AAPL: Look Ahead to December 2009 Quarterly Results

Apple (NASDAQ: AAPL) earned $1.82 per diluted share in the fourth quarter of fiscal 2009, which ended on 26 September, up from $1.26 in the same quarter of the previous year.

In October, we examined Apple's Income Statement for the September quarter.  We later performed a financial gauge analysis of Apple, which produced a GCFR Overall gauge score of 41 of the 100 possible points.  A subsequent adjustment in how scores are calculated increased the figure to 45 points.

Despite blowout earnings in the September quarter, the score remained modest because iPhone accounting negatively affected certain Balance Sheet ratios, some growth rates were not as robust as in the previous year, and a soaring share price pressured the Value gauge.

We have now modeled Apple's Income Statement for fiscal 2010's first quarter, which ended on 26 December 2009.  The intent of this exercise was to produce a baseline for identifying deviations, positive or negative, in the actual data the company will announce on 25 January.  GCFR estimates are derived from trends in the historical financial results and guidance provided by company management.

Let's be clear: There are an extraordinary number of sources of information about Apple, its business, and its finances.  Professional and amateur analysts compete to predict the company's earnings.  We lack that in-depth company-specific expertise.  We have tapped what sources we could find, and synthesized the information as best we could, but readers won't have any difficulty finding more complete and authoritative information about Apple.


First, we set the stage with some background information about Apple and the business environment in which it is currently operating.

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

Apple sells Macintosh® desktop and laptop computers, iPod® music and video players, the iPhone™ portable communications devices, the OS X operating system, iLife and iWork application software, and various accessories.  The imminent addition of a tablet computer to the product line has triggered an avalanche of speculation and valuable publicity.

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

Gartner estimated Apple shipped 1.48 million personal computers in the U.S. during the fourth quarter of calendar 2009.  This quantity is 23 percent more than the number of units shipped in the same quarter of the 2008.  Apple's market share slipped from 7.7 percent to 7.5 percent, probably because low-cost computers were in greater demand.

Apple is not, according to Gartner's figures, one of the top five sellers of personal computers worldwide.

Apple and Nokia Corp. (NYSE: NOK) are involved in an escalating patent flap.  The two companies compete most directly in the market for smartphones.  Other rivals include Research in Motion's (NASDAQ: RIMM) Blackberry, Palm's (NASDAQ: PALM) Pre, Google's (NASDAQ: GOOG) Android-based Nexus One, as well as various products from Motorola (NYSE: MOT), LG Electronics (SEO: 066570) and Sony Ericsson.

It is important to understand that, in accordance with the subscription accounting method, almost all iPhone™ Revenue and Costs of Goods Sold are deferred from the quarter in which the devices are purchased by a customer.  For any given iPhone, the associated Revenue and Costs are recognized uniformly over the device's two-year estimated economic life. 

Apple is expected to switch to a different accounting method in either fiscal 2010 or 2011.  The end of subscription accounting will, for a time, boost reported Revenue and Earnings by substantial amounts.

We're now ready to look specifically at the December quarter.

When announcing September's quarterly results, Senior Vice President and Chief Financial Officer Peter Oppenheimer stated:

“Looking ahead to the first fiscal quarter of 2010, we expect revenue in the range of about $11.3 billion to $11.6 billion and we expect diluted earnings per share in the range of about $1.70 to $1.78.”

Additional guidance was provided during the company's conference call on 19 October 2009 with financial analysts.

"For the December quarter, ...  We expect gross margin to be about 34%, reflecting approximately $33 million related to stock-based compensation expense. We expect OpEx to be about $1.64 billion, including about $178 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 30%. ....

Apple's guidance has been extremely conservative.  For the September quarter, the company forecast "revenue in the range of about $8.7 billion to $8.9 billion" and diluted earnings per share in the range of about $1.18 to $1.23."  The actual figures were $9.87 billion and $1.82.

Therefore, we have to consider information other than Apple's guidance to prepare an Income Statement model. 

Philip Elmer-DeWitt at BrainstormTech recently posted three articles with estimates of how many iPhones, Macs, and iPods were sold by Apple in the December quarter. 

In the first article, Mr. Elmer-DeWitt reported that analyst estimates for the number of iPhones sold in the quarter range from a low of 8.17 million to a high of 11.3 million units.  Apple sold 4.36 million iPhones in the December 2008 quarter and 7.4 million iPhones in the September 2009 quarter.

In the second article, he reported that the number of Macintosh computers sold has been estimated between 2.79 million and 3.31 million.  Apple sold 2.52 million Macs in the December 2008 quarter and 3.05 million Macs (a record high) in the September 2009 quarter. 

In the third article, he reported that the number of iPods sold has been estimated between 17.75 million and 23 million.  Apple sold 22.7 million iPods in the December 2008 quarter and 10.2 million iPods in the September 2009 quarter. 

The median estimate cited by Mr. Elmer-DeWitt for iPhone sales is 8.7 million units, an increase of 18 percent relative to the September 2009 quarter.  The median estimate for Mac sales is 3.1 million units, a sequential increase of 1.6 percent.  The median estimate for iPod sales is 20.5 million units, about double the number in the September quarter.

If the average selling prices for these products didn't change from September to December, Apple's overall Revenue would increase by roughly $2.0 billion, from $9.9 billion to $11.9 billion. 

Apple's Gross Margin has averaged about 36.5 percent in the last three quarters, but we are expecting a lower 35.5 rate in the December quarter because lower-margin iPods will comprise a great proportion of the sales mix in the holiday period.  In other words, we are looking for a Cost of Goods Sold of (1 - 0.355) * $11.9 billion = $7.68 billion.

We are assuming that Research and Development expenses will be 3.5 percent of Revenue, or 0.035 * $11.9 billion = $417 million.

For Sales, General, and Administrative expenses, we are expecting 10 percent of Revenue, or  0.1 * $11.9 billion = $1.2 billion.

These figures would result in Operating Income of $2.62 billion in the December quarter, up 23 percent from $2.28 billion in the same period of the previous year.

Other non-operating income and expense items are typically minor at Apple.  We are assuming these items will, in total, match the September quarter's income of $45 million.

These figures would result in pretax income of $2.66 billion.  If we assume fiscal 2009's effective tax rate of 28.6 percent is applicable, the tax provision would be $762 million.  With these figures, the estimate for Net Income becomes $1.9 billion (about $2.07 per share).  In the year-earlier quarter, Apple earned $1.6 billion ($1.78 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.







References:

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

2. 3-2-1-Launch! Apple Tablet Ready to Launch in Second Quarter, CoolTechZone.com, Written by: Matt Hartley on 1/09/10.

3. A history of the elusive Apple tablet, in links., TechRepublic, October 5th, 2009, Jason Hiner.

4. Gartner Says Worldwide PC Shipments in Fourth Quarter of 2009 Posted Strongest Growth Rate in Seven Years, Press Release, January 13, 2010.

5. Apple Reports Fourth Quarter Results, Press Release, October 19, 2009.

6. Apple Inc. (AAPL) F4Q09 Earnings Call, SeekingAlpha transcript.

7. Apple's Guidance 'Comically Conservative', Silicon Alley Insider, Dan Frommer, Apr. 23, 2009, 10:00 AM.

8. How many iPhones did Apple sell?, CNNMoney.com, Fortune Brainstorm Tech, Apple 2.0, Posted by Philip Elmer-DeWitt January 3, 2010 5:00 PM

9. How many Macs did Apple sell?, CNNMoney.com, Fortune Brainstorm Tech, Apple 2.0, Posted by Philip Elmer-DeWitt January 5, 2010 4:39 AM.

10. How many iPods did Apple sell?, CNNMoney.com, Fortune Brainstorm Tech, Apple 2.0, Posted by Philip Elmer-DeWitt January 8, 2010 8:00 AM.

11.  Apple Inc (AAPL): Q4 2009 Estimates, Financial Alchemist. Monday, October 19, 2009.

12.  Apple to report first quarter 2010 earnings on Jan. 25 [u], AppleInsider, Monday, January 11, 2010 12:40 PM EST.

13.  Apple Inc.(NASDAQ: AAPL): First Quarter Earnings Preview 2010, iStockAnalyst: Wednesday, January 13, 2010 1:55 PM.

14. Apple Earnings Preview: Another Blow-Out Expected, Stefan Sidahmed, SeekingAlpha, January 13, 2010.

15. Apple: December Qtr EPS Blowout? Barrons Tech Trader Daily, By Eric Savitz, December 30, 2009, 9:21 AM ET


Full disclosure: No position in AAPL at time of writing