Apple: Q4 2008 Earnings Preview

Wall Street investors are holding their breath as Apple (AAPL) is set to report earnings after the close of regular trading this afternoon. This particular report will be one of the most crucial in the company's history as Wall Street and her analysts have completely written Apple off as a business that could thrive in a slower economic environment. In order for Apple's shares to recover from its recent 50% plunge in value, Apple will have to demonstrate its resilience in this slowing economy by both reporting strong earnings results and offering some compelling guidance.

In the past, Apple has consistently offered the street ultra conservative guidance, basically rendering such guidance useless when it comes to how the company will actually perform. Yet, irrational investors on Wall Street continue to be completely preoccupied with Apple's meaningless guidance making it extremely difficult for Apple to rebound until management gets a clue that its conservative nonsense is not working in this particular environment. Apple should either take a page from Google's book and not offer guidance at all, or offer guidance that is more realistic in this skittish environment. Analysts polled by Thomson Financial expect Apple to post earnings of $1.11 in EPS on $8.05 billion in revenue fueled by sales of 2.7 million Macs, 10.5 million iPods and about 4 million iPhones. For Q1 2009, analysts are generally looking for Apple to report $1.66 in EPS on $10.6 billion in revenue.

I am looking for Apple to record approximately $1.25 in EPS on $8.343 billion in revenue. I expect Apple to sell 2.9 million Macs, 11 million iPods and about 7.25 million iPhones. I expect Apple to report that it reached its 10 millionth iPhone sales goal a full three months ahead of schedule. I expect gross margins to drop sequentially to 33.5%, operating expenses to rise to $1.310 billion, and OI&E to rise to $122 million. I expect Apple to post net income of about $1.33 billion after taxes of $474 million.

In terms of the revenue breakdown from Apple's primary operations, I am looking for Apple to produce $4.118 billion in revenue from Mac sales (2.9 million Macs at $1,420.00 ASP), $1.595 billion in iPod revenue (11 million iPods at $145 ASP), and a total of about $2.63 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 lists my estimates along with two other analysts whose opinions I highly respect.

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

Line Item	Apple's Forecast	Andy Zaky, Bullish Cross	Deagol, Stashbox	Turley Muller, Financial Alch.
Revenue	$7,800	$8,343	$8,333	$8,436
Cost of Goods Sold	$5,343	$5,548	$5,541	$5,736
Gross Margin	(31.5%) $2,457	(33.5%) $2,795	(33.5%) $2,792	(32.0%) $2,699
OpEx	$1,270	$1,310	$1,292	$1,270
Operating Income	$1,187	$1,485	$1,500	$1,429
OI&E	$118	$122	$122	$130
Net, before taxes	$1,305	$1,607	$1,622	$1,559
Taxes	(30.5%) $398	(29.5%) $474	(30.0%) $486	(29.0%) $452
Net Income	$907	$1,133	$1,136	$1,107
Earnings Per Share	$1.00	$1.25	$1.25	$1.22
Outstanding Shares	907,000,000	907,000,000	907,000,000	906,000,000

Segment Information & Product Summary (in Millions)

Line Item	Consensus Estimates	Andy Zaky, Bullish Cross	Deagol, Stashbox	Turley Muller, Financial Alch.
Macintosh Sales	2,700	2,900	2,880	2,961
Macintosh Revenue	-	$4,118	$4,072	$4,160
iPod Sales	10,500	11,000	11,000	11,200
iPod Revenue	-	$1,595	$1,540	$1,680
iPhone Sales	4,000	7,250	7,500	6,800
iPhone Rev. Recognized	-	$850	$894	$748
iTunes & Other Music	-	$800	$837	$811
Other Hardware	-	$460	$454	$467
Other Software	-	$520	$538	$559
Total Revenue	$8,050	$8,343	$8,333	$8,436

My Estimates Compared to Wall Street Analysts
The table below compares my estimates with Wall Street analysts. It should be noted that Kathryn Huberty from Morgan Stanley consistently provides earnings estimates which prove to be one of the worst on Wall Street. I fully expect the trend to continue when Apple reports earnings this afternoon.

Analyst	Revenue	EPS	G.M.	iPhones	iPods	Macs
Apple's Guidance	$7.8b	$1.00	31.5%	-	-	-
The Consensus Estimates	$8.05b	$1.11	30.5%	4.0m	10.5m	2.7m
Unpaid Analysts
Andy Zaky, Bullish Cross	$8.343b	$1.25	33.5%	7.25m	11.0m	2.9m
Deagol, Stashbox.org	$8.333b	$1.25	33.5%	7.5m	11.0m	2.880m
Turley Muller, Financial Alchemist	$8.436b	$1.22	32.0%	6.8m	11.2m	2.961m
Wall Street Analysts
Jeff Fidacaro, Merrill Lynch	$7.969b	$1.09	32.7%	3.88m	11.0m	2.7m
Gene Munster, Piper Jaffray	$8.370b	$1.17	32.0%	5.0m	11.0m	2.8m
Richard Gardner, Citigroup	$8.096b	$1.18	-	-	-	-
Ben Reitzes, Barclays	$8.00b	$1.11	32.9%	5.0m		2.761m
Mike Abramsky, RBC	$8.200b	$1.15	-	6.0m	10.8m	2.9m
Kathryn Huberty, Morgan Stanley	$7.865b	$1.05	32.9%	-	-	2.8m
Toni Sacconaghi, Sanford Bernstein	$8.151b	$1.14	32.0%	4.000	10.7m	2.783m

My Past Performance compared to Wall Street Analysts for Q2 2008
The table below compares my past performance with Wall Street analysts. 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, Barclays	$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
Kathryn Huberty, Morgan Stanley	$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 Kathryn 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. Credibility should be called into question when an analyst misses iPhone sales by 41%, 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 in Q2 2008. I also tried to point out that investors ought to ignore Kathryn Huberty's estimates and her meaningless downgrades of the stock. In September, she downgraded Apple two weeks in a row causing the stock to drop a cumulative 30 points or about 30% between the two downgrades. I still haven't figured out who is less intelligent: Kathryn Huberty or the irrational investors who continue to listen to anything she has to say.

Disclosure: Long 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.