iPhone to Create Earnings Bonanza for Apple

Apple (AAPL) COO Cook has affirmed that 10 million iPhones will be sold in 2008.

Let's take Apple at its word that it will in fact achieve that sales number. In the past, they've made good on their predictions. If anything they've made a tradition of making conservative estimates and then beaten them.

Recall that iPhone revenues are not taken when the device is sold but rather spread out over an eight quarter period (see my article entitled The Street Underestimates the Strength of Apple's Deferred Revenues). The revenues, expenses, and profits are realized straight line over two years except for expenses having to do with engineering, sales, and marketing which are taken out as they occur.

Last quarter, Apple sold 2.3 million iPhones. Remember that only 1/8 of the profits of those phones have yet appeared in the earnings; the remaining 7/8 will be taken over the next seven quarters. If 10 million more iPhones are sold CY 2008, Apple will have sold 12.3 million phones. Let's go out another quarter to Q2 2009 and estimate they sell only an additional 1.7 million iPhones that quarter. By very conservative reckoning, Apple should have sold at least 15 million iPhones.

How much profit does Apple make on each iPhone? iSuppli estimates Apple paid $265 in hard ware to build each 8G iPhone. Let's assume costs are actually much higher at $349 (although Apple suggests falling component parts). If Apple sells its iPhone at $499, the company should make $150 a phone.

Take 15 million phones at $150 a piece, or 2.25 billion dollars. Now spread that over 8 quarters. You get 280 million dollars a quarter in profit.

Apple also gets a monthly fee from the cell phone carriers for the right to use the iPhone, though no one knows exactly how much. Piper Jaffrey analyst Gene Munster estimates that AT&T (T) pays Apple $18 a month (See Seeking Alpha article AT&T Paying Apple $18 a Month). Again let's lowball the amount to $15 for each of its carriers. Let's assume one third of the 15 million iPhones are unlocked and don't get the monthly subscriber fee, leaving 10 million who do.

That makes $15 times 10 million phones, or 150 million dollars a month, 450 million dollars a quarter.

Putting it all together, in Q2 2009, Apple should log 280 million dollars from its iPhone sales and 450 million dollars from its cell phone carriers, or 730 million dollars. That's almost half of what their total earnings were last quarter. That says nothing about desktops, notebooks, software, and iPod sales. These deferred iPhone profits will keep snowballing. If the number of iPhones accelerates (as I expect over the next two years) and the profit margins improve, the iPhone contribution to the bottom line will be profound.

Disclosure: Long AAPL

Comments

[raman kandola]

AAPL did lost a big momentum in the last few weeks. We can see this stock roaring in the $150 sooner that we think. Even with less optimistic this stock has been badly beaten, and the stock pricing which we have right where it was with even when I-phone was introduced. I have a personal target of $1890 by the end of the year. Have accumumated over 5,000 shares during this unexpected bottoms !

Lucky, for me I would say !

[Jon T]

Sssshhhhh.... you are only meant to be talking about LOST iPhones, falling iPod growth and all things designed to LOWER the price of APPL.

How can you dare to write such ridiculously positive information on APPL??

[AAPLpie]

wow, using math and making what appear to be reasonable assumptions rather than getting data from the 3rd stall on the right at an airport restroom and spinning it negative. not sure I can deal with that early on a monday morning. i mean, it's still too early right now to even use caps! i've also been steadily building my position and will enjoy the upswing, panicked short coverers, analysts flip-flopping, and other assorted malcontents having to eat crow. plus, a recent article that apple stores are now hot social meet-up sites. sweet. does it get any better? well, maybe $250 would be nice. fun week, everyone. shareholders meeting and media event against the backdrop of global financial system meltdown. oh my!

[AAPLpie]

oh, and remember, iphone agreement with carrier in china before the olympics!!! at least that's my guess. but, hey, i'm not a paid analyst - just a little guy investor. that alone will cause a $25 bounce in the stock price when announced, as well it should. nothing like the smell of hot AAPLpie in the morning!!

[Viva Newton]

yeah it's a good analysis , but the analysts fear was that Apple was lying and they would not meet the 10mil target ...

I personally think Apple will blow past those numbers and they will sell close to 20 mil total iphones by the end of 08, in fact noone can't really estimate anything until all the deals with all the carriers are done
heck Apple could very well sell 60mil iphones or more, no one knows what's in store for the future, there will be more models for sure with more features, more apps etc...

[samij]

what about the declining price of iphone? realistically they won't be selling iphones at current price points in 1q 2009. think razr. what about the operators not wanting to pay the "apple tax", and not taking iphone into their portfolios before apple gives in? COO Cook already hinted that this might be coming?

the $15/month/iphone from operators is over estimated. the problem with piper jeffrey's calculations was that he assumed apple getting the new customer payment from operators every quarter! not realistic. removing that leaves apple with about $8-10/month/iphone, about half of your estimation.

[User 86330]

yes, i agree, aapl will reach 140-150 in a heartbeat.

[ssross]

To go further, if Apple decided not to sell another iPhone in Q3 2009, the built up deferred earnings that quarter would amount to about 85 cents a quarter. Talk about resting on your laurels.

[Iowa]

I am also long Apple, but I think your numbers are a little rosy. Apple did not say it would sell 10 mil iPhones in CY2008--it said it would have sold a TOTAL of 10 mil iPhones by the end of 2008. That's 10 mil (conservatively) over an 18-month period, not a 12-month period. And some of the information indicates that almost half are unlocked, which means no continuing monthly revenue, just the profit from the sale. The numbers are still good; just not quite as good as the article indicates.

Obviously, expansion to more countries, especially China, would be great for sales revenue. But I expect three other things to boost the iPhone in the next 18 months (purely my conjecture): first, enterprise server support; then the SDK toolkit, with support for things like third-party games and business apps; and then (this is the biggie), a high-end model that will include a hidden keyboard for all the current RIM Blackberry users. If the iPhone had these things now, we'd be talking about 50 mil in sales by the end of 2008.

[chinaman]

The price of an 8GB iPhone is $399, not $499 as Stephen Rosenman's article states. So Apple's iPhone hardware profits are much less than $150/phone. The 16GB iPhone model is $499.

[checkit]

@ iowa, please go to the following:
www.apple.com/quicktime/qtv/mwsf07 /
click on the iphone intro, go to 1hr 16 minutes. I think it is pretty clear what Jobs was predicting for 08. You are much better served going to primary sources than relying on the blooming number of bloggers, both independent and employed by Forbes, Fortune, Barrons, etc.
A bonus for you is this link about the reality of 3G, which many people think appl should have had in the iphone to begin with. Baloney.
blogs.computerworld.com/was_the_choice_o...

[Gregg Thurman]

The author's analysis is full of factual errors and does not include deferred COGS. Its worthless.

[JPC CPA]

Gregg-
COGS are not deferred, they are expensed at the time of sale! AAPL is using uber-conservative accounting methods.

[raman kandola]

AAPL long term holders would be rewarded with holding this stock. 3G is around the corner, and it still needs to go out to ASIA (India, China: over 2.5 billion population). We would see some explosive growth there >?