Apple Will Survive Jobs' Departure

In a memo that spread throughout the press like wildfire, Steve Jobs, CEO of Apple (AAPL) announced that he'd be stepping away from day to day duties to focus on his health issues. The iconic CEO cited further complications in this treatment to fix a protein irregularity, along with the fact that persistent rumors about his health are becoming a distraction to Apple's current management team.

The media back-and-forth had gotten so bad and had become such a distraction that it forced Apple and Steve to release a letter to the "Apple Community" describing briefly his personal health issues in an effort to reassure Investors that the company was not only in good hands but had Jobs for the foreseeable future. That future got murky very quickly in after hours trading with Apple shares falling 5% on the news of Steve taking a 6 month leave of absence.

And the media back-and-forth continues, as several pundits are calling Apple out for not being open enough in disclosing the true nature and severity of the health issues Steve was facing. While Apple's corporate line of a "constantly evolving" situation with Jobs will hold under most scrutiny, it will not come as a shock to anyone if the lawsuits start piling higher at the desks of Apple's counsel. As share prices have eroded in the last 12 months and with Apple sitting at $80/share, the $190s seem like a distant memory, and while much of decline is attributable to general market and economic factors, the haze of doubt over Steve Jobs, his health, and his ability to continue on as CEO, contributed a meaningful part of the sell-off.

The memo from Jobs concludes with the friendly "see you all this summer" send off, yet many outlets are skeptical of his return at all. Apple it seems has been prepared for a transition for some time. Over the course of the last year, several Apple product events have had Steve share the stage with others in an effort to showcase the brilliant team Apple has surrounded Jobs with. This was most notable at this year's MacWorld conference in which Marketing guy Phil Schiller took the stage for the keynote speech. Taking the company reins during the 6 month term will be Tim Cook, who's very familiar with all aspects of the company due not to to his Operations experience, but the fact that he took over as CEO when Jobs had surgery in 2004.

Apple's product standing among consumers is the highest it has ever been with 4 major lines of businesses becoming part of every day lexicon (iTunes, iPod, iPhone, Macs), and with analysts trimming estimates and cutting price targets left and right, something seems to be amiss. Economic stresses have weighed heavily on Apple as its upscale products tend to carry higher price points as compared with other companies. But here's the kicker; analysts expect higher unit sales than last year for the company in virtually every business category, yet expect Apple to earn significantly less per share.

The company guidance from last quarter was no real help as a range of just over $1 to the $1.30s was alarmingly low for the Street. While current consensus stands in the $1.40s-$1.50s that is still off the holiday season of 2007 in which Apple posted $1.76/share in earnings and $9.6Billion in Revenue with a higher than anticipated gross margin of over 34%.

For the current frame analysts expect Apple Revenue on average at $9.85Billion and a gross margin in the 31-32% range slightly above Apple's own forecasts.

Last Year sales:
-> 2.3Million Macs - $3.5Billion in Revenue
-> 22.1Million iPods - $4Billion in Revenue
-> 2.3Million iPhones - $240Million in Revenue (Rest Deferred)
-> Music Sales - $800Million in Revenue
-> Other Hardware - $380Million in Revenue
-> Software Sales - $630Million in Revenue

All of the above translated into $9.6Billion in Revenue for the quarter with gross margins of 34.7% and income of $1.58Billion for a net profit margin of 16.5%.

Estimate Ranges for this year from analysts include:
-> 2.5-2.8Million Macs, led by the refreshed line of MacBook models
-> 18-21Million iPods, likely with a higher average selling price due to the popularity of iPod Touch
-> 4-5.5Million iPhones, down quarter over quarter due to the previous quarter 3G launch and the in-store activation policy for which gift cards were issued instead of iPhones.
-> The growth in iTunes digital music sales business continues to be strong and the AppStore has become another line of business for the company with over 300Million Application for iPhone and iPod Touch already downloaded.
-> Other hardware and software sales will likely be lower but in similar ranges, with any declines to be made up by the growth in iTunes and the AppStore.

So some quick accounting for Christmas 2008 for Apple:
-> The Mac business with 2.6Million units (0% quarter over quarter growth) at a similar $1500 average selling price translates into $3.9Billion in Revenue
-> The iPod business with 19.5M units at a higher average selling price near $190 translates into $3.7Billion in Revenue
-> The iPhone business selling 5Million this quarter and with 18Million units deferred at an average selling price of $400 becomes $900Million in revenue
-> The iTunes store, AppStore along with AppleTV etc becomes close to $1Billion in Revenue
-> Other hardware and software could fall to $800Million

Total Revenue estimates for Apple on this end come out to $10.3Billion and with a 2% gross margin drop the income calculation would be close to $1.6Billion in profits and per share earnings in the mid $1.70s. Year over year flat profit growth given Apple's product momentum paints a somewhat conservative picture to some, however, given the current economic environment, it still bodes very well given current analyst expectations. With analysts cite slowing demand and a weak economy the numbers just don't seem to add up for a Christmas quarter with Apple earnings in the $1.40s, however even in very pessimistic scenarios a drop of $0.30/share in earnings from the above estimate still beats current expectations.

While all Apple faithful wish Steve a speedy recovery and all the best during his treatment, the company is indeed in good hands and can still outperform the competition in the months to come. With Tim Cook at the reigns now, the company has seemingly played its transition team cards and the company can move Steve Jobs into more of an oversight role with Tim behind the day to day reigns upon his return. The fact that Apple has such a competent and capable management team has always been overshadowed by the charisma of Jobs, but perhaps in his absence the continued quality of Apple products will shine through and others behind Jobs will get the credit they rightfully deserve.

Disclosure: Author owns AAPL

Comments

[See through it:]

Last years Dec 1/4 included high mark-up software sales of the new OS. This years, 1/4 doesn't. Therefore, YOY comparisons are somewhat misleading.

Jan 16 07:44 AM

[mollytjm:]

A wonderful article! Thank you! When the first Apple store opened, i felt Apple was finally secure...and then the iPod, and then the iPhone, then the Apps store, itunes and everything else. Jobs has done a great job of leading this wonderful company into the 21st century where it will flourish and prosper. While it would be nice for us to get to know the other brilliant people at Apple and celebrate them, I think it's smarter to present them more as a team and sidestep this 'one person' focus that has been disruptive to the company and certainly to the stock.
again, thank you for an intelligent article.

Jan 16 09:27 AM

[bluesmoke:]

Good, well written article. It's hard to imagine Apple without jobs, but at some point inevitable. I'm not selling.

Jan 16 09:39 AM

[attenuation:]

There is no doubt that Apple is the finest company around, the credit for which goes to Steve Jobs who, painstakingly, built the company into the Apple empire which it presently is. Long may Steve Job survive. Long may Apple survive and propsper.

Jan 16 10:09 AM

[VSD:]

First of all Jobs has not departed yet. Second, don't underestimate people's sympathy buying of apple products after Jobs news. This whole Jobs affair might be the best marketing campaign for apple.

Jan 16 10:20 AM

[User 338619:]

Steve Wozniak, co-founder of Apple and geneous engineer.
Steve Jobs, co-founder of Apple and geneous salesforce
I'm sure there are many great engineers and salesforces in Apple.
Great Product, Great Manager and Great Company.

Jan 16 10:34 AM

[Roger Knights:]

the first comment stated:
"Last years Dec 1/4 included high mark-up software sales of the new OS. This years, 1/4 doesn't. Therefore, YOY comparisons are somewhat misleading."

But the author allowed for that when he wrote:
"Other hardware and software could fall to $800 Million" [from $1010 million in 2007]

Jan 16 10:37 AM

[bobbobwhite:]

Everyone dies sooner or later, even Jobs. Apple will be a different company without him due to the loss of his unique vision, but it has enough bright people who now get the "Jobs way" for it to continue being successful, even if not as much as with Jobs still there leading the charge like a great battle general. He is one of a kind, to be sure, and irreplaceable.

I know he's dying. He will be so missed. Thanks, Steve, for all you have done for Apple, tech comm. and the smart people of the world.

Jan 16 11:05 AM

[DavyJ:]

With Steve Jobs relieved of the burden of day to day activities, it just may be that he will have more time for the blue sky visions he's noted for.You know, like sometimes the best ideas come not when you're in the office, but in the proverbial shower.

Jan 16 11:05 AM