Apple (AAPL) posted EPS of $1.25 or more yesterday, beating the high range of its conservative $0.90 to $1 EPS guidance by 25%, and beating consensus $1.09 estimates by 14% or more. It posted revenues of at least $7.8 billion and continues its recent trend of booking $3 or more billion in net cash for the quarter. I have made conservative assumptions about its ability to sell some products in an economic environment such as we have had, but the biggest potential surprise may be upside EPS. Here’s how Apple will do this.
First, although this quarter follows the traditional blockbuster holiday quarter for iPod sales, and usually sees iPod numbers fall by 40% or more, the continuing success of the iPod Touch and the introduction of the affordable and innovative talking iPod Shuffle has kept the iPod line on pace to deliver financial results. Margins have only increased during the recession, as component prices have become favorable to Apple, and discounting and promotional pricing were limited. I am modeling at least 9.4 million iPods in total, generating $1.24 billion in revenue, and contributing 17 cents EPS.
iPods | |||
Model | Quantity | Average Price | Revenue |
iPod Shuffle | 4,500,000 | $52 | $233,640,000 |
iPod Classic | 500,000 | $219 | $109,560,000 |
iPod Nano | 2,000,000 | $153 | $306,240,000 |
iPod Touch | 2,400,000 | $246 | $591,360,000 |
Total | 9,400,000 |
| $1,240,800,000 |
Analysts have practically been shouting down Mac sales from the rooftops, but even with sales of 2.15 million units - which is by no means an exorbitant figure - this portion of the Apple line still contributes $3 billion in revenue and about one-third of Apple’s total EPS. The introduction of a completely new desktop lineup, and associated channel stocking, may push desktop unit sales to compete with notebooks for the first time in years. I have modeled many different scenarios, and could not predict much less than $3 billion in revenue and 40 cents in EPS from the Mac line. In fact, I am going with $3.04 billion in revenue and 42 cents, given the introduction of the 17” MacBook Pro. Admittedly, this computer is a niche offering with fewer buyers due to economic concerns, but at $2,799, it doesn’t take many unit sales to stack up revenue and EPS. Note, in general, that Apple has been able to maintain pricing against Windows PCs that retail for about 50% less. Here are the numbers for Macs:
Macs | |
Total Macs Sold | 2,150,000 |
Total Mac Revenue | $3,037,669,950 |
Average Mac Unit Price | $1,413 |
Next, iPhone has a revenue and earnings basis that is largely, at this point, insulated from quarter to quarter variations due to the buffering capacity of deferred earnings. I am modeling 2.6 million iPhones, based upon a previously accurate method measuring of the iPhone OS as a percent of web page view traffic. Look for iPhone to generate about $1.4 billion in revenue and 24 cents EPS at this sales level. Again, the deferred revenue model insulates quarterly performance due to the 8-quarter accounting; with ZERO iPhones sold this quarter it would generate 21 cents EPS, and with 5 million sold, 26 cents EPS.
Any iPhone advance shipments to large country carriers – especially China Unicom (CHU) – could provide upside surprise in unit sales, but again, very limited current quarter upside for revenue or EPS. Look for the strong cash flow levels as well due to the immediate recognition of cash for iPhone sales.
The catchall category of software, iTunes, AppleCare, servers, and the App Store may provide the biggest source of stealth upside. Apple doesn’t release numbers in the manner in which I categorize, but I look for $2.1 billion and 29 cents EPS. The App Store isn't yet contributing significant EPS, but is shaping up to be a very impressive and necessary addition to this platform.
Apple’s growing cash pile is good for a dime or more in EPS every quarter, at this point. Perhaps this is one point that the analysts miss. In summary, here are the important figures that I predict:
| Revenue | EPS |
iPod | $1,240,800,000 | $0.17 |
iPhone | $1,439,615,000 | $0.24 |
Mac | $3,037,669,950 | $0.42 |
iTunes, software, etc. | $2,100,000,000 | $0.29 |
Investment EPS |
| $0.12 |
Total Revenue | $7,818,084,950 |
|
Earnings | $1,117,372,524 | |
EPS | $1.25 | |
Shares | 890,553,729 | |
ROS Assumption | 12.4% |
Apple will presumably guide conservatively going forward, but I would not rule out a slight increase – perhaps a nickel or so – to their range estimates. This many mean that they guide 95 cents to $1.05 for the current quarter. The company already has 45 or more cents in the bank due to deferred EPS and investment income.
Finally, while Apple may not be completely immune from revenue pressure due to economic headwinds, it is really difficult to envision a scenario of less than $7.5 billion in revenue. Favorable component pricing and healthy margins may generate upside EPS surprise. $1.30 or $1.35 would not surprise this Apple watcher at all.
Disclosure: Long Apple, Holding Jul-09 Call Options
