Although there are more signs lately that the worst of the recession is over, Apple is one of the few companies that has seen little of the effects of the recession to begin with.
We'll find out if the company's good health has remained during the quarterly checkup Monday afternoon. According to Wall Street, it's been another good three months for the Cupertino, Calif.-based company. Apple's stock price jumped 43 points during the quarter to close at $185.35. Because of a string of impressive earnings announcements dating back a year ago, the launch of the company's latest operating system update, signs it gained share in the smartphone and computer markets, and a helpful accounting rule change, financial analysts are expecting good things from the company's fiscal year fourth-quarter earnings.
Did price cuts on the MacBook improve Mac sales for the quarter?
(Credit: Dan Ackerman/CNET)Analysts are expecting Apple to record earnings per share somewhere between $1.24 and $1.72, and revenue between $8.74 billion and $10.55 billion for the quarter ending September 30. Apple is known to provide consistently conservative guidance for future quarters, hence the wide gap in analyst estimates.
But a good way to know what's to come can usually be seen in the unit sales reports. Last week IDC reported that Apple had amassed a 9.4 percent share of the U.S. PC market--a jump from the 8.6 percent of the previous quarter. Near the end of the previous quarter Apple offered some price cuts on most of its Mac models. The sales numbers for the quarter, whatever they end up being, will be regarded as a commentary on whether those price cuts went far enough.
Apple watcher Gene Munster over at Piper Jaffray says he's had a peek at Mac unit sales for the quarter, and he says the company is on target to report sales of 2.8 million Macs. That would be an increase over the previous quarter's sales of 2.6 million, and it makes sense: The third quarter is a traditional time for people to buy computers ahead of the back-to-school season, and Apple also released its long-awaited operating system update, Mac OS X 10.6, or Snow Leopard.
On the smartphone side of the business, if Apple does once again report good numbers, it'll be one of the few in that industry. Despite constant attempts by rival handset makers to produce the "iPhone killer," Apple's main competitors in the smartphone world have struggled during the most recent quarter--Nokia, Palm, and Research In Motion each posting disappointing results.
Piper Jaffray is estimating that Apple sold 7.5 million iPhones. Munster said inventory checks showed that demand for the iPhone 3GS is "outstripping supply," which means that iPhone sales for the next several quarters should be fairly steady. We should also get an update on the number of countries and carriers that have the latest iPhone model. Apple had said in July that it was supposed to be in 80 countries by the end of the summer.
The iPod is the only real question mark when it comes to Apple's main revenue-generating products. The quarter ending in June was the first in which iPod sales saw a year-over-year drop. Apple acknowledged it last quarter, saying that it expected eventual declines in iPod sales, and that it was the reason it developed the iPod Touch. Chief Financial Officer Peter Oppenheimer actually broke out the individual sales numbers for each iPod model and cautioned that the company expected "to cannibalize ourselves with iPod Touch and iPhone."
A slew of new iPods--including the new camera-equipped Nano--were introduced near the end of the quarter, so the full effect of those new models probably won't be visible until the following quarter.
(Credit:
James Martin/CNET)
The biggest change during the quarter however had nothing to do with anything that had a keyboard or a touch screen. Apple was one of several companies to lobby (successfully) for an accounting rule change that, if applied to the most recent quarter, will likely show much higher revenue for the iPhone.
The practice--in which Apple has been recognizing revenue for the iPhone and Apple TV over a two-year period--was put in place to avoid charging a fee for every product upgrade. It was something Apple was told it would need to satisfy accounting regulations that require companies to establish a value for product upgrades. The new rule won't change the amount of revenue coming into the company's coffers, but it will provide a more accurate picture of how much money the iPhone in particular is bringing in every quarter.
Check back Monday afternoon. Apple's results will be posted shortly after 1 p.m. Pacific.
After a preliminary agreement last week the Financial Accounting Standards Board made it official Wednesday, accepting proposed changes to how companies recognize revenue.
With a change in accounting rules, we'll soon have a more accurate picture of the iPhone's success.
(Credit: James Martin/CNET)The change will be of particular interest to companies like Apple, which has stuck to a rather bewildering accounting practice of recognizing revenue from sales of the iPhone and Apple TV over a period of two years, or eight financial quarters. The practice was put in place on those two products to avoid charging a fee for every product upgrade--something Apple was told it would need to satisfy accounting regulations that require companies to establish a value for product upgrades.
The new rule won't change the amount of revenue coming into corporate coffers, but it will allow investors to have a more accurate picture of how much money companies are making every quarter. Apple is a company that many point to as benefiting from this rule change because of the enormous popularity of the iPhone.
New accounting rules could see boost Apple's reported iPhone revenue.
(Credit: James Martin/CNET)Though not yet a done deal, a tentative change in accounting rules could have a dramatic effect on the earnings reports of tech companies, and in particular, Apple.
Apple stands to gain a lot from a new draft of rules that governs how companies recognize revenue from subscriptions, as Fortune noted. Though it still needs final approval from the Financial Accounting Standards Board, the change could mean that Apple will stop recognizing revenue for its highly successful iPhone over a two-year period, the length of a standard wireless contract, and instead recognize it as soon as a phone is sold.
As Apple showed for the first time in October last year, as successful as the company had been with sales of the iPhone, the current accounting practice was obscuring the true wealth the device is actually generating for the company. For the most recent quarter, adherence to GAAP (generally accepted accounting principles) meant that Apple reported $8.34 billion in iPhone and Apple TV revenue (assume the iPhone is a large chunk of that number). In reality the company recorded $9.74 billion in revenue.
Now, flash-forward to today, after a summer in which we saw the most successful iPhone launch of the three since 2007, and it's clear that if the revenue from each device were accounted for all at once, the company's overall earnings would be much higher. And, as Apple Vice President and Controller Betsy Rafael wrote while lobbying for the rule change, the company's stock price would likely see significant gains if investors were able to see how much money the company was actually bringing in every quarter.
In a letter to the FASB last month, Rafael wrote that the current practice "often results in accounting that does not reflect the underlying economics of transactions and can result in financial reporting that lacks the transparency necessary to fully inform users making investment decisions."
The reason Apple recognizes revenue from the iPhone over a two-year period stems from an uproar surrounding an upgrade to the MacBook Pro more than two years ago. Apple had secretly sold those laptops with an 802.11n chip but didn't activate it right away. Because the famously secretive Apple kept the existence of a new 802.11n chip under wraps, and because it recognized all of the revenue from the sale of those notebooks at the time they were sold, accounting experts said Apple had to charge a fee to satisfy accounting regulations that require companies to establish a value for product upgrades.
Apple only applies this practice to the iPhone and Apple TV, but not Macs or iPods, and it's the reason why iPod Touch owners have to pay a fee to upgrade to each new iPhone OS software update, whereas iPhone owners do not.
If the rule were to be approved by the FASB--the next meeting isn't until mid-November--it would mean a far less bewildering method of accounting for all tech companies that adhere to it, but especially Apple and investors who follow the company. And it also means we should be prepared for a bigger than usual jump in results whenever Apple does institute the practice.
Correction, 11:06 a.m. PST: This story initially misstated the day the report was released. It was Friday.
Update at 10:31 a.m. PST, with more information from the analyst report and a chart.
A J.P. Morgan analyst cut his financial estimates for Apple's fiscal second quarter and fiscal 2009 on Friday, pointing to expectations that its iPhone and Mac sales may be weaker than previously anticipated.
Apple fell as low as 7.3 percent in early morning trading Friday to $82.33 a share.
"We are lowering our estimates for the March quarter and beyond," Mark Moskowitz, a J.P. Morgan analyst, said in his research note. "The deepening global downturn is a driver."
Moskowitz lowered his quarterly earnings estimates to $1.01 a share from his previous estimates of $1.02 a share. And he dropped his quarterly revenue estimates to $7.62 billion from $7.72 billion.
And for fiscal 2009, Moskowitz cut his earnings estimates to $4.73 a share from $4.82 a share, and dropped his revenue projections to $32.98 billion from $33.97 billion.
In light of the weakening economy, Moskowitz also cut his estimates for Mac unit shipments to 2.19 million in the fiscal second quarter, down from his previous estimates of 2.39 million.
iPhone unit shipment estimates were also lowered to 3.4 million in the fiscal second quarter from Moskowitz's previous projections of 3.8 million.
"While a lot remains to the March quarter, inputs from our primary research contacts suggest that Mac and iPhone volumes had been trending below our prior expectations," Moskowitz noted in his research note.
Here's a look at Moskowitz's revised estimates for Apple's revenue, unit shipments per category, profit margins and earnings for the fiscal second quarter and fiscal year 2009:
(Credit:
J.P. Morgan Securities)
In further elaborating on Apple's product line, Moskowitz notes in his report:
We acknowledge that there could be a channel fill benefit over the next 30-45 days related to the Mac refresh. While this is still a potential, we do not expect any fill period to fully counter the bigger issue of weakening PC demand in general. Apple's desktop line had been the last to be updated, so we think the company could partially offset the weakening demand environment for desktop PCs with potential buzz around new features and price points.
Looking ahead, we expect investors to key in on the iPhone new product funnel. with the Mac refresh out of the way and summer approaching, it is our view that investors expect a June launch of the next iPhone. We expect Apple to follow the iPod expansionary course with the iPhone over time. In other words, refresh the original form factor in the first two years or so and then introduce newer form factors. While only conjecture on our part, we expect the next iPhone addition to be a smartphone but one with a smaller footprint. We do not expect too much fluctuation in the feature set or pricing, though.
The analyst also cut his price target on Apple's stock, predicting it will hit $100 a share by the December period, versus his earlier prediction of $102 a share.
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