Apple: A Look Ahead to March 2010 Quarterly Results

Includes: AAPL, T, VZ
by: Neil Carvin
This post describes our model of Apple's (NASDAQ: AAPL) Income Statement for the second quarter of fiscal 2010, which ended on 27 March.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report on 20 April 2010. Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.

There are an extraordinary number of analysts, both amateurs and professionals, that dig into every aspect of Apple's product line and its finances. For this post, we have tapped into many information sources and synthesized the information as best we could. Readers won't have any difficulty finding more authoritative information about Apple.

We begin by reviewing background information about Apple and the business environment in which it is currently operating.

Apple Inc. is known for elegant product design, innovation, customer loyalty, secrecy, and the cult-like status afforded CEO (and savior) Steve Jobs.

Apple sells Macintosh® desktop and laptop computers, iPod® music and video players, iPhone™ portable communications devices, the newly launched iPadtablet, the OS X operating system, iLife and iWork application software, and various accessories.

Products are sold online and through iconic company-operated retail stores. Digital content is made available through the iTunes Store®, as well as iPhone and iPad Apps stores.

In the quarter that ended in December 2009, Apple revised how it accounts for sales of the iPhone(and the less important Apple TV). This change, which complies with the latest standards issued by the Financial Accounting Standards Board , enables Apple to recognize "substantially all" iPhone and Apple TV Revenue in the period that the sale to a consumer took place. Apple had been required to recognize Revenue from these products over each product's two-year estimated economic life. This "subscription accounting" method resulted in substantial amounts of deferred Revenue and costs.

When it made this accounting change, Apple restated its results (required for "retrospective adoption") for each quarter of fiscal 2007, 2008, and 2009. For fiscal 2009, which ended last September, Apple now reports earningsof $8.2 billion on sales of $42.9 billion.

Apple's soaring stock price has caused its market value to reach $218 billion, which makes it the third-most valuable U.S. company.

A recent story in the Wall Street Journal claimed that Apple would soon be producing a CDMA iPhone that would work with Verizon Wireless's (NYSE:VZ) network, breaking AT&T's (NYSE:T) monopoly. This report caused Apple's share price to jump.

The Gartner research firm projected last month that nearly 20 percent more personal computers would be shipped worldwide in 2010 than 2009. In a trend that benefits Apple, Gartner "expect[s] mobile PCs to drive 90 percent of PC growth over the next three years."

We're now ready to look specifically at the March 2010 quarter. When announcing results for the December 2009 quarter , Apple Senior Vice President and Chief Financial Officer Peter Oppenheimer stated:

Looking ahead to the second fiscal quarter of 2010, we expect revenue in the range of about $11.0 billion to $11.4 billion and we expect diluted earnings per share in the range of about $2.06 to $2.18.

Additional guidance was provided during the conference call on 25 January 2010 with financial analysts:

"Looking ahead to the March quarter, ...

We expect revenue to be between $11-11.4 billion compared to $9.1 billion in the March quarter last year under the new accounting principles. We expect gross margin to be about 39% reflecting approximately $40 million related to stock based compensation expense. We expect OpEx to be about $1.64 billion including about $190 million related to stock based compensation. We expect OI&E to be about $30 million reflective of the short-term interest rate environment and we expect the tax rate to be about 29%. We are targeting EPS in a range of about $2.06 to $2.18 compared to $1.79 in the year-ago quarter under the new accounting principles.

Apple's guidance has been extremely conservative . Therefore, we have to consider other information to improve the Income Statement model.

The company's Revenue will be determined, for the most part, by how many Macintoshs, iPhones, iPods it sold and the average selling price (ASP) for each product type.

Gene Munster, a Piper Jaffrey Senior Research Analyst, estimated (based on retail sales data from NPD Group) that Apple sold between 2.8 million and 2.9 million Macintoshs in the March 2010 quarter, at an ASP 10 percent less than the $1329 ASP in the March 2009 quarter. Mr. Munster's figures imply Mac Revenue between $3.35 billion and $3.47 billion.

Maynard Um, of UBS, estimated that Apple sold 7.5 million iPhones during the quarter. If the ASP matched the $638 of the December 2009 quarter, this suggests iPhone Revenue of about $4.8 billion.

Mr. Munster also estimated sales of 9 million to 10 million iPods. If the ASP is $160, this product could provide Revenue between $1.4 billion and $1.6 billion.

We need to add another $2.0 billion, give or take, of Revenue for "Other Music Related Products and Services," "Peripherals and Other Hardware," and "Software, Service and Other Sales."

Using the figures above, the estimate for Total Revenue is between $11.55 billion and $11.87 billion. Let's say $11.7 billion, which is 28.8 percent more than Revenue of $9.084 billion in the March 2009 quarter.

Apple forecast a Gross Margin of 39 percent for the March quarter, but we think it will be higher because sales will exceed the guidance range. In the past four quarters, the Gross Margin averaged nearly 41 percent. We'll split the difference and use 40 percent as our projection for the March 2010 quarter. In other words, we are looking for a Cost of Goods Sold of (1 - 0.40) * $11.7 billion = $7 billion.

Management's $1.64 billion guidance for Operating Expenses seems reasonable. We have allocated $400 million to Research and Development and $1.24 billion to Sales, General, and Administrative expenses.

These figures would result in Operating Income of $3.04 billion in the March quarter, up 31 percent from $2.32 billion in the same period of the previous year. We will use Apple's estimate of $30 million for other non-operating income and expense items, and we accept their 29 percent guidance for the income tax rate.

With these figures, the estimate for Net Income becomes $2.18 billion (about $2.36 per share). In the year-earlier quarter, Apple earned $1.62 billion ($1.79 per share).

Please click here to see a full-sized, normalized depiction of the projected results next to Apple's quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.


1. "Apple's Mac Business Solid: Should Beat Street Estimates," Business Insider, by Jay Yarow, 15 March 2010.

2. "February Mac sales up 43%, Apple on track for 2.9M in quarter," Apple Insider, by Neil Hughes, 15 March 2010.

3. "7.5M iPhones estimated sold in Q1 2010, users stay in Apple ecosystem," Apple Insider, by Katie Marsal, 7 April 2010.

4. Accounting board votes 5-0 for pro-Apple rule change,, Fortune Brainstorm Tech, Apple 2.0, Posted by Philip Elmer-DeWitt, September 23, 2009 3:52 PM.

5.The iPhone, Innovation and Subscription Accounting, Posts At Eventide, 29 July 2009.

6.Apple Inc. Form 10-K/A, Amendment 1, filed 25 January 2010.

7.Gartner Says Worldwide PC Shipments to Grow 20 Percent in 2010, Gartner Inc., 4 March 2010

8.Apple Reports First Quarter Results, Apple Inc., 25 January 2010.

9.Apple Inc. (NASDAQ:AAPL) F1Q10 Earnings Call, Seeking Alpha, 25 January 2010.

10. Apple's Guidance 'Comically Conservative' , Silicon Alley Insider, Dan Frommer, Apr. 23, 2009.

11.Apple is No. 3, closing in on Microsoft, Apple 2.0, by Philip Elmer-DeWitt, 31 March 2010.

12. New iPhone Could End AT&T's U.S. Monopoly, Wall Street Journal, By Yukari Iwatani Kane, Ting-I Tsai, and Niraj Sheth; 30 March 2010.

13. Apple is No. 3, closing in on Microsoft, Apple 2.0, by Philip Elmer-DeWitt, 31 March 2010.

Full Disclosure: No position in AAPL at time of writing