Apple Takes a Bite of Research In Motion

Apple (AAPL), which recently topped my list of the Top Five Handset Stocks, reported fourth quarter results on Wednesday that beat profit estimates but missed revenue estimates. Despite the tough market, Apple sold 6.9 million iPhones in the quarter and beat its sales target of 10 million iPhones in calendar year 2008.

Another significant milestone that Steve Jobs highlighted in the earnings call was that Apple outsold Research In Motion (RIMM), which had sales of 6.1 million BlackBerry devices in its recent quarter. Apple shares soared about 12% in after-hours trading on Wednesday.

Revenue in the fourth quarter grew 27% to $7.9 billion versus analyst estimates of $8.05 billion and the company’s own guidance last year of $7.8 billion. Net income grew 26% to $1.14 billion or $1.26 per share. Analysts estimated earnings of $1.11 per share.

During the quarter, it generated $3.7 billion in cash, ending with a $24.5 billion reserve. Gross margin improved from 33.6% last year to 34.7% mainly due to better component pricing. In our last earnings coverage, we observed that despite the price cuts, the new 3G iPhone still manages a respectable gross margin of about 60%.

Apple’s Mac shipments increased 21% to 2,611,000 and Mac revenue grew 17%. Last week, the company introduced its new MacBook and MacBook Pro line, for which some consumers delayed purchasing Macs. Revenue from iPods grew 3% and shipments grew 8%.

Apple sold 6.89 million 3G iPhones in the quarter versus 1.12 million last year and 6.1 million first generation iPhones. It is currently selling the iPhone in about 51 countries; by December, the phone should be available in about 70 countries.

Recognized revenue from sales of the iPhone, its accessories, and carrier payments was $806 million, up from $118 million last year. As per the new subscription accounting system, iPhone revenue is distributed over two years, but it allows Apple to provide free software updates. Deferred revenue from iPhone and Apple TV sales grew to $5.8 billion, up $3.8 billion since the last quarter. That makes iPhone revenue about $4.6 billion, or 39% of total revenue had it not been deferred. This makes it the third-largest mobile phone vendor by revenue.

As for fiscal 2008, revenue was $32.5 billion, up 35% and Apple generated $9.1 billion in cash. For the first quarter of fiscal 2009, Apple expects revenue between $9 and $10 billion. EPS is expected between $1.06 and $1.35. Analysts estimate earnings of $1.65 on sales of $10.57 billion. The stock is currently trading around $98 after recovering from its 52-week low of $85 on October 10.

Steve Jobs sums up Apple’s situation well:

We have the strongest product lineup in Apple’s history, the most talented employees, and the best customers and $25 billion in the bank. We may get buffeted around by the waves a little bit, but we will be fine and stronger than ever when the water is calm in the future.

I have to agree!

 

Disclosure: None

 

Comments

[Kevin_S:]

By Q1 2009, the cash ($35B) + the deferred revenue ($15B) is more than half of Apple market cap (assuming Apple sells conservatively 6M 3G iPhones each quarter). So, if Apple can build up both the cash and the deferred revenue at this rate without tapping into their existing cash (for spending), eventually all deferred revenue becomes cash. So we look at $70B cash and still around $15B of defered revenue by 2012, which is about Apple's market cap right now.

2008 Oct 23 07:51 AM

[.crazylegs..:]

Sramana, I thought you were sophisticated enough to see through this PR claim of Apple selling more phones than RIM in the last quarter. Yes the numbers appear to show more sales but when did the first generation iPhone stop selling? About two months before the 3G was released. So this quarter had two things going 1. Pent up demand for two months where no iPhones were being sold and 2. the typical launch surge you would expect to see given the loyal, even fanatical, nature of Apple customers who upgraded. If you normalize the numbers of iPhones over 5 months, you would see only a little over 4 mln were sold for a normalized 3 month quarter. Very impressive nonetheless, but definitely not more than RIM. And these sales come on the back of $350-400 subsidies by carriers. How long will carriers subsidize at these levels as the product matures? Is there a real value proposition here for carriers? Sure they get new subs, but at what cost to them upfront and to the network itself. How much does AT&T need to spend now to get capacity up to snuff? I believe in time the value proposition that RIM provides (i.e. lower subsidies, data compression respecting the network, and high value subs) will continue to keep RIM at the top of the industry. Of course the iPhone will be there as well, but let's compare apples to apples (or blackberries) in doing the comparison.

2008 Oct 23 10:32 AM

[.crazylegs..:]

Kevin S - Apple just threw out GAAP accounting treatment and issued non-GAAP numbers this last quarter that undo the subscription accounting to give investors a true look at the performance of the business (without having to figure it out on your own). Your cash figure is off by $10 billion as well, they have $25B cash. And the deferred revenue does not "become" cash, they get it upfront. it only becomes recognized as revenue under GAAP over the 8 quarter life.

2008 Oct 23 10:38 AM

[Kevin_S:]

crazylegs, I meant the $35B number is for Q1 of *2010* (next year). Sorry. My prediction is that 4 years from now, Apple will have about $70B cash.

2008 Oct 23 11:11 AM

[mollytjm:]

great article! and just wait for the holiday season...Apple will outdo Rim again. 'pent up demand' isn't over, you know. a lot of people are coming off old contracts every month and will continue to do so. if you've ever used an iPhone, you know how it feels and what it does...it's just heads and shoulders above the pack. and the point is that Apple will keep innovating, quickly while others keep trying to play catch up.

2008 Oct 23 11:25 AM

[kris23:]

I really think Apple is gonna have a great holiday season and will most likely outperform RIMM. Jobs is right, AAPL may get beaten a little by the waves, but its gonna be mostly smooth sailing. Too many companies are having a hard time keeping up with there innovation. Sentiment appears to be getting stronger (www.predictwallstreet....) and I predict up today for Apple. I think we'll see some fluctuations, but Apple also stays pretty strong.

2008 Oct 23 12:51 PM

[KenC:]

Geez, crazylegs, you need to calm down a little. EVERYONE KNOWS that Apple launched the 3G iPhone and got a bump. EVERYONE KNOWS that sales of the old phone were cutoff. It's assumed by everyone, so no one needs to repeat it.

The fact is, regardless of whether Apple outsold or caught up, or was even behind Blackberry sales, it's STILL REMARKABLE, after only 15 months in the market. Yes, we know you're a RIM shareholder. It's obvious. Just because people are justifiably proud of how Apple has done with the iPhone should not threaten your manhood.

2008 Oct 23 03:06 PM

[dlawe:]

I don't see why both RIMM and AAPL can't exist and prosper as the top two vendors in the smartphone market. Clearly the pie is divided between the two- why is there so much ridiculous posturing amongst shareholders of one or the other- like two toddlers in a sandbox... both companies will do extremely well in the long term.

2008 Oct 23 10:39 PM

[dlawe:]

I don't see why both RIMM and AAPL can't exist and prosper as the top two vendors in the smartphone market. Clearly the pie is divided between the two- why is there so much ridiculous posturing amongst shareholders of one or the other- like two toddlers in a sandbox... both companies will do extremely well in the long term.

2008 Oct 23 10:39 PM

[.crazylegs..:]

KenC - if everyone knows all this stuff, where is it being reported? Why aren't people saying if you normalize the numbers, they would have sold over 4 mln devices? This number is still very impressive (and I did say that in my post) but not more than RIM. I am just trying to be skeptical, like any good investor should. And fyi, own aapl as well as rimm. So perhaps, you should relax yourself a little. And my other points are very valid and make me worry about Apple's attempts to lower prices. If the carriers are getting squeezed on capacity, they are going to price iPhone data at a premium. This could become an issue over time. Of course, the avg apple loyalist gets angry at anyone who has anything but good things to say about apple or its future. really funny how fired up people get about this company.

2008 Oct 24 10:52 AM