Apple: Q3 Earnings Preview

As anyone who follows the technology sector knows, Apple (AAPL) is set to report earnings after the close of regular hours trading this afternoon. Analysts polled by Thomson Financial expect Apple to post earnings of $1.08 on $7.37 billion in revenue fueled by sales of 2.2 million Macs, 10 million iPods and about 600,000 iPhones. Despite the general bearish feel going around on Wall Street, the "whisper numbers" have gotten as high as $1.11 on $7.45 billion in revenue. In mid-June, I published my initial earnings forecast for Apple's fiscal third quarter, but have made some revisions to those estimates in light of recently released data on Macintosh sales by the Gartner Group.

I am now looking for Apple to record approximately $1.20 in EPS on $7.720 billion in revenue. I expect Apple to sell 2.54 million Macs, 10.5 million iPods and about 700,000 iPhones. I expect gross margins to rise to 34%, operating expenses to rise to $1.225 billion, and OI&E to rise to $165 million. I expect Apple to post net income of $1.08 billion after taxes of $485 million.

In terms of the revenue breakdown from Apple's primary operations, I am looking for Apple to produce $3.725 billion in revenue from Mac sales (2.54 million Macs at $1,466.43 ASP), $1.785 billion in iPod sales (10.5 million iPods at $170 ASP), and a total of about $2.2 billion derived from its other primary operations (this includes revenue Apple recognizes through its other music related products and services, iPhone and related products & services, peripherals & other hardware, and software, service and other sales). The table below compares my overall estimates to Apple's guidance.

Forecasted Income Statement (In Millions, except per share data)

Line Item	Apple's Forecast	Bullish Cross Forecast	Difference
Revenue	$7,200	$7,720	$520
Cost of Goods Sold	$4,824	$5,095	$452
Gross Margin	(33%) $2,376	(34%) $2,625	$343
OpEx	$1,185	$1,225	$40
Operating Income	$1,191	$1,400	$303
OI&E	$115	$165	$50
Net, before taxes	$1,306	$1,565	$308
Taxes	(31%) $405	(31%) $485	$85
Net Income	$901	$1,080	$259
Earnings Per Share	$1.00	$1.20	$0.20
Outstanding Shares	N/A	900,000,000	N/A

Segment Information & Product Summary
Macintosh Sales: $3.725 billion
iPods: $1.785 billion
Other Music Related Products & Services: $810 million
iPhone: $400 million
Peripherals: $420 million
Software: $580 million
Total Revenue: $7.72 billion

My Estimates Compared to Analyst Estimates Last Quarter (Q2 2008)
The table below compares my earnings forecast with some of the top analyst' forecast last quarter. The numbers highlighted in "blue" designate the closest estimate to Apple's actual report whereas the numbers highlighted in "red" designate the estimate which was furthest from Apple's actual report.

Analyst	Revenue	EPS	G.M.	iPhones	iPods	Macs
Apple, Inc.	$7.512b	$1.16	32.9%	1.703m	10.644m	2.289m
Andy Zaky, Bullish Cross	$7.449b	$1.31	36.0%	1.700m	10.5m	2.350m
Gene Munster, Piper Jaffray	$6.900b	$1.19	36.0%	1.6-2.0m	10.5m	2.100m
Shaw Wu, AmTech	$7.000b	$1.10	33.5%	1.5m	10.0m	2.150m
Richard Gardner, Citigroup	$7.000b	$1.23	36.5%	1.5m	9.5m	2.100m
Ben Reitzes, Lehman	$6.950	$1.05	33.2%	1.5m	10.3m	2.090m
Mike Abramsky, RBC	$7.200b	$1.11	34.0%	1.8m	10.5m	2.200m
Katy Huberty, Morgan Stan.	$6.634b	$1.10	35.8%	1.0m	8.5m	2.020m
Scott Craig, BofA	$6.900b	$1.07	n/a	1.22m	10.0m	2.021m

Notice how Katy Huberty of Morgan Stanley made the worst call in four out of the six major areas of prediction. She actually missed revenue by almost a cool billion ($815 million). How an analyst can miss that badly and continue to have any credibility in his or her coverage of a stock is beyond me. That is what happens when an analyst misses iPhone sales by 700,000 units, iPods by a whole 2.1 million units and Macs by 269,000 units. I pointed out the obvious flaws in her analysis before and after earnings was released last quarter.

Alternatively, Mike Abramsky of RBC Capital is really starting to make a name for himself as one of the better analysts covering Apple. He was the closest out of Wall Street analyst in predicting revenue, iPods and Mac sales last quarter. He also recently made the excellent prediction that Apple would sell about 1 million 3G iPhones on opening weekend. I am really starting to respect this guy as an Apple analyst.

Disclosure: I own long term 2009 and 2010 call options in Apple. The information contained in this blog is not to be taken as either an investment or trading recommendation, and serious traders or investors should consult with their own professional financial advisors before acting on any thoughts expressed in this publication.