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Apple Earnings: Conservative Estimates, Outrageous Results

apple earnings chartWhen Apple issued earnings guidance at the end of the third quarter they attempted to reset analyst (and investor) expectations.   An ambiguous new product launch (which turned out to be both new macs and the new iPod line) would decrease margins and profits, they cautioned.  They advised a conservative view.  They forecast meager revenue of $5.7 billion and earnings of only 65 cents a share. That seemed way too low. Call it conservative finance, call it sandbagging, or overly cautious analysis, call it what you want, but whatever the name – there seemed little reason for it.  Now there’s proof. was , in fact, no reason for caution at all.

After the close of markets Monday, Apple announced their results for the 4th quarter.  For football fans, the numbers were like yesterday’s first half score between the Patriots and the Dolphins: a blowout.   For Q4 Apple reported the highest September earnings in their history.

Earnings were up 67% over last year with revenue of $6.22b (versus $4.84b last year).  Profits were $1.01 a share ($904m gross), well ahead of Thompson analyst consensus estimates of 86cents/share on revenue of $6.07b.

Among the divisions, all the numbers were rosy.

Mac sales, which have been strong and getting stronger, broke into a new range besting a sales record set in June.   Even as some like to say Mac unit sales benefit from a “halo effect” from brand goodwill built by the iPod’s, there’s no question the Mac’s can stand up on their own.     Total unit sales were up 34% relative to last year.   Further, Mac related products accounted for a staggering 62% of the quarter’s revenue. 

The new iPod lineup also returned strong sales and demand.  Unit’s sold fell slightly short of expectations, but the 10.2m units still accounted for a 17% increase over last year.    The Music Category represented  36% of total revenue. 

iTunes far and away remained the leader in its category. The store remained the 3rd largest US music distributor (ahead of Target and Amazon).  It accounted for 85% of digital music bought and sold in the U.S.  (Nielsen SoundScan).

iPhones were also impressive.  On the quarter, 1.2m phones were sold; a  number on the high side of most estimates.  And that should only improve into the next quarter as the phone’s global launch comes online (O2 in the U.K. and T-Mobile in Germany will launch the iPhone on November 9th.  Orange will roll the phone out in France on November 29.)

Apple’s stock has more than doubled over the past year amidst a combination of strong sales, hot products (iPhone and new iPods) and investor speculation about an even stronger future.  Right now, evidence of the positive sentiment, the stock is trading at more than 37 times projected 2008 profits.

For the next quarter, Apple up-adjusted their guidance to predict revenue of $9.2n, solidly above the $8.7b previous Wall Street Target.  Earnings are estimated at $1.42/share, up 3cents over estimates.

Apple has a history of being conservative with their guidance, as this quarter further indicated.(Apple forecast revenue of only $5.7 billion and earnings of only 65 cents a share for this quarter)   Looking ahead, that conservative trend probably continues even with the upgraded guidance.  It’s probably safe to expect another banner quarter.

Analyst soundbytes:
•The holiday season is approaching. Typically cyclical the period is a significant period for the company’s earnings.
Apple’s heading into the quarter with strong momentum in all categories
•European growth has been impressive and should only be further buoyed by the European launches of the iPhone.
•Even with the stock increasingly rich, a history of beating conservative guidance and high investor speculation should drive the stock through the quarter.

Related Articles:
Apple’s Q4 Earnings Transcript (via Seeking Alpha)
Apple Q3 Earnings
Apple’s Two Step: Reversing Positions
The New iPod Lineup
Movie Rentals on iTunes?
Led Zeppelin on iTunes  

More detailed press coverage of Apple’s finances can be found at:
Yahoo Finance
Google Finance

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