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iPhones, Macs Give Apple a Strong Q4 2008

Last year at this time, I commented that the Mac had made a comeback as a major contributor to Apple’s bottom line after several quarters where the iPod dominated the balance sheets. With last week’s release of the company’s Q4 2008 financial results, the Mac is joined decisively by the iPhone, which, including sales to date, has now surpassed Apple’s goal of selling 10 million units during 2008.

For the quarter ending 27-Sep-08, Apple earned $7.9 billion in revenue with a net quarterly profit of $1.14 billion ($1.26 per diluted share). That compares to $6.22 billion in revenue and a $904 million profit from the fourth fiscal quarter of 2007 (see “Apple Sells Record Number of Macs for Q4 2007,” 2007-10-22). Sales of 2,611,000 Macs (a 21 percent increase from last year) and 11,052,000 iPods (an 8 percent increase) contributed heavily.

However, that’s not the full story.

Mind the GAAP — The big question for this quarter was iPhone performance. In the third quarter of this year, Apple sold 717,000 first-generation iPhones – the iPhone 3G had not yet been released. For this quarter, Apple marked an impressive 6,892,000 iPhone sales (that compares to 1,119,000 in the year-ago quarter). The company didn’t break the number down any further, but during the earnings call that followed Apple’s announcement Apple COO Tim Cook pointed out that the iPhone’s market expanded from 6 countries to 51 during the quarter, and therefore a significant percentage is attributable to international sales. (International sales accounted for 41 percent of the overall quarterly revenue.)

Apple also crowed that the 6.9 million number beats RIM (Research in Motion), which sold 6.1 million BlackBerry devices in the same period – not bad for the upstart entrant in the market. It’s also a larger amount than sales of the original iPhone – 6.1 million – over the previous five quarters combined.

Another aspect of the iPhone to watch is the revenue it produced, which isn’t straightforward. Due to GAAP (Generally Accepted Accounting Principles), Apple doesn’t treat the sale of an iPhone (or Apple TV) as a regular sale, but rather counts the expected income over the life of the product (currently set at 24 months for accounting purposes) due to the fact that Apple provides free updates after the sale; one example is the iPhone 2.0 software update that was made available to all iPhone owners.

(Speaking of the Apple TV, Apple CEO Steve Jobs reiterated that he thinks it – and the category of the “digital living room market” – will continue to be a “hobby” in 2009.)

If you count income without the GAAP consideration, Apple reported revenue of $11.68 billion – an increase of 48 percent over its reported $7.9 billion – and net income of $2.44 billion.

Looking Ahead — Despite all the strong financial news, the declining economy figured prominently in the company’s conference call and guidance for the future. Apple CFO Peter Oppenheimer said, “Looking ahead, visibility is low and forecasting is challenging, and as a result we are going to be prudent in predicting the December quarter.” Apple expects a revenue target of between $9 and $10 billion and earnings per diluted share between $1.06 and $1.35.

A few indicators fueled this approach. Education sales were down 7 percent from last year as K-12 school districts tightened their budgets, according to Tim Cook; that accounts for approximately 75,000 lost Mac sales. Slowing Mac purchases in the last month as customers waited for last week’s MacBook and MacBook Pro refresh also hurt earnings, though sales since the announcement have surged.

However, Apple doesn’t have much to worry about looking ahead. It has $25 billion in the bank and zero debt, which Jobs said would help the company innovate its way through a rough economy. In fact, Jobs even pointed out that Apple customers’ loyalty means they’re likely to delay purchases instead of buying a less expensive brand.

When asked about whether Apple would offer its products at lower prices (citing the iPhone and MacBook as examples), Jobs delivered a quintessential answer that reflects the company’s overall attitude. “There are some customers which we choose not to serve. We don’t know how to make a $500 computer that’s not a piece of junk,” he said. “And our DNA will not let us to ship that. But we can continue to deliver greater and greater value to those customers that we choose to serve – and there’s a lot of them.”

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