Apple Inc. (nasd:AAPL) Rising gross margins stemming from increased recognition of deferred iPhone revenue has been a key factor in propelling Apple’s share price and EPS. I believe the next major tailwind will be increased revenue growth and higher margins arising from the falling U.S. Dollar.

In 2009, 46% of Apple’s total revenue came from overseas, up from 43% in FY08 and 41% in FY07. Including European Apple retail stores, revenue generated in Europe was roughly 30% of total revenue in FY09. International markets are a key source of Apple’s revenue and growth, and a declining dollar is beneficial for the firm. Apple’s performance for the past several quarters was challenged by headwinds from the strengthening USD. Going forward, Apple should benefit from the dollar’s decline. This will lift international revenue growth and boost margins. Alternatively, Apple could choose to lower prices abroad to stimulate product demand to drive volume. I believe many investors overlook the fact that Apple derives nearly half its revenue outside the U.S., thus don’t consider the considerable impact coming from a weaker USD.

Apple Inc (AAPL). For some time, many have speculated about an arrival of a $99 iPhone. Some analysts expect a low-cost model with scaled back features, such as 2.5G instead of 3G, no GPS, and possibly a smaller form factor. While I believe a lower iPhone price point is possible, I don’t expect Apple to go backwards by removing features that reduce device functionality to achieve a lower-cost offering. The price of the handset is much less significant than the lifetime cost of the required $30/month data plan. Therefore, crippling device functionality to lower handset price makes no sense when the primary cost component is the data plan.

Apple Inc (AAPL) $91.21- Here's a quick snapshot of Apple's cash holdings over the past 9 quarters. In the case of Apple, it's extremely important to focus on cash flow opposed to accounting [GAAP] income due to the massive build of deferred revenue on its balance sheet. Total deferred revenue is $9.7B, $7.3B of which is iPhone related.

Accounting EPS is often a poor gauge of a firm's actual earning power due to the many ways to legally (and illegally) inflate, obscure, or mislead actual performance. However, all one needs to do is follow the cash. The concept of investing is inserting cash into a vehicle that will return a larger cash amount back in the future. Cash flow, not earnings, best reflects a firm's investment prospects.

Authentidate Holding Corp (ADAT) $0.27- Authentidate is attractively positioned to benefit from the expected flood of spending aimed at modernizing healthcare IT. Remote patient monitoring, also known as telehealth, is one area where Authentidate stands to capitalize due to its unique and superior product solution. Patient home monitoring is expected to be a $12 billion industry by 2012.

ADAT will earn $120M in revenue if it achieves just 1% penetration. This compares to $6M in revenue Authentidate earned last fiscal year. There are a decent number of patient monitoring devices deployed currently, yet very few have actual “telemedicine” functionality, whereby a patient’s vitals are electronically transmitted to the healthcare provider coupled with any patient instructions subsequently relayed back to the patient. According to an InMedica study, there were less than 1 million telehealth subscribers in 2008, yet that number is expected to climb to over 55 million by 2016.

Apple Inc (AAPL)- Apple’s FY09 EPS estimate continues to be revised downward and now stands at $5.08, a level Apple should easily exceed. The consensus FY09 estimate represents a 5.2% decline from FY08 $5.36 EPS, although revenues are forecasted to increase 11.8%, or $3.8B to $36.3B. Thus, analysts are expecting significant margin compression. Specifically, the consensus estimates for EPS and revenue imply net margin will be 12.8% in FY09, a decline of 2.1% from 14.9% recorded in FY08.

It’s not that I don’t believe the recession will take a major toll on Apple, it will. Instead of achieving 35%-40% earnings growth likely to occur in a normal economy, Apple’s EPS should increase at least 5%-10% in FY09. Due to deferred revenue recognition and upward margin pressure, it’s very unlikely Apple’s earnings will decline, certainly not to the 20%-30% magnitude some analysts predict.

MAC DEMAND CONCERNS:
For the past couple months, Wall Street’s concern du-jour for Apple (AAPL) has been Mac demand. No PC / consumer electronics firm is immune to this economic downturn, but many analysts believe there is substantial downside risk for Mac sales.

Analysts claim the contracting economy is causing changes to the complexion of industry demand that could have further negative implications for the Mac segment. Specifically, the slowdown in consumer spending will cause industry demand to contract, and within the computer industry, demand will shift away from Mac to lower-priced PCs.

APPLE INC (Nasdaq:AAPL) According to my calculations, deferred revenue booked from Q4 iPhone sales carries a 55.5% gross margin. Gross margin on the deferred revenue [DR] booked from the first generation model averages about 29%. The average gross margin for total booked DR is 47.8%.

I derived this number from the “deferred expense under subscription accounting“ that Apple disclosed in its annual filing (10-K) in conjunction with the deferred revenue (under subscription accounting) also reported. I used some rather extensive math to come up with the 55.5% number which I discuss below.

Slowing iPod sales growth has been one of the chief concerns among Apple Inc. (AAPL) investors because the iPod has historically been a major contributor to Apple’s overall revenue growth. The concern stems from the belief that the PMP market is becoming saturated.

With 175 million iPod units sold, finding new customers is becoming more difficult. However, the iPod is becoming less of a revenue contributor, hence Apple is less dependent on the iPod for its sales growth. Andy Zaky, a highly accurate AAPL analyst addressed the iPod’s shrinking importance with regards to Apple’s corporate revenues. In addition, If Apple reported iPhone sales as part of the iPod segment, this wouldn’t be much of a concern, because the iPhone would have reaccelerated sales growth in the iPod segment. I recently discussed that scenario. Yet, Apple reports the iPhone separately. Therefore, this analysis focuses on the traditional iPod product line and its growth outlook.

Apple Inc. (AAPL) analysts and the media have regularly cited slowing iPod sales as a major headwind for Apple shares. The iPod has been a major force in Apple’s total sales growth since it has been such a large percentage of Apple’s overall revenue. A common claim is that the iPod has been so successful, that everyone has one.

A seemingly positive statement, some choose to take a negative point of view. For example, “It’s not good for future growth because Apple is running out of new people to sell iPods to. Basically everyone who wants an iPod, already has one. While there will be sales resulting from the replacement cycle, it certainly won’t generate the magnitude of growth exhibited in the past. Therefore, iPod sales will significantly deteriorate.”

Apple Inc.'s (AAPL) FY09 gross margin should well-exceed management’s guidance of 30%. There are multiple factors that will support FY09 gross margins. 1) As iPhone’s revenue contribution to total company sales increases, overall gross margins will rise since the iPhone carries a very high GM. 2) There will be a more favorable component price environment created by plunging commodity and energy prices. 3) As production volume rises for the iPhone and MacBooks, scale effects and cost efficiencies will benefit drive down product costs. 4) Higher revenues supply leverage by spreading fixed costs across a higher revenue base.

Apple’s guidance is way too conservative; yet considering the economic landscape, management is exercising prudence. This cushion should help Apple exceed earnings expectations even if the economy adversely affects its business. With gross margin expectations so low, Apple’s revenue growth could turn out worse than expected and still match/beat EPS estimates. Alternatively, Apple could use the gross margin cushion for lowering prices to boost demand if warranted.

This article was co-authored by Seeking Alpha contributor Turley Muller.

Based on the tremendous joint efforts by members at Mac Observer's AFB  and Investor Village's AAPL Sanity Board member howlongtoretire (aka HLTR) to track IMEI iPhone numbers, we have determined that Apple has drastically surpassed analysts' Q4 iPhone sales estimates, and that Apple has reached its goal of selling 10 million iPhones in 2008. The consensus estimates for iPhone sales figures for Apple's Q4 (calendar Q3) were calling for approximately 4 million units. It now appears that Apple has sold at least 7 to 7.5 million iPhones in Q4—that's nearly 80% above consensus. Apple has far surpassed even Gene Munster's bullish estimates of 5 million iPhone sales in Q4 according to the data.

Apple Inc. (AAPL) $152.65 - Apple introduced the new 3G iPhone model on July 11th, and sales thus far look to be impressive. Using the OS market share data from Net Applications and the IMEI tracking data from the Mac Observer’s Apple Finance Board, iPhone sales appear to have approached 6 million units since launch.

By the end of this quarter [Q4], I predict iPhone sales will reach 7-8 million. Most estimates on the Street are calling for unit sales to come in under 5 million units. Perhaps the most important aspect is the effect on cash earnings. Since Apple spreads iPhone revenue over 8 quarters, reported EPS will see little effect. However, cash earnings should increase more than $2.00.

A common mistake people often make refers to how a firm’s cash stockpile is treated in the valuation process. Specifically, Investors err when they subtract cash from market value before calculating an earnings multiple that includes interest income. P/E multiples are calculated using EPS, or net income per share. This figure includes interest income that is generated from a firm’s cash investments.

Apple Inc (AAPL) currently at $156.63: I believe investors have become overly fixated on Apple’s expected accounting income, while ignoring Apple’s impressive free cash flow generating ability. Free cash flow, not earnings reported in the accounting statements, determines the true value of a firm. AAPL’s high margins, coupled with minimal capital investment needs, enables it to produce robust free cash flow. Another issue is the iPhone accounting treatment, which conceals the true magnitude of its cash generation. According to my estimations, the 3G model’s cash flow per unit is higher than its predecessor. In addition, Apple receives these cash flows much sooner compared to the old model. Not only will Apple sell many more 3G models, the per-unit impact on cash earnings will be much greater. Therefore, when shifting focus to cash earnings, as opposed to accounting earnings, AAPL looks attractive at current levels.

Earnings Expectations:
At the Q3 earnings call, Apple guided well below expectations for Q4, and gave a weak gross margin forecast for FY09. Shares took a hit and prompted Wall Street analysts to reduce their 4Q08 and FY09 estimates. Consensus estimates for FY08 & FY09 are $5.20 & $6.05, respectively. Early this year, the FY09 estimate was ~$6.50, then drifted lower to ~ $6.35 where it hovered for several months. Since Apple announced its margin guidance, the consensus FY09 EPS estimate has plunged to $6.05.

Apple’s (AAPL) 3G iPhone appears to be quite profitable. The fully subsidized price from AT&T (T) is $199/$299 for the 8GB/16GB models, respectively- requiring a 2-year contract. If a current AT&T customer has recently purchased a discounted phone, then the price may increase up to $399/$499, depending on how much subsidy AT&T needs to recover on the old phone. Without a 2-year contract from AT&T, the iPhone will cost $599/699.

The actual amount Apple receives per iPhone is uncertain. Wall Street analysts estimate AT&T is paying a $300-$350 subsidy. The AT&T pricing scheme suggests the subsidy may be as high as $400 per unit.

Regions Financial (RF) has plummeted to $11.40 from its July 2007 levels of $32. For most of 2008, RF traded in the $18-22 range, but since May, RF has been on a pronounced downtrend. It’s also important to note, that the regional banking group as a whole, has been extremely weak for the past several weeks.

Regions fell 7.4% on Tuesday, June 17th, and then fell 10.4% on Wednesday. In the last 30 days, RF has plummeted 45%. Also under pressure are Suntrust (STI), Key Corp (KEY), Fifth Third (FITB), BB&T (BBT), and Wachovia (WB). Looking at the table, most of the 3 & 6 month cumulative losses occurred just in the last month.

Apple Inc (AAPL) has surged to $180 from $120, where it was trading back in February. Of course, Apple was trading near $200 at the end of December 2007, but sentiment turned and Apple’s shares plummeted January through March before reversing, and staging a rally in April. Shares have been stuck in the $180s since May. The pivotal question becomes: “what can/will push shares higher?”



Apple’s stock may have gotten ahead of itself at the end of last year (2007), when it hit $200. Analysts were bullish and nearly all had a price target above $200. Then January arrived, Apple provided weak guidance and the Street flipped out. Sentiment quickly turned negative, and heavy selling drove Apple lower. A couple of analysts downgraded the stock, and most revised their price targets lower to the $150-175 range.