Apple Earnings: What to Expect (And Who Not to Believe)

Wall Street investors are holding their breath as Apple (AAPL) is set to report earnings after the close of regular trading this afternoon. This particular report will be one of the most crucial in the company's history as Wall Street and her analysts have completely written Apple off as a business that could thrive in a slower economic environment. In order for Apple's shares to recover from its recent 50% plunge in value, Apple will have to demonstrate its resilience in this slowing economy by both reporting strong earnings results and offering some compelling guidance.

In the past, Apple has consistently offered the Street ultra conservative guidance, basically rendering such guidance useless when it comes to how the company will actually perform. Yet, irrational investors on Wall Street continue to be completely preoccupied with Apple's meaningless guidance making it extremely difficult for Apple to rebound until management gets a clue that its conservative nonsense is not working in this particular environment. Apple should either take a page from Google's book and not offer guidance at all, or offer guidance that is more realistic in this skittish environment. Analysts polled by Thomson Financial expect Apple to post earnings of $1.11 in EPS on $8.05 billion in revenue fueled by sales of 2.7 million Macs, 10.5 million iPods and about 4 million iPhones. For Q1 2009, analysts are generally looking for Apple to report $1.66 in EPS on $10.6 billion in revenue.

I am looking for Apple to record approximately $1.25 in EPS on $8.343 billion in revenue. I expect Apple to sell 2.9 million Macs, 11 million iPods and about 7.25 million iPhones. I expect Apple to report that it reached its 10 millionth iPhone sales goal a full three months ahead of schedule. I expect gross margins to drop sequentially to 33.5%, operating expenses to rise to $1.310 billion, and OI&E to rise to $122 million. I expect Apple to post net income of about $1.33 billion after taxes of $474 million.

In terms of the revenue breakdown from Apple's primary operations, I am looking for Apple to produce $4.118 billion in revenue from Mac sales (2.9 million Macs at $1,420.00 ASP), $1.595 billion in iPod revenue (11 million iPods at $145 ASP), and a total of about $2.63 billion derived from its other primary operations (this includes revenue Apple recognizes through its other music related products and services, iPhone and related products & services, peripherals & other hardware, and software, service and other sales). The table below lists my estimates along with two other analysts whose opinions I highly respect.

Forecasted Income Statement (In Millions, except per share data)

Line Item	Apple's Forecast	Andy Zaky, Bullish Cross	Deagol, Stashbox	Turley Muller, Financial Alch.
Revenue	$7,800	$8,343	$8,333	$8,436
Cost of Goods Sold	$5,343	$5,548	$5,541	$5,736
Gross Margin	(31.5%) $2,457	(33.5%) $2,795	(33.5%) $2,792	(32.0%) $2,699
OpEx	$1,270	$1,310	$1,292	$1,270
Operating Income	$1,187	$1,485	$1,500	$1,429
OI&E	$118	$122	$122	$130
Net, before taxes	$1,305	$1,607	$1,622	$1,559
Taxes	(30.5%) $398	(29.5%) $474	(30.0%) $486	(29.0%) $452
Net Income	$907	$1,133	$1,136	$1,107
Earnings Per Share	$1.00	$1.25	$1.25	$1.22
Outstanding Shares	907,000,000	907,000,000	907,000,000	906,000,000

Segment Information & Product Summary (in Millions)

Line Item	Consensus Estimates	Andy Zaky, Bullish Cross	Deagol, Stashbox	Turley Muller, Financial Alch.
Macintosh Sales	2,700	2,900	2,880	2,961
Macintosh Revenue	-	$4,118	$4,072	$4,160
iPod Sales	10,500	11,000	11,000	11,200
iPod Revenue	-	$1,595	$1,540	$1,680
iPhone Sales	4,000	7,250	7,500	6,800
iPhone Rev. Recognized	-	$850	$894	$748
iTunes & Other Music	-	$800	$837	$811
Other Hardware	-	$460	$454	$467
Other Software	-	$520	$538	$559
Total Revenue	$8,050	$8,343	$8,333	$8,436

My Estimates Compared to Wall Street Analysts
The table below compares my estimates with Wall Street analysts. It should be noted that Kathryn Huberty from Morgan Stanley consistently provides earnings estimates which prove to be one of the worst on Wall Street. I fully expect the trend to continue when Apple reports earnings this afternoon.

Analyst	Revenue	EPS	G.M.	iPhones	iPods	Macs
Apple's Guidance	$7.8b	$1.00	31.5%	-	-	-
The Consensus Estimates	$8.05b	$1.11	30.5%	4.0m	10.5m	2.7m
Unpaid Analysts
Andy Zaky, Bullish Cross	$8.343b	$1.25	33.5%	7.25m	11.0m	2.9m
Deagol, Stashbox.org	$8.333b	$1.25	33.5%	7.5m	11.0m	2.880m
Turley Muller, Financial Alchemist	$8.436b	$1.22	32.0%	6.8m	11.2m	2.961m
Wall Street Analysts
Jeff Fidacaro, Merrill Lynch	$7.969b	$1.09	32.7%	3.88m	11.0m	2.7m
Gene Munster, Piper Jaffray	$8.370b	$1.17	32.0%	5.0m	11.0m	2.8m
Richard Gardner, Citigroup	$8.096b	$1.18	-	-	-	-
Ben Reitzes, Barclays	$8.00b	$1.11	32.9%	5.0m		2.761m
Mike Abramsky, RBC	$8.200b	$1.15	-	6.0m	10.8m	2.9m
Kathryn Huberty, Morgan Stanley	$7.865b	$1.05	32.9%	-	-	2.8m
Toni Sacconaghi, Sanford Bernstein	$8.151b	$1.14	32.0%	4.000	10.7m	2.783m

My Past Performance compared to Wall Street Analysts for Q2 2008
The table below compares my past performance with Wall Street analysts. The numbers highlighted in "blue" designate the closest estimate to Apple's actual report whereas the numbers highlighted in "red" designate the estimate which was furthest from Apple's actual report.

Analyst	Revenue	EPS	G.M.	iPhones	iPods	Macs
Apple, Inc.	$7.512b	$1.16	32.9%	1.703m	10.644m	2.289m
Andy Zaky, Bullish Cross	$7.449b	$1.31	36.0%	1.700m	10.5m	2.350m
Gene Munster, Piper Jaffray	$6.900b	$1.19	36.0%	1.6-2.0m	10.5m	2.100m
Shaw Wu, AmTech	$7.000b	$1.10	33.5%	1.5m	10.0m	2.150m
Richard Gardner, Citigroup	$7.000b	$1.23	36.5%	1.5m	9.5m	2.100m
Ben Reitzes, Barclays	$6.950	$1.05	33.2%	1.5m	10.3m	2.090m
Mike Abramsky, RBC	$7.200b	$1.11	34.0%	1.8m	10.5m	2.200m
Kathryn Huberty, Morgan Stanley	$6.634b	$1.10	35.8%	1.0m	8.5m	2.020m
Scott Craig, BofA	$6.900b	$1.07	n/a	1.22m	10.0m	2.021m

Notice how Kathryn Huberty of Morgan Stanley made the worst call in four out of the six major areas of prediction. She actually missed revenue by almost a cool billion ($815 million). How an analyst can miss that badly and continue to have any credibility in his or her coverage of a stock is beyond me. Credibility should be called into question when an analyst misses iPhone sales by 41%, iPods by a whole 2.1 million units and Macs by 269,000 units. I pointed out the obvious flaws in her analysis before and after earnings was released in Q2 2008. I also tried to point out that investors ought to ignore Kathryn Huberty's estimates and her meaningless downgrades of the stock. In September, she downgraded Apple two weeks in a row causing the stock to drop a cumulative 30 points or about 30% between the two downgrades. I still haven't figured out who is less intelligent: Kathryn Huberty or the irrational investors who continue to listen to anything she has to say.

Disclosure: Long Apple. 

Comments

[Michael Shu...:]

Our (ChangeWave) surveys show Apple has reached a mature and increasingly positive place in the market - laptop and iPOD products now sell based on features and price and there is not buyer hesitation due to "newness." Apple is close to reaching this point with iPhones but as it reaches this level of customer maturity it will find more and more customers waiting until their current phone contract expires before buying an iPhone. This is all being said, Apple should beat estimates, especially in laptops.

Apple's guidance is clearly driven by lawyers or a smart CFO - they have no obligation to anyone to change the way they do guidance. Why should they? Companies like Apple should worry about long term financial and stock performance, not making an analysts or trader happy on a given Wednesday in October.

If and when you analyze Apple again, the key data point is money flows into tech or other mutual funds with a history of owning this sector. Apple's guidance will be much better than virtually any other tech company and money will flow out of other stocks into Apple as opposed to totally fresh money entering the market to play Apple. The stock does not have to fight Apple analysts - it has to fight continuing and massive withdrawals from mutual and hedge funds investing in tech.

One thing Apple could so is spread it IR wings and start working consumer spending/retail analysts, something it does not realyl do at this time (or so I have been told).

Bottom line: not a short (my specialty) and not a long based on investor concerns over the market. And we may not be at an appropriate entry point if the average multiple of an S+P stock continues to contract.

2008 Oct 21 10:43 AM

[Andy Zaky:]

To Michael Shulman,

Apple trades at about 4 times its cash position. That's way better than GOOG, MSFT, INTC, CISCO, RIMM, AMZN, HPQ, IBM and other similarly situated tech companies. It will also produce about $3.00 per share in free cash flow per quarter over the next four quarters. That's $12.00 per share over the next year alone. Apple will have about $37.00 per share in cash by the time we hit October 2009 and you want to say that the stock is not valued correctly because of some nonsense P/E method? What if Apple had $200 per share in cash? Do you still think the P/E method would be appropriate? Jesus. People really need to look beyond P/Es man.

2008 Oct 21 10:50 AM

[Andy Zaky:]

To Michael Shulman,

Apple trades at about 4 times its cash position. That's way better than GOOG, MSFT, INTC, CISCO, RIMM, AMZN, HPQ, IBM and other similarly situated tech companies. It will also produce about $3.00 per share in free cash flow per quarter over the next four quarters. That's $12.00 per share over the next year alone. Apple will have about $37.00 per share in cash by the time we hit October 2009 and you want to say that the stock is not valued correctly because of some nonsense P/E method? What if Apple had $200 per share in cash? Do you still think the P/E method would be appropriate? Jesus. People really need to look beyond P/Es man.

2008 Oct 21 10:50 AM

[Offgrid:]

APPL may be up or down in afterhours - what I'm looking at is the collapse of the Credit Market and how this will affect the average consumer from purchasing an expensive laptop or cell phone. I'd say that if it is getting difficult to buy groceries, pay the heating bill, or mortgage, these extras will be eliminated. I'd watch things like ATT subscription rates and decreasing Credit Card profits as a signal that Apple's stock wil continue to fall.

2008 Oct 21 11:07 AM

[Vox Rationalis:]

Jesus!

Why so insecure in what you've written that you need to attack detractors so aggressively?

Read his post carefully. He's a market timer, he doesn't think the market's headed back up in his near-term, and Apple is a high-beta stock. Pretty straightforward. He didn't say ANYTHING about Apple's cash flow; he actually indicated no interest in fundamental analysis whatsoever, except at a macro level.

Seriously - put your stuff out there (pretty ballsy, you are), and let people have at it. For one day, anyway.

2008 Oct 21 11:07 AM

[Neel JOSHI:]

I have a lot of faith in Apple and its management. I am a long term investor and fully believe in it's model. --- However I have a hard time with Analyst such as Kathryn Huberty. This creature has no clue and I am surprised that Morgan Stanley still employs her. Freedom of speech is one thing but she has the smarts of a doorknob. Now I know why why Morgan Stanley is belly up. Instead of looking at Apple or any other company they need to clean house starting with Kathryn Dumb Huberty.

2008 Oct 21 11:22 AM

[joseas:]

Andy I hope you are ok on your prediccions,I have read so many articles related to apple, that when apple releases earnings people not over react
for good or for bad giving this valuable American company the credit that deserves for his continuosly effort to give the world the best creations of desing and high tech gadgets

2008 Oct 21 11:31 AM

[americanstu...:]

great analysis, do you have access to information that these analysts do not? why do you suspect there are such wide discrepancies? is anyone considering the idea that Apple might announce a dividend today or sometime in the near future? With tons of cash, several stable product lines, and a shaky macroeconomic climate ahead, I think it would make sense if they start paying out that cash to shareholders. The opportunity cost of not re-investing the dividend cash into the company is shrinking because they're nearing market saturation in their product lines and unless their pipeline has another revolutionary product coming out (that can drum-up support in a shaky economy), I think the cash is better off being given to investors.

2008 Oct 21 11:49 AM

[Doug, Mtn. ...:]

Oh for God's sake, User283143, you're embarrassing yourself with your poor grammar and incomprehensible language constructs. It took me about ten seconds to figure out that "creations of desing" was supposed to be "creative design," for instance. No one knows what you're trying to say, so put a sock in it. I'd recommend a class in bonehead English at a community college near you.

2008 Oct 21 11:49 AM

[Murphy Mac:]

My position is simple: I believe in the products and management. Guidance is a game. My aapl investment should pay many times over within a few years. In fact, my early accumulations at 15, 30 and 60 already have. Today will be interesting, but history shows patience is rewarded.
Traders? I'd rather be playing blackjack in Vegas.

2008 Oct 21 12:04 PM

[iNeal:]

I agree with Mr. Shulman. Apple is a lawsuit magnet and the class-action vultures would have a field day if they missed guidance. We need more investors who think long-term, as does Apple. Everything has been about keeping the day-traders happy––look where that got us.

2008 Oct 21 12:07 PM

[No saturation:]

jtreble:

How is 17% of smart phones and 9% US PC market reaching saturation? Of course Apple will also come out with revolutionary new products.. that's what they do.

A divendend may be a good way to help the investor but wouldn't it make sense to hang on to pleny of cash when it is so tough to get credit? What happens if they pay out all the cash in dividents and don't have $ to buy up smaller companies as opportunities present themselves. Maybe RIMM stock will go to $30 and Apple could buy them and shut them down-taking over that entire market share. Crazy idea for a crazy commenter about saturation.

Always remember saturation is based on the idea that new customers don't come into existence daily which unless the human population slows is not going to be a problem for a long long time.

2008 Oct 21 12:24 PM

[Evan Grey Owl:]

I believe that as the economy retracts and people may not be rushing to buy houses yet, and as many have experienced big losses in assets, and increasingly, jobs, a mental transformation comes about. In-between jobs is a good time to invest in oneself. Online training and courses are a large and growing industry. Ease of use of Macs gives them an edge here, as they already have in many University communities. Also, those who have to postpone big dreams because of the economy are prone to console themselves with more affordable items that help them to feel contemporary and that have an anti-depressant effect. I would predict an increase in trendy mobile phone sales, furniture and inexpensive home decorating.

As to Apple earnings and guidance, the analysts need to recognize the market environment we are in now, and stop inflating their estimates before a report. They are the ones - not the companies - that keep setting investor shareholders up for a fall. If they believe the company is worthy of investor risk, the best thing they can do is let the company's own figures guide investors, and don't jack them up before earnings. It is a fraud that long-term investors pay for heavily.

2008 Oct 21 12:40 PM

[iNeal:]

Just for fun, I looked up the sales figures for BMW, whom I consider to be the "Apple" of car companies. January-June, 2008 was their best half-year in company history, and the "recession" was already here. There is a large segment of our population which can always find the money to buy a true work of art.

2008 Oct 21 12:41 PM

[Brian in Mo...:]

"I also tried to point out that investors ought to ignore Kathryn Huberty's estimates and her meaningless downgrades of the stock. In September, she downgraded Apple two weeks in a row causing the stock to drop a cumulative 30 points or about 30% between the two downgrades. I still haven't figured out who is less intelligent: Kathryn Huberty or the irrational investors who continue to listen to anything she has to say."
I guess I'm more of a niave CDN, than somebody with 6 years of self-taught fundemental analysis, but it looks like those irrational investors have saved some old school coin.
Not long or Short, yet....I'm with Shulman on this one...I'll go old school and wait for more details, thanks.

2008 Oct 21 12:42 PM

[rinky:]

Always puzzling and disappointing to me that Apple consistently offered the street ultra conservative guidance after posting phenomenal earnings every quarter!!! It's like squirting lemon on a luscious Macintosh apple!!!

I agree! At least let the stockholders celebrate that moment of another successful quarter earnings without doom and gloom thrown in at the same breath with depressing "guidance".

2008 Oct 21 12:55 PM

[Brian in Mo...:]

PS last month I went even more Old School and bought Puts since I was long at that time, that worked out. If you are long there's nothing wrong with a little protection sometimes, especially on a big positions.
This time I actually was considering sell covered calls, the call prices are mouthwatering with the VIX so high. Yes you lockin your potential gain if the stock heads north, but it's a pretty good gain over 3 weeks, and cushions any fall a long-term investor may take.

2008 Oct 21 12:55 PM

[Evan Grey Owl:]

Apple believes in the Old School idea: "Never promise more than you can deliver."

Brian in Montreal: I am a newer investor and got caught off guard by the drastic fall in the market -- made worse by the "Bailout" vote debacle, political infighting, and the major media effort to drive us all off a cliff edge. My hat is off to those who knew how to use options to advantage during this time. Have you any recommendations of books or courses to learn about options? [e-mail]

2008 Oct 21 01:13 PM

[apple maven:]

FYI Rinky: In food preparation, peeled apple parts are usually tossed in lemon juice to retain color.

2008 Oct 21 02:08 PM

[KenC:]

Let me point out that Changewave's last survey had a chilling effect on Apple's stockprice, AND, if you look at their charts that they used to justify their call, just stare at the x-axis. The incremental dates they take their survey are not the same. Sometimes there's a 3 month interval, and sometimes it's a one month interval. What that does is confuse the trends they are supposedly highlighting. People naturally see the x-axis and think the intervals are the same, either quarterly or monthly and they're not. It's a total mishmash, and makes interpretation, much much harder, if not impossible.

I'd say that it's almost stupid how they present the information, so I'd take anything that the Changewave guy said with a HUGE grain of salt. He has an angle and he will promote it. Didn't he say he's a "short" specialist?

Here's the article on SA where Paul Carton, Mr.Shulman's colleague showed off his nonsensical charts. Just stare at the x-axis and tell me that the data is valid for trendspotting?!?

seekingalpha.com/artic...

2008 Oct 21 10:34 PM

[winindthedust:]

Spot on.

Apple will have another record quarter. They made a mistake with their guidance, and should not give it at all. Hopefully, the "street" which consists of ignoramus buffoons, finally looks at the company's actual performance instead of the meaningless guidance.

Why will Apple have a record quarter despite the economic slowdown?

1) The election will be over; the wag the dog media will reverse it's negative sky is falling course.
2) The election will be over; people will feel better with all this behind them- positive consumer sentiment will rebound.
3) Holiday seasons always mean more to people during hard times. Purchases will be limited to those that have real value and appeal- Apple's iconic brand is in an excellent position.
4) Fuel prices are way down, and will continue down: this will justify more consumer spending in the holiday quarter. Home heating oil is down, people have been saving for this winter, they will now feel more positive about the future, and spend for the holidays.
5) The dollar is strengthening. This will translate into more purchasing power from both Apple and consumers.
6) Apple has the best products on Earth, and EVERYONE knows it. Even die hard Windows enthusiasts know it... the advertising has worked, the stores have worked, M$ has bombed, Dell is selling factories and laying off, while Apple is innovating and hiring....
7) 25 BILLION in the bank to invest in R&D, while others shrink back, Apple has the money to garner the best component pricing, and leverage sick tech at the best prices. If Apple were a bank, it's stock would be sky high based on this alone.
8) Apple's management is brilliant. Economic downturns are always a business opportunity for tremendous growth & expansion. This will leave competitors in the dust.
9) Apple finally spelled out the REAL numbers by converting it's subscription accounting for the idiot "street"- these numbers are nearly DOUBLE the consensus, and are truly "stunning" as Steve said. Any analyst that ignores these REAL numbers and promotes negative bias based on a guidance that never meant anything, anyway, will go down in flames in their credibility.
10) Stock prices are not a real indication of company performance, and do not prevent real people from making real purchases. Apple is on the top of consumers list of things to buy.

There are many other positives for Apple; bottom line, this all translates into the perfect storm for Apple to dominate in all that they touch.

2008 Oct 22 10:15 AM