iPhone to Create Earnings Bonanza for Apple

Mar. 3.08 | About: Apple Inc. (AAPL)

Apple (NASDAQ: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 (NYSE: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