Apple Could Get a Boost From iPhone's Introduction to China

Heading into its next quarter, sales of Apple Inc. (AAPL) products appear to be slowing down, according to a report from Barclays Capital.

Given the weak economic environment and the poor timing of holiday shopping days, Apple should have flat sales for its Mac product line, down 0.5% year-over-year, said Barclays Capital analyst Ben Reitzes. However, sales of Apple’s iPhone may be boosted by a possible introduction to China in mid-2009.

According to media reports, China is expected to issue licenses to telecom operators for 3G networks by the beginning of 2009, thus opening the door for the new iPhone 3G model to make its way into the country.

Meanwhile, netbooks and iPods continue to dominate the top seller lists at Amazon.com, leading Mr. Reitzes (as well as many other analysts on Wall Street) to speculate that Apple will introduce a C$600-level notebook in the near future.

Comments

[awcabot:]

"However, sales of Apple’s iPhone may be boosted by a possible introduction to China in mid-2009."

Noooo, you don't say!? You must be kidding me? Apple's iPhone may be boosted by a possible introduction to China? I thought that selling the iPhone in China was going to reduce sales!!! I mean, I thought Apple selling the iPhone in Malta was going to be a boost!

(How much are financial analysts paid to come up with statements like this? And one wonders why the US is in a financial crises...)

2008 Dec 17 02:13 PM

[jmmx:]

Perhaps the announcement of Schiller doing the keynote is to insinuate that there is no great new products so people should go ahead and buy now.

2008 Dec 17 02:46 PM

[jenny:]

I agree that perhaps Apple doenst have any new products to come out. To compensate, they are introducing products in China which will clearly help to boost sales despite a slow down in consumer spending. The Macworld rumors are not faring well for Apple right now however, as Apple has a history of leaving too many things unsaid and up for speculation. I already watched sentiment drop for AAPL, becoming more bearish (www.predictwallstreet....) as the price drops right now almost 7%.

2008 Dec 17 03:12 PM

[Constable Odo:]

Apple can use any help it can get with whatever new products. The stock has literally turned to shizzle based on, well, nothing but pure speculation about Steve Jobs health and a likely slowdown of sales. Apple is down all out of proportion to the company's financial health. What a bummer for investors.

2008 Dec 17 05:11 PM

[brewer:]

It didn't drop much, IYAM. Wait until the next earnings announcement.

2008 Dec 18 10:10 AM

[applesauce:]

Red China will eat up Red Apple products.

2008 Dec 18 01:39 PM

[John R. Fer...:]

How much (net) does Apple make per iPhone? To find out, you have to isolate it within the financial statements, which has been virtually impossible…until now.

Let me preface this analysis by saying that I was only one cent off of Apple’s Q3 net earnings and 3 cents off of Q4 (when you take into account that I was still using 885m as the sharecount, not the 907m…I need to find out where to get the correct info next time, but the net was the same regardless).

Bragging Point: That puts my last two estimates, combined, closer than Andy Zacky’s by 33% (I’ve only been off by a combined 4 cents regarding earnings over the past two quarters vs Andy’s 6 cents). Don’t get me wrong, Andy has the best analysis on the street, but brag I must.

OK…on to how I got to $206 as the profit from each 3G iPhone in Q4.

In disclosing the additional income and profit that it could only include in the non GAAP figures (1.14B net GAAP, 2.44B net non GAAP), when one assumes this difference is primarily iPhone profit (Apple TV and iPhone Apps could be a contributor, but would still make only a percent or two difference among the figures I will outline below), one can manipulate the information provided to come darn close to figuring out the net for each iPhone we see walking down the street.

Given/Assumed:
1- iPhones sold in Q4 = 6.9m
2- 2.44B – 1.14B = 1.30B net iPhone profit not included in GAAP statement

Profit Recognition goes as follows:
July Sales: 1/8th of net profit of iPhones sold in July are recognized for the quarter
(recognized for July, August, September = 3 months of the 24 months recognition is spread over)
August Sales: Net/12
September Sales: Net/24

Here are a few sales scenarios, meant to shed light on how, based upon the 6.9m iPhones sold, there is a small range under which profit per iPhone falls. I show greater detail in the two scenarios in which the most and the least iPhones are recognized in full (this is not necessarily how they are accounted for on the balance sheet, but is an equivalent measure that makes visualization a bit easier than dealing with so many fractions of the two year recognition period) in order to show the range. The others come so close to .6m iPhones that I rounded to one decimal instead of extending to two.


Scenario 1
July: 2.9m sold = 362,500 iPhones net recognized in full (equivalent)
August: 2m sold = 166,667 iPhones net recognized
September: 2m sold = 83,333 iPhones net recognized

Total recognized = 612,500
Total unrecognized = 6.9m – 612,500 ~ 6.3m
Unrecognized net/unrecognized iPhone Sales = 1.3B/6.3m = $206.39


Scenario 2
July: 3.2m sold = 400,000 iPhones net recognized
August: 1.8m sold = 150,000 iPhones net recognized
September: 1.9m sold = 79,167 iPhones net recognized

Total recognized = 629,167
Total unrecognized = 6.27m (going out two decimals for highest unrecognized total for variance purposes)
Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m = $207.34


Scenario 3
July: 2.4m sold = 300,000 iPhones net recognized
August: 2.3m sold = 191,667 iPhones net recognized
September: 2.2m sold = 91,667 iPhones net recognized

Total recognized = 583,334
Total unrecognized = 6.32m (going out two decimals for highest unrecognized total for variance purposes)
Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m = $205.70


Scenario 4
July: 2.7m sold = 337,500 iPhones net recognized
August: 2.2m sold = 183,333 iPhones net recognized
September: 2.0m sold = 83,333 iPhones net recognized

Total recognized = 604,166
Total unrecognized = 6.3m
Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m = $206.39


Scenario 5
July: 2.7m sold = 337,500 iPhones net recognized
August: 2.5m sold = 208,333 iPhones net recognized
September: 1.7m sold = 70,833 iPhones net recognized

Total recognized = 616,666
Total unrecognized = 6.3m
Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m = $206.39


Given these scenarios, one can determine the iPhone net profit recognized is likely no less than 570,000 and no greater than 640,000 for the quarter. Therefore, the unrecognized iPhones should range from 6.26m – 6.33m.

The most iPhones that could possibly be recognized would be .125 (3 months in quarter / 24 months in recognition period) x 6.9m iPhones, which is 862,000, and would require all iPhones to have been sold in July, which didn’t happen. The least that could have been recognized would be 371,000 (1m were sold in first 3 days, as per Jobs’ statement). I don’t want to delve too much into statistics, but to fall out of the 570,000 to 640,000 range of recognized iPhones would be improbable, assuming the iPhones were recognized accordingly in the full month in which they were sold and not to the day.

This results in a net profit range of $205.37 to $207.67. This can vary depending upon expenditures related to the iPhone, future decreases or increases in component costs, dollar exchange rates, etc., but at least represents the snapshot on October 1st, 2008.

Therefore, $206 net profit per iPhone is a good…no, VERY good estimate. I look forward to some good constructive criticism, and some good bashing.

J.R.F
Disclaimer: Long too much AAPL

2008 Dec 18 03:35 PM

[mollytjm:]

Macworld wasn't that great for Apple once Apple gained fame again. it sent waves of fear through consumers shopping for the holidays, wondering how many days their 'new' innovative product would be 'new' and not obsolete. the winter timing was awful...in january?!! Apple employees will appreciate holidays with their families, instead of sleeping in their offices, trying to perfect a product before macworld.
And Steve Jobs isn't getting any better looking as he ages, even though he seems healthy enough. It's a good time to let the public know about all the other (lots) gifted people who work at Apple.
Long APPL

2008 Dec 18 04:51 PM