link Flag
Apple Sold 146,000 iPhone in the last 2 days of the quarter
this is from the ATT numbers, where they claim they activated
146,000 iPhone subscribers in the last two days of the quarter.
From
WSJ....

so safe to say apple sold a bit more.... as some were not
activated, but torn apart.. :)
Posted by mobiman (9 comments )
Reply Link Flag
146,000 iPhones in the last 30 hours of the quarter
The iPhones went on sale at 6PM on the 29th. So 30 Hours later the quarter was over.

Despite the activation problems (remember that ruckus?), it sounds like they still managed to activate 146,000 phones in 30 hours. That's an average of about 81 phones per minute.

Let's say over the next five days they were activated at 1/2 that rate. That's about another 300,000 phones. So the total could be approaching a half million phones over the first week.

Are my assumptions reasonable? Nobody knows yet. Either way, this "sky is falling" AAPL sell-off seems a bit extreme.

I wouldn't be surprised if Apple announces that a million iPhones were sold (but maybe not activated) so far, then the stock jumps back up.

Guess we'll see.
Posted by open-mind (1027 comments )
Link Flag
I have Tivo, XM and still couldn't avoid iPhone
commericials. What crap that was! Apple some how paid off, or scammed the news agencies everywhere to showcase their damn phone. In the end I couldn't careless about iPhone.
Posted by bobby_brady (765 comments )
Reply Link Flag
I'm curious why AT&T isn't promoting the phone
Apple commercials for the iPhone are expected. I'm kind of surprised that AT&T only begrudgingly acknowledges that they sell the unit at their stores. You won't find them promoting it in any advertising, and instead are pushing their other phone model lineups.

I'm sure there is some sort of contractual obligation going on there.
Posted by Vegaman_Dan (6683 comments )
Link Flag
Bloomberg: Apple Shares Fall on Signs IPhone May Disappoint
July 24 (Bloomberg) -- Apple Inc. shares fell as much as 5 percent on signs that demand for the new iPhone may fail to meet investors' expectations.

Activations from AT&T Inc., the exclusive carrier for the iPhone, are a ``disappointment,'' Piper Jaffray & Co. analyst Gene Munster said today.

****

CIBC World Markets said demand for the iPhone has had a ``significant decline'' in the past 10 days and that Apple and AT&T may try to boost demand by increasing their marketing efforts. Apple introduced the iPhone, its first mobile device, in the U.S. on June 29.

``We have noticed decent inventories at stores, and thin demand at best,'' analyst Ittai Kidron wrote in a note. ``Among the stores we visited, most visitors were not looking at the device, and only a very small subset bought it.''
Posted by john55440 (1020 comments )
Reply Link Flag
Apple expects to exceed expectations
The markets are clearly awaiting the results eagerly, and with more uncertainty than usual.
The iPhone introduction has definitely injected an additional variable into the equation.
For more analysis click here:
<a class="jive-link-external" href="http://sneakybusiness.typepad.com/sneaky/2007/07/apple-earnings-.html" target="_newWindow">http://sneakybusiness.typepad.com/sneaky/2007/07/apple-earnings-.html</a>
Posted by DayNovo (6 comments )
Reply Link Flag
Subscription Accounting
I don't get it. Why would Apple have to charge for a software upgrades/firmware fixes if it didn't do subscription accounting? Microsoft (or rather device manufacturers and carriers) pushed out MSFP for Windows Mobile adding direct push and other stuff without charging a fee. Why would Apple have to charge a fee if it recognized revenue all at once?

I know what happened with their 802.11n issue, but that was substantially changing the product into a new product class. I can't see adding iChat and MMS features, which just about every cell phone has, is substantially upgrading the product.
Posted by raulmot (72 comments )
Reply Link Flag
Soon you will all be able to toss your iphone to next river
Soon Google is coming with Google Cell Phone, wich will have all google services such as gmail, google maps, search etc.

I think the right thing to do right now is buy a relevant domain names like those sell on ebay:

<a class="jive-link-external" href="http://cgi.ebay.com/Google-Cellular-Google-Cell-Phone-com-8-domain-names_W0QQitemZ120144690732QQihZ002QQcategoryZ11153QQssPageNameZWDVWQQrdZ1QQcmdZViewItem" target="_newWindow">http://cgi.ebay.com/Google-Cellular-Google-Cell-Phone-com-8-domain-names_W0QQitemZ120144690732QQihZ002QQcategoryZ11153QQssPageNameZWDVWQQrdZ1QQcmdZViewItem</a>
Posted by erezhustla (14 comments )
Reply Link Flag
IPhone and AT&T
I have not yet purchased an iPhone. Even with all of its features it is still a little pricey for me.

But, I can understand why AT&#38;T hasn't seen the sign ups they expected; I'm guessing that many buyers still want all of the other cool features. But as long as Apple sticks with just AT&#38;T then I guess I'll never buy one. Over the past 30+ years I have had nothing but trouble with AT&#38;T and all of the versions of them (the Bells). As long as I can't use Verizon, I'll do without the iPhone.

Pity, I've looked at one and it looks cool.

Pete F
Posted by Pete F (1 comment )
Reply Link Flag
And when the 3G versions come out?
If the new phones coming out this November are running on a faster network as AT&#38;T has mentioned, where does that leave the 146,000 existing iPhone users? The won't be able to turn their phones in- they'll have to buy new at full price.

I think people may be waiting to see what Apple plans on releasing this fall instead. That's just my opinion though.
Posted by Vegaman_Dan (6683 comments )
Reply Link Flag
 

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