Will Apple Record Another Halt-Trading Big Beat?

Shares of Apple, Inc (Nasdaq: AAPL) might be halted after the close of regular trading today due to much higher than expected revenue and earnings results. Occasionally, stocks will be halted when a company's earnings results come in at levels that are far beyond the normal variance seen in a typical earnings report. In Q1 2007, for example, the NASDAQ halted trading in Apple when it delivered a pretty hefty beat on both the top and bottom lines. The NASDAQ will typically halt trading in a stock when big market moving news is pending. They do this both to allow a settling in of the news, and to give market makers time to organize the buy and sell orders in orderly fashion. I think this particular report might be one of those situations where the NASDAQ halts trading as Apple's earnings results are released to the public.

Analysts polled by Thomson Financial expect Apple to report earnings of $1.38 in EPS on $9.74 billion in revenue when Apple releases its results shortly after the close of trading this afternoon. The analysts are looking for Apple to sell approximately 4.5 million iPhones, 18.5 million iPods and about 2.45 million Macs this quarter. I'm looking for Apple to beat those expectations quite handily. I expect Apple to report earnings of $1.81 in EPS on $10.730 billion in revenue driven in part by sales of 7.11 million iPhones, 20 million iPods and 2.72 million Macs. On a non-GAAP basis, I'm expecting Apple to report earnings of $3.12 in EPS on $13.646 billion in revenue driven by approximately $4.266 billion in fully recognized iPhone revenue. The tables below outline my earnings forecast, and unit sales estimates for Apple's first fiscal quarter of 2009:

Andy Zaky's Earnings Estimates for Q1 2009 (in Millions, except for per share data)

Revenue Breakdown by Unit Sales for Q1 2009

At the outset of the quarter, I offered detailed arguments as to why there might be such a disparity between analyst consensus estimates and reality (see here). The analysts simply were too carried away with the chopping of their estimates this quarter, and they let the bear get the best of them. If previous earnings debacles weren't already embarrassing enough for the analysts, then this quarter should be one for the books. The sad part is that all of the data in support of my estimates are available to the public at large. All it takes to accurately forecast Apple's results is basic math and common sense – Wall Street analysts seem to lack in both regards. The table below outlines earnings estimates from several prominent Wall Street analysts along with a few rather accurate, but unaffiliated analysts.

Q1 2009 Analyst Estimates GAAP-Based (Lowest Est. in Red; Highest in Green)

Some notable highlights from the table above include the rather bearish outlook by Toni Sacconaghi from Bernstein Research who is famous for incorrectly predicting that Apple would not meet its internal but highly publicized goal of selling 10 million iPhones in 2008 (Apple completed the feat in nine months). Sacconaghi is looking for Apple to come in at the extreme low end of its proffered revenue guidance of $9 billion. I guess Sacconaghi has a difficult time understanding the term "prudence" which Apple repeatedly used in its Q4 conference call to describe the nature of its guidance. While it was difficult to secure full estimates from Kathryn Huberty, her revenue expectations are likely quite low given the fact that she is once again modeling for apocalyptic iPod sales. This wouldn't be the first time Huberty has modeled for the complete destruction of Apple's financials, and it certainly won't be the first time she is shown to be dead wrong, either.

Also interesting is how all three unaffiliated analysts arrived at very tight estimates for Q1. Both Deagol from Mac Observer's AFB (famous for his accuracy in forecasting based on his tracking of web orders is forecasting sales) and Turley Muller from the Financial Alchemist have come within a few million dollars in revenue of my own revenue estimates. Each of us is basically looking for $1.80 in EPS when Apple reports this afternoon.

In terms of non-GAAP earnings forecasts, several analysts including Yair Reiner and Ben Reitzes simply failed to provide estimates for Apple's adjusted earnings in their research reports despite the fact that Apple promised to report adjusted earnings on an on-going basis. I was able to secure non-GAAP revenue estimates from a few analysts however, and each is presented in the table below.

Q1 2009 Analyst Estimates Non-GAAP (Highest Est. in Green; Lowest in Red)

The table above should highlight just how delusional some Wall Street analysts can be regarding Apple's financial situation. Toni Sacconaghi's non-GAAP estimates have risen beyond the level of mere incompetence to outright negligence. Sacconaghi's non-GAAP revenue estimates are almost $400 million below the unaffiliated analyst consensus for GAAP-based revenue! If Apple does happen to report in-line with our expectations, Sacconaghi will have missed calling Apple's revenue by more than $3 billion! It will be interesting to see if his clients continue to place any weight in his future forecasts if such an event happens to happen. After all, why pay for a research report if you could do a better job guessing?

Macintosh Sales Estimate

I arrive at the 2.72 million Mac unit sales estimate based on interpreting quarterly data released by the Gartner Group on computer sales in the United States. I also use IDC and NPD data as secondary sources to complement my primary analysis. Gartner data is especially helpful in that it typically predicts about 44-46% of Apple's total sales during fiscal Q1 and Q4 while accurately predicting between 55-63% of Apple's total Mac sales in Q2 and Q3 of any given fiscal year. While this quarter is unusual in that it is difficult to tell just how well Mac sales fared in Europe, the fact that Apple grew its U.S. sales rather dramatically on YoY basis might suggest that things are not as bad as they might seem.

I place a lot less emphasis on NPD data because NPD focus exclusively on retail chain store sales. Apple's own retail has been growing at an explosive pace and to extrapolate Mac sales data from NPD findings places the analyst on rather dangerous grounds. This is especially true in an environment where retail sales are sinking and online sales are booming. To read a full in-depth analysis on this method of forecasting Mac sales, click here. Gartner data this quarter seems to suggest that Apple will post sales of 2.670 to 2.852 million Macs.

Quarterly Released Gartner Data Compared to Actual Macintosh Sales

Macintosh Unit Sales Breakdown by Region

Comparing Actual U.S. Sales with Total Actual Sales

A Note on iPhone Sales Estimates

Last quarter, the analysts missed on their iPhone sales forecasts by an average of 72%. Even bullish analysts such as Gene Munster from Piper Jaffray missed iPhone estimates by close to 30%. The unaffiliated analysts, by contrast, all came within 8% of the actual number. The unaffiliated analysts arrive at their iPhone estimates by tracking IMEI data, which unofficially tracks the actual production rate of the iPhone by analyzing the TACs or numbering system used by Apple. Not the hocus pocus nonsense methods which seem to be employed by Wall Street analysts and which lead them to miss estimates by 72%. Seriously, what the hell is the point of using a research method that leads one to miss estimates by a whopping 72%!

At the end of November, IMEI data suggested that Apple had produced its 15 millionth 3G iPhone. Yet, no data is available for the month of December so a lot guess work has to go into how might have happened in December. Since its debut, Apple has produced, on average, about three million iPhones per month. If one conservatively assumes that Apple produced only one million iPhones in December (only 33% of the normal rate), that would put Apple at a total of 16 million 3G iPhones produced. If one subtracts the 3G iPhones Apple already reported as sold in Q4 2008 (6.89 million), one will arrive at a total of 9,110,000 iPhones that could have potentially been sold. However, one always has to assume that about 2 million iPhones are sitting in Apple's inventory, are replacements for defective iPhones, or are damaged during the manufacturing process. Thus, if one subtracts about 2 million iPhones from the total potential sales for the quarter, one would arrive at 7.11 million iPhone sales. Read more about this extremely accurate method of forecasting iPhone sales here.

Analyst FY 2009 Earnings Forecast for Apple, Inc.

While investors should rightly focus on Apple's Q1 earnings results out after the market closes today, I think it's important to hold analysts accountable for their obvious errors in forecasting 2009 earnings results. So, before analysts are quick to adjust the FY 2009 estimates after Apple reports today, I thought it would be nice to remind everyone how these analysts have handled themselves over the past few months. The table below outlines several Wall Street analyst estimates, price targets and buy ratings for FY 2009. I find it interesting that it's a lot easier to locate a Wall Street analyst's FY 2009 estimate than it is to find that same analyst's estimate for the current accounting period.

FYE 2009 Analyst Estimates for Apple, Inc. (Highest Est. in Green; Lowest in Red)

Disclosure: None

Comments

[Buffeted:]

You mean Kathryn Huberty was wrong????

Jan 21 09:14 AM

[Hayweed:]

Andy:

Wish Apple would put you on the conference call so you could ask some questions.

Jan 21 09:22 AM

[Hayweed:]

If sales are flat year over year, prices are constant for Apple products, and component prices have dropped, isn't that enough to mean they beat last years number.

Jan 21 09:24 AM

[bluemarlin1402:]

Andy, to any Apple watcher worth their salt, you're one of the best, most informed, analysts out there and most times, dead on. Love the way you put it to Sacconaghi. Ever thought about taking his job!

7.11M iphones would be fantastic and completely destroy most estimates. We'll find out in a couple of hours.

Thanks for your hard work. I really appreciate it.

Jan 21 09:28 AM

[typopolice:]

do the numbers even matter anymore? the stock is at 2006 levels, so basically, the market din't give a crap about the last 8 quarters, the revenue stream, cash flow, or prospects going forward...
the day Steve jobs blmded hedge fund manipulation for the stock price drop to the 150's was the day the music died on this stock.
i have all 2010/2011 leaps, my account was worth over $300 k a year ago, today it's worth 11,000. I have been decimated as an apple fan. i own a 24 imac, a macbook air, my wife and i have an iphone, we have an apple tv, and apple airport extreme...and now ou life savings is gone forever. analyze, over analyze, keep typing to your fingers bleed...it doesn't matter with this company--they are screwed on wall street.

Jan 21 09:28 AM

[top_tier:]

I noticed that yesterday Mike Abramsky, RBC Capital, lowered their target for Apple to $70, they also raised their target for RIMM to $75.

I don't believe in market conspiracy, dishonest analysts, or manipulation. Nope.

Jan 21 09:36 AM

[another.ana...:]

Apple should institute a "Huberty Award" for the worse performance by a anal ist each quarter. Sorta like former Senator William Proximire's "Golden Fleece" awards for Federal Government money wasting.

Then at the end of each earning report we can all wait with baited breath for Steve Jobs to make a quick appearance and say (with great fanfare) "And the winner of the Huberty Award for this quarter is......."

Ayuh

Jan 21 10:03 AM

[jmmx:]

Andy,

Another really well done analysis. Bravo!

I disagreed with you yesterday on Apples use of deferred accounting on the iPhones, but I always appreciate your analysis.

Jan 21 10:05 AM

[jmmx:]

@typopolice

Hey buddy - you and me both! My situation is very close to yours. But this is true of almost all in the Market. So hang in there - if you have 5 years for the recession to unwind. As soon as the economy gets a REAL updraft, Apple will go intergalactic.

Stocks are not for the faint of heart!

Jan 21 10:11 AM

[Timeline St...:]

Hi Andy - Thanks again for your insight. The story with these analysts continues to make me scratch my head.

For what it's worth, here are my projections:

iPhone: 6 million

iPod: 18 million, but shifted toward much higher revenue per unit due to sales of 8 million (!) iPod Touch units

Mac: 2.45 million, notebooks at well more than 50% of total units sold

Financials:
All figures except EPS in millions
iPod, $3,228
iPhone, $1,425
Mac, $3,675
iTunes, software, peripherals, AppleCare, $2,585*
Total Revenue, $10,913
Earnings, $1,746

EPS, $1.93

Shares, 904

I used a higher ROS (16%) than you, on the basis of better component pricing and also production and M & S efficiencies in products that have now been offered for more than 6 months.

*It's also important to note that the 'miscellaneous' category is growing rapidly in revenue and earnings, I believe, due to:

1. App Store: Now serving an install base of more than 34 million users (19 million iPhone, 15 million iPod Touch). Use of paid Apps increasing weekly. Install base increasing by 10 million per quarter, even in non-holiday quarters!

2. iTunes: Install base of 70-80 million users means that $20 per user per quarter revenue is now approaching $2 billion. Increasing video availability driving revenues. People are watch more video on laptops and mobile devices.

3. AppleCare: Increasing shift to notebooks AND purchase via the Apple Store has dramatically increased participation in AppleCare. For users who receive free help from Genius Bar, AppleCare coverage for larger product issues seems like a bargain.

Jan 21 10:11 AM

[.crazylegs..:]

typopolice - seriously? you put ALL your savings in LEAPS? Long term options that can expire worthless? Looked like a sure thing when you did it, huh? That is the dumbest thing I have ever heard. and Americans wonder why we are in this mess. I guess people are learning that leverage cuts both ways - amplifies gains and increases the velocity of losses. this guy deserves to lose his ass if he really put 100% of his savings in options.

Jan 21 10:13 AM

[Roger Knights:]

My guess is that earnings will be $1.90 for the Dec. quarter.

TypoPolice: Hang on to your LEAPs--AAPL will surprise you again--this time pleasantly.

Jan 21 10:19 AM

[See through it:]

This quarters YOY comparison does not have the prior years software operating system upgrade sales. That one time event boosted profits and margins. Therefore, this quarters YOY comparison will look worse, even if the balance of the business is stronger. The funny thing is, the OS software sales revenue should be deferred over some period based on the frequency of the upgrades and the Iphone revenues should NOT be deferred. Somehow Apple management got this backwards. As an investor, one looks to invests when a security has been mispriced. In this environment, I cannot imagine a better risk adjusted play for the long haul.

Jan 21 10:23 AM

[jgonion:]

Andy,

You certainly deserve congratulations for your accuracy last quarter, and you have undoubtably put an equal amount of diligence into preparing the numbers you present here, which we all appreciate.

However, the ego and hubris that you deliver along with the estimates is unbecoming somebody who has a clear talent for analysis. What matters is that your estimates are accurate. That others are wrong is irrelevant. You are a fine Apple analyst in your own right. You don't elevate yourself any further by slamming the other analysts. It seems childish and it weakens your overall message. In investment, win by making money from your skills. Nobody has to lose in order for you to win. (In case you're wondering, I'm not one of the analysts you smeared, I'm simply an individual investor and Apple shareholder.)

Stick with the analysis. You're actually quite good at it.

Jan 21 10:28 AM

[AGuysOpinion:]

Andy - appreciate your analysis work

How are you forming your 34.5% GM assumption (down 20 bps sequentially) when the company guided down 370-470 bps sequentially to reflect the new ipods and notebooks? Management said Q4 FY08 GM was better than anticipated mainly due to component pricing

Jan 21 10:31 AM

[DickM:]

The fundamentals on Apple are still outstanding. The long term investors will still be rewarded. The fact that a few short term investors went down with the overall market doesn't change anything. I suspect some of them are trying to influence the stock to go down by piling on Job's health so they can make up for their lack of perspective and due dilligence. It won't work.

Jan 21 10:40 AM

[DickM:]

Also, to do an analysis of analysts is very appropriate. Who else is is doing it, the SEC, God, you? This is bringing a measure of accountability to these people who use the web to megahorn witless and misleading so-called "analyses" that confuse investors who themselves don't have the ability to perform their own due dilligence, a la the Madoff investor flock. When backed up with thorough research, this can hardly be called childish. Exactly what is needed, and long overdue.
Andy, I thank you for this contribution!

Jan 21 10:56 AM

[alice.crowder:]

I think jgonion said it well. Reading Andy's estimates has value to me as an investor. Reading about Andy being better than everyone else has no value to me as an investor. On the contrary, it wastes my time. I also agree that it detracts from the analysis that he is providing, and portrays himself more as an insecure kid than a serious investor. Andy - Your accuracy has been great, but you're watering it down by mudslinging at the other analysts. Investment shouldn't be personal. Keep it objective.

Jan 21 11:48 AM

[jmmx:]

@See through it

Be careful of your expectations for the Snow Leopard upgrade. It is not going to be the blockbuster that Leopard was.

1- It is for Intel Macs only. While the rate of sales of Macs has risen, and therefore newer Intel based Macs are a high percentage of the installed base, there are till a lot of Serviceable G5s - even G4s - out there who will not be able to upgrade.

2- Snow Leopard is a very important release, mostly however, for technical reasons. With very few "new features" its focus is on footprint (disk space required) and efficiency. While these are very important issues, it is hard to justify an upgrade unless you particularly need the extra speed.

3- The economy.

So, I imagine that Snow Leopard will really sell 30-50% of Leopards great run.

Jan 21 12:17 PM

[jmmx:]

BTW- Apple's investment in Snow Leopard is well worth it, even if it is not a huge success in sales. It is for them a long term investment.

Look to all their computers with multiple GPUs (currently only the MacBook Pros) to see extraordinary performance boosts in many tasks.

Also look to possible inclusion of full, or slightly scaled, version of OSX on the iPhone & Touch. THAT will be revolutionary. If they then are able to add a discrete GPU (Graphical Processing Unit) to the iPhone, it will become by far the most powerful handheld platform.

Jan 21 12:27 PM

[Hayweed:]

But Huberty would always win.


On Jan 21 10:03 AM another.anal.ist wrote:

> Apple should institute a "Huberty Award" for the worse performance
> by a anal ist each quarter. Sorta like former Senator William Proximire's
> "Golden Fleece" awards for Federal Government money wasting.
>
> Then at the end of each earning report we can all wait with baited
> breath for Steve Jobs to make a quick appearance and say (with great
> fanfare) "And the winner of the Huberty Award for this quarter is......."
>
>
> Ayuh

Jan 21 12:43 PM

[Hugo van de...:]

Hi Andy, I appreciate all the work you've done, but I'm not sure I agree with you on where the stock price will go after hours today. Why? Apple has previously blown away estimates, but because they were also very cautious in their outlook, the stock tanked. That has happened several times, and I think that in these uncertain times, Apple will surely be very cautious in their outlook. Apple may have sold a lot of iphones, macs and ipods during the holiday quarter, but it it very well possible that most Americans and a lot of Europeans hvae used the holiday quarter to buy some Apple goodies, but are now waiting until the economy turns around. That would not be good for Apple. So I'm on the sideline, I don't take the risk.

Jan 21 01:16 PM

[Hugo van de...:]

Andy, if Apple announces share buybacks or dividend that would change the situation, I think that would be applauded by the market. Otherwise, if Apple beats expectations (even by far) but are also really cautious in their outlook, I think the stock will tank.

Jan 21 01:21 PM

[Buffeted:]

I support the motion of a Huberty award! She might have to share it this year with Toni S. though.

But here's what I wrote over at Bullish Cross today, just so you dont thik I dont appreciate your hard work, Andy:

Athough I believe your unit sales numbers, except for ipods due to touch sales, are too high especially for iphones, they're likeley to be closer than anyone else's. It's thorough and a valueable reference for the future.
You've done good in shedding light on incompetent Apple analysis and hopefully investors will refer back to this article in the future when we have to hear the same bullshit from the same people next quarter.

Jan 21 03:07 PM

[Yagottabe K...:]

Not bad - better not call yourself an "analyst" though - you'll be giving yourself a bad name.

Jan 21 04:35 PM

[wizkid15:]

Good analysis indeed........Actual results very close to your projection Andy......

Jan 21 04:46 PM

[Hayweed:]

off 3 cents. You are the man. Tell Tony to blow it out his *&%

Jan 21 04:50 PM

[tamarak:]

Nice call.

Jan 21 04:52 PM

[.crazylegs..:]

you were right for the wrong reason - should we really commend you for that? iPhone prediction was 66% off? does this mean you should stop giving estimates like you say other off analysts? perhaps a little contrition would be in order...

Jan 21 05:08 PM

[D. McHattie:]

Thanks Andy, I've been a fan of AAPL for a while but never bought in until this morning, due in part to your analysis. Bought in at $80.27 and sold at $89 in extended hours. I don't normally daytrade like that but anytime I get 10% in a day then I cash in my chips and give thanks where it's due.

This is what seekingalpha is all about - you combine your own ideas and research with that of someone you respect and you come out on top.

Forget about the 'anal-ists' and the celebrity 'experts' on cnbc. I'll trust a thorough and objective seekingalpha recommendation any day.

Looking forward to a pre-FQ2 earnings prediction.

Jan 21 05:31 PM

[chazgil:]

Thanks Andy I read your piece first thing this morning checked some of your facts and bought a couple thousand shares at 80 by 11am and am now a happy camper. Can I send you a ipod as a thank you gift

Jan 21 05:46 PM

[jack dee:]

yeah so Chaz invested 160K based on a blog, What a lair or what a butthead. Andy was lucky not right, he got the right number but for all the wrong reasons.

duh , when will you guys ever learn, if you make enough calls some will be right.

Jan 21 06:40 PM

[OptimusMaximus:]

Dude! What a Call!

I was a little unsure at first...based on all the negative comments about AAPL...but you made me a believer

Keep Blogging!!

Jan 21 07:53 PM

[gvsmitty19:]

Nice call... chalk another win up against the analysts... Turned out to be too light on the iPods and too heavy on the iPhones, but you still came very very close!

Jan 21 08:10 PM

[David Forjan:]

congratulations.

you just about nailed it.

Jan 21 08:13 PM

[Glen Bradford:]

Great, so where's the disclosure? Do you own Apple or not? Were you smart enough to take this analysis and capitalize on it?

I hope so. Otherwise it's just wasted analysis.

seekingalpha.com/artic...

Jan 22 12:23 AM

[chazgil:]

Jackdee what was the downside risk of buying apple at 80 have you seen the chart! Your problem is you think 160k is a lot of money I don't


On Jan 21 06:40 PM jackdee wrote:

> yeah so Chaz invested 160K based on a blog, What a lair or what
> a butthead. Andy was lucky not right, he got the right number but
> for all the wrong reasons.
>
> duh , when will you guys ever learn, if you make enough calls some
> will be right.

Jan 22 08:26 AM

[User 265729:]

i this and i that, it doesn't matter...

There is something about it that has an "If it's too good to be true..." aspect to it.

I would like to revisit that aspect a few quarters from now.

I just think there is something odd about their performance based on what I've seen in the United States with my own two eyes.

Jan 22 03:10 PM

[Roger Knights:]

Jimmx wrote:
"I imagine that Snow Leopard will really sell 30-50% of Leopards great run."

I think its availability only on Intel machines will induce many non-Intel owners to upgrade. I suspect that, when snow leopard is released, Apple will toss in a few tempting new features (as "one more thing"). I suspect SL's 64-bitness will tempt buyers, because of its cutting-edge nature. So I think it'll be taken up by 75% of the base one year after release.

(PS: I'm not an early adopter myself--I still haven't upgraded to Leopard yet, because it didn't seem stable enough to me. Maybe I'll skip over it!)

Jan 24 05:01 AM

[Roger Knights:]

.crazylegs wrote:
"you were right for the wrong reason ..."

Well, it's better than being wrong for the wrong reason, like those he criticized.

Jan 24 05:05 AM

[t0000:]

Hey Andy, Don't know if you will read this or not but I think this is the quarter you get the $1 billion beat on the top line. I am looking at $8.7 billion top line with 3.5 million iphones and $1.51 billion in iphone revenue. Some analyst have appl at $7.4 billion top line. Can't wait for next article next week.

Apr 10 12:01 AM