With all the lunacy surrounding Apple’s iPhone, it wouldn’t be surprising if the company tried to ratchet back expectations to some level that more approximates optimistic reality. And that’s exactly what Apple did with its fiscal Q3 07 earnings release today.
Against the backdrop of investor disappointment yesterday, when AT&T said that it had activated 146,000 iPhones (a number that sent analysts scurrying in fear because they had guessed the number of iPhones sold on June 29 and 30 to be around 500,000), Apple issued a superb earnings report today, showing a 24% rise in revenue year-over-year, with fiscal Q3 revenues totalling $5.4 billion.
Net income, however, soared 73% year-over-year to $818 million, as sales of Apple’s lucrative iPod and Mac computers continued to increase strongly. Apple shipped 9.8 million iPods during the quarter, up 21% on an annual basis.
Strong Mac sales were, however, the real surprise of the quarter. Apple shipped 1.76 million Mac units during the quarter, a third more than were shipped during the corresponding quarter last year and a record-breaker for the company. Revenues from this product line were up 36% year-over-year to $2.5 billion.
In terms of the iPhone, Apple shipped 270,000 of the units during the last 36 hours of the quarter, an admirable performance that nonetheless looks skimpy in comparison to the big numbers bandied about earlier. Don’t believe the hype and don’t expect wild numbers from us, company COO Tim Cook seemed to say during the analysts call.
Apple is in this business for the long haul and we’re not rushing around to supply big numbers to anybody, he also seemed to say. “Our primary focus is not on initial sales…but on building a long-term third business” in addition to computers and iPods, Cook said. “Our perspective is measured in years, not months.”
Perhaps that’s one reason why Apple has chosen to treat the sale of iPhone units as if they were subscriptions for accounting purposes. (I missed the beginning of the call when CFO Peter Oppenheimer explained the reason for this accounting treatment. I did catch that somehow Apple will provide support to iPhone buyers for the length of their AT&T subscriptions. Maybe this fact alone dictates treating unit sales as subscription services for tax purposes according to GAAP.)
What this means is that Apple will report only a portion of the actual revenue generated through iPhone sales each quarter — the remaining revenue is considered “deferred” and will be reported on a pro-rated basis according to a 24-month schedule. Anybody who has ever had a subscription business knows what a nightmare it is to keep track of realized versus deferred revenues.
But anybody who has ever had a subscription business also knows that treating revenue this way smooths out the peaks and valleys, which should insulate Apple from any weird misperceptions when it has a big quarterly shipment of iPhones.
During fiscal Q3 07, Apple reported only $5 million in revenue from iPhone sales (not including any revenue splits from AT&T on the monthly phone service subscription fees — those revenues will kick in next quarter), even though it took in at least eight times that in actual monies paid.
Look for a big jump in iPhone revenues, even with this allocation of revenues, next quarter. The company says it’s on track to sell at least a million iPhones during the current quarter (which, on an unallocated basis would boost Apple’s revenue by at least $500 million) and reiterates its goal of selling 10 million of the fancy devices by the end of next year.
Despite the bump up that the iPhone (sales of the units plus revenue splits from AT&T) will give Apple for its fiscal Q4 07, the company is projecting light revenue growth for the quarter and an actual drop in earnings per share. Apple expects Q4 07 revenue to be around $5.7 billion, compared to $5.4 billion for Q3 07, and EPS to hover around $.65, compared to Q3 07’s EPS of $.92.
During the analysts call, Cook and Oppenheimer were peppered with disbelieving questions about these seemingly lowball projections. True to Apple’s personality, neither executive offered much detail about the sober projections.
My guess, however: Apple is trying to rein everybody in from the edge of overheated expectations that surround the company. Apple may have overshot its goal by going too low, but clearly the Cupertino giant is trying to calm everybody down.
Cynthia Brumfield at 7:11 PM|Comments(1)
The wrong move was made from the start on this phone. Hooking up with AT&T was the big mistake. Bad service to say the least. I know of many that would love to have the iPhone, myself included, but not under an AT&T tag. Was a shocker that Jobs went to that level.
Posted by: avgeno at July 26, 2007 9:17 PM
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