HALTED: Will Apple be halted in AH when it delivers a $1 Billion beat on the Top Line?

Shares of Apple, Inc (Nasdaq: AAPL) might be halted after the close of regular trading today due to much higher than expected revenue and earnings results. Occasionally, stocks will be halted when a company's earnings results come in at levels that are far beyond the normal variance seen in a typical earnings report. In Q1 2007, for example, the NASDAQ halted trading in Apple when it delivered a pretty hefty beat both on the top and bottom lines. The NASDAQ will typically halt trading in a stock when big market moving news is pending. They do this both to allow a settling in of the news, and to give market makers time to organize the buy and sell orders in orderly fashion. I think this particular report might be one of those situations where the NASDAQ halts trading as Apple's earnings results are released to the public.

Analysts polled by Thomson Financial expect Apple to report earnings of $1.38 in EPS on $9.74 billion in revenue when Apple releases its results shortly after the close of trading this afternoon. The analysts are looking for Apple to sell approximately 4.5 million iPhones, 18.5 million iPods and about 2.45 million Macs this quarter. I'm looking for Apple to beat those expectations quite handedly. I expect Apple to report earnings of $1.81 in EPS on $10.730 billion in revenue driven in part by sales of 7.11 million iPhones, 20 million iPods and 2.72 million Macs. On a non-GAAP basis, I'm expecting Apple to report earnings of $3.12 in EPS on $13.646 billion in revenue driven by approximately $4.266 billion in fully recognized iPhone revenue. The tables below outline my earnings forecast, and unit sales estimates for Apple's first fiscal quarter of 2009:

Andy Zaky's Earnings Estimates for Q1 2009 (in Millions, except for per share data)

	GAAP-Based Est.	Non-GAAP Est.	Difference
Revenue	$10,730	$13,646	(27.2%) $2,916
Cost of Goods Sold	$7,028	$8,256	$1,228
Gross Margin	(34.5%) $3,702	(39.5%) $5,390	$1,688
Operating Expenses	$1,510	$1,510	-
Operating Income	$2,192	$3,880	$1,688
OI&E	$150	$150	-
Net, Before Taxes	$2,342	$4,030	$1,688
Taxes	(29.5%) $691	(29.5%) $1,189	$498
Net Income	$1,651	$2,841	$1,190
Earnings Per Share	$1.81	$3.12	(72.4%) $1.31
Diluted Shares	912,000,000	912,000,000	-

Revenue Breakdown by Unit Sales for Q1 2009

Product	Unit Sales	ASP	GAAP Revenue	Non-GAAP Revenue
iPods	20,000,000	$165.00	$3.300 Billion	$3.300 Billion
Macintosh Computers	2,720,000	$1,500.00	$4.080 Billion	$4.080 Billion
iPhone Sales	7,110,000	$600.00	$1.350 Billion	$4.266 Billion
iTunes	-	-	$1.000 Billion	$1.00 Billion
Software	-	-	$520 Million	$520 Million
Peripherals	-	-	$480 Million	$480 Million
Total Revenue	-	-	$10.730 Billion	$13.646 Billion

At the outset of the quarter, I offered detailed arguments as to why there might be such a disparity between analyst consensus estimates and reality (see here). The analysts simply got too carried away with the chopping of their estimates this quarter, and they let the bear get the best of them. If previous earnings debacles weren't already embarrassing enough for the analysts, then this quarter should be one for the books. The sad part is that all of the data in support of my estimates are available to the public at large. All it takes to accurately forecast Apple's results is basic math and common sense – Wall Street analysts seem to lack in both regards. The table below outlines earnings estimates from several prominent Wall Street analysts along with a few rather accurate, but unaffiliated analysts.

Q1 2009 Analyst Estimates GAAP-Based (Lowest Est. in Red; Highest in Green)

Analyst	Revenue	EPS	iPhones	iPods	Macs
Peter Oppenheimer, Apple Inc.	$9-10 Billion	$1-1.35	N/A	N/A	N/A
Analyst Consensus, Thomson Financial	$9.740 Billion	$1.38	4.5 Million	18.5 Million	2.5 Million
Unaffiliated Analysts	Revenue	EPS	iPhones	iPods	Macs
Andy Zaky, Bullish Cross	$10.730 Billion	$1.81	7.11 Million	20.0 Million	2.72 Million
Turley Muller, Financial Alchemist	$10.734 Billion	$1.80	5.85 Million	18.0 Million	2.65 Million
Deagol, AFB Member	$10.880 Billion	$1.80	6 Million	19.5 Million	2.7 Million
Wall Street Analysts	Revenue	EPS	iPhones	iPods	Macs
Gene Munster, Piper Jaffray	$10.00 Billion	$1.32	6.4 Million	18.6 Million	2.627 Million
Mike Abramsky, RBC Capital	$9.800 Billion	$1.48	4.5 Million	20.4 Million	2.50 Million
Toni Sacconaghi Jr. Bernstein Research	$9.293 Billion	$1.47	3.5 Million	18.1 Million	2.57 Million
Yair Reiner, Oppenheimer	$9.928 Billion	$1.39	4.8 Million	17.683	2.57 Million
Doug Reid, Thomas Weisel	N/A	$1.44	4.9 Million	18.500 Million	2.53 Million
Scott Craig, Merrill Lynch	$9.75 Billion	$1.48	4.2 Million	17.697 Million	2.429 Million
Richard Gardner, Citi Group	$9.90 Billion	$1.42	4.0 Million	N/A	N/A
Ben Reitzes, Barclays Capital	$9.398 Billion	$1.31	4.5 Million	19.245 Million	2.405 Million
Wendy Abramowitz, Argus Research	$9.7 Billion	$1.52	N/A	N/A	N/A
Kathryn Huberty, Morgan Stanley	N/A	N/A	4 Million	16 Million	2.6 Million

Some notable highlights from the table above include the rather bearish outlook by Toni Sacconaghi from Bernstein Research who is famous for incorrectly predicting that Apple would not meet its internal but highly publicized goal of selling 10 million iPhones in 2008 (Apple completed the feat in 9 months). Sacconaghi is looking for Apple to come in at the extreme low end of its proffered revenue guidance of $9 billion. I guess Sacconaghi has a difficult time understanding the term "prudence" which Apple repeatedly used in its Q4 conference call to describe the nature of its guidance. While it was difficult to secure full estimates from Kathryn Huberty, her revenue expectations are likely quite low given the fact that she is once again modeling for apocalyptic iPod sales. This wouldn't be the first time Huberty has modeled for the complete destruction of Apple's financials, and it certainly won't be the first time she is shown to be dead wrong either.

Also interesting is how all three unaffiliated analysts arrived at very tight estimates for Q1. Both Deagol from Mac Observer's AFB (famous for his accuracy in forecasting based on his tracking of web orders is forecasting sales) and Turley Muller from the Financial Alchemist have come within a few million dollars in revenue of my own revenue estimates. Each of us is basically looking for $1.80 in EPS when Apple reports this afternoon.

In terms of non-GAAP earnings forecasts, several analysts including Yair Reiner and Ben Reitzes simply failed to provide estimates for Apple's adjusted earnings in their research reports despite the fact that Apple promised to report adjusted earnings on an on-going basis. I was able to secure non-GAAP revenue estimates from a few analysts however, and each is presented in the table below.

Q1 2009 Analyst Estimates Non-GAAP (Highest Est. in Green; Lowest in Red)

Unaffiliated Analyst	Revenue	EPS	iPhones	iPhone ASP	iPhone Rev.
Andy Zaky, Bullish Cross	$13.646 Billion	$3.12	7.11 Million	$600	$4.266 Billion
Turley Muller, Financial Alchemist	$13.171 Billion	$2.72	5.85	$610	$3.782 Billion
Deagol, AFB Member	$13.425 Billion	$2.83	6 Million	$600	$3.600 Billion
Wall Street Analysts	Revenue	EPS	iPhones	iPhone ASP	iPhone Rev.
Gene Munster, Piper Jaffray	$12.422 Billion	$2.70	6.4 Million	$558.91	$3.577 Billion
Toni Sacconaghi Jr., Bernstein Research	$10.400 Billion	$1.88	3.5 Million	$600	$2.100 Billion
Scott Craig, Merrill Lynch	$11.233	$2.02	4.2 Million	$632.61	$2.657 Billion

The table above should highlight just how delusional some Wall Street analysts can be regarding Apple's financial situation. Toni Sacconaghi's non-GAAP estimates have risen beyond the level of mere incompetence to outright negligence. Sacconaghi's non-GAAP revenue estimates are almost $400 million below the unaffiliated analyst consensus for GAAP-based revenue! If Apple does happen to report in-line with our expectations, Sacconaghi will have missed calling Apple's revenue by more than $3 billion! It will be interesting to see if his clients continue to place any weight in his future forecasts if such an event happens to come to pass. After all, why pay for a research report if you could do a better job guessing?

Macintosh Sales Estimate
I arrive at the 2.72 million Mac unit sales estimate based on interpreting quarterly data released by the Gartner Group on computer sales in the United States. I also use IDC and NPD data as secondary sources to compliment my primary analysis. Gartner data is especially helpful in that it typically predicts about 44-46% of Apple's total sales during fiscal Q1 and Q4 while accurately predicting between 55-63% of Apple's total Mac sales in Q2 and Q3 of any given fiscal year. While this quarter is unusual in that it is difficult to tell just how well Mac sales fared in Europe, the fact that Apple grew its U.S. sales rather dramatically on YoY basis might suggest that things are not as bad as they might seem. I place a lot less emphasis on NPD data because NPD focus exclusively on retail chain store sales. Apple's own retail has been growing at an explosive pace and to extrapolate Mac sales data from NPD findings places the analyst on rather dangerous grounds. Especially in an environment where retail sales are sinking and online sales are booming. To read a full in-depth analysis on this method of forecasting Mac sales, click here. Gartner data this quarter seems to suggest that Apple will post sales of 2.670 to 2.852 million Macs.

Quarterly Released Gartner Data Compared to Actual Macintosh Sales

	Gartner U.S. Sales	Total Actual Mac Sales	U.S. Sales as a % of Total Macs
Q1 2009	1,255,000	*2,720,000	*46.14%
Q4 2008	1,645,000	2,611,000	63.00%
Q3 2008	1,397,000	2,496,000	55.97%
Q2 2008	1,010,000	2,289,000	44.12%
Q1 2008	1,035,000	2,319,000	44.63%
Q4 2007	1,338,000	2,164,000	61.83%
Q3 2007	1,011,000	1,764,000	57.31%
Q2 2007	741,000	1,517,000	48.85%
Q1 2007	808,000	1,606,000	50.31%
Q4 2006	975,000	1,610,000	60.56%
Q3 2006	N/A	1,327,000	N/A

Macintosh Unit Sales Breakdown by Region

	Q2 06	Q3 06	Q4 06	Q1 07	Q2 07	Q3 07	Q4 07	Q1 08	Q2 08	Q3 08	Q4 08
Americas	494	642	781	625	605	824	965	841	884	1,134	1,121
Europe	316	301	342	491	433	393	499	705	627	576	611
Japan	82	79	62	70	79	81	72	91	118	102	78
Retail	154	216	323	308	275	330	473	504	458	476	596
Other	66	89	102	112	125	136	155	178	202	208	205
Total	1112	1327	1610	1606	1517	1764	2164	2319	2289	2,496	2,611

Comparing Actual U.S. Sales with Total Actual Sales

	Americas + Retail	Outside U.S.	Total Macs	U.S. % Total Macs
Q4 2008	1,717,000	894,000	2,611,000	65.76%
Q3 2008	1,610,000	866,000	2,496,000	64.50%
Q2 2008	1,342,000	947,000	2,289,000	58.62%
Q1 2008	1,345,000	974,000	2,319,000	58.00%
Q4 2007	1,438,000	726,000	2,164,000	66.45%
Q3 2007	1,154,000	610,000	1,764,000	65.42%
Q2 2007	880,000	637,000	1,517,000	58.01%
Q1 2007	933,000	673,000	1,606,000	58.09%
Q4 2006	1,104,000	506,000	1,610,000	68.57%
Q3 2006	858,000	469,000	1,327,000	64.60%
Q2 2006	648,000	464,000	1,112,000	58.27%
Q1 2006	708,000	546,000	1,254,000	56.46%

A Note on iPhone Sales Estimates
Last quarter, the analysts missed on their iPhone sales forecasts by an average of 72%. Even bullish analysts such as Gene Munster from Piper Jaffray missed iPhone estimates by close to 30%. The unaffiliated analysts, by contrast, all came within 8% of the actual number. The unaffiliated analysts arrive at their iPhone estimates by tracking IMEI data which unofficially tracks the actual production rate of the iPhone by analyzing the TACs or numbering system used by Apple. Not the hocas pocus nonsense methods which seem to be employed by Wall Street analysts and which lead them to miss estimates by 72%. In all seriousness, what the hell is the point of using a research method that leads one to miss estimates by a whopping 72%!?!?!?!

At the end of November, IMEI data suggested that Apple had produced its 15 millionth 3G iPhone. Yet, no data is available for the month of December so a lot guess work has to go into how might have happened in December. Since its debut Apple has produced, on average, about 3 million iPhones per month. If one conservatively assumes that Apple produced only 1 million iPhones in December (only 33% of the normal rate), that would put Apple at a total of 16 million 3G iPhones produced. If one subtracts the 3G iPhones Apple already reported as sold in Q4 2008 (6.89 million), one will arrive at a total of 9,110,000 iPhones that could have potentially been sold. However, one always has to assume that about 2 million iPhones are sitting in Apple's inventory, are replacements for defective iPhones, or are damaged during the manufacturing process. Thus, if one subtracts about 2 million iPhones from the total potential sales for the quarter, one would arrive at 7.11 million iPhone sales. Read more about this extremely accurate method of forecasting iPhone sales here.

Analyst FY 2009 Earnings Forecast for Apple, Inc.
While investors should rightly focus on Apple's Q1 earnings results out after the market closes today, I think it's important to hold analysts accountable for their obvious errors in forecasting 2009 earnings results. So before analysts are quick to adjust the FY 2009 estimates after Apple reports tomorrow, I thought it would be nice to remind everyone how these analysts have handled themselves over the past few months. The table below outlines several Wall Street analyst estimates, price targets and buy ratings for FY 2009. I find it interesting that it's a lot easier to locate a Wall Street analyst's FY 2009 estimate than it is to find that same analyst's estimate for the current accounting period.

FYE 2009 Analyst Estimates for Apple, Inc. (Highest Est. in Green; Lowest in Red)

Unaffiliated Analyst	Revenue	EPS	Price Target	Rating
Analyst Consensus, Thomson Financial	$35.840 Billion	$5.00	$124.39	Buy
Andy Zaky, Bullish Cross	$40.636 Billion	$6.47	$175	Buy
Turley Muller, Financial Alchemist	$37.378 Billion	$6.16	$165	Buy
Deagol, AFB Member	$41.134 Billion	$6.51	N/A	Buy
Wall Street Analysts	Revenue	EPS	Price Target	Rating
Gene Munster, Piper Jaffray	$38.860 Billion	$5.46	$235	Buy
Mike Abramsky, RBC Capital	$36.200 Billion	$5.00	$70	Underperform
Scott Craig, Merrill Lynch	$35.954 Billion	$5.18	$110	Buy
Mark Moskowitz, JP Morgan	$34.700 Billion	$4.75	$102	Overweight
Toni Sacconaghi Jr. Bernstein Research	$34.197 Billion	$5.04	$135	Outperform
Yair Reiner, Oppenheimer	$37.352 Billion	$5.36	$120	Outperform
Shaw Wu, Kaufman Bros.	$35.510 Billion	$5.05	$120	Buy
Andy Hargreaves, Pacific Crest	$35.940 Billion	$5.73	$160	Outperform
Ben Reitzes, Barclays Capital	$34.406 Billion	$4.75	$113	Overweight
David Bailey, Goldman Sachs	-	$4.54	$115	Neutral
Doug Reid, Thomas Weisel	-	$5.31	$130	Overweight
Vijay Rakesh, Think Equity	-	$4.78	$110	Buy
Richard Gardner, Citi Group	-	$4.78	$132	Buy
Keith Bachman, BMO Capital	-	$4.60	$108	Outperform
Brian Marshall, AmTech	-	$4.87	$95	Neutral
Kathryn Huberty, Morgan Stanley	-	$4.37	$95	Equal Weight
Maynard Um, UBS	-	$5.20	$115	Neutral