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April 21, 2008, 7:00 am

Apple’s Q2 earnings: What to watch

Apple is set to release its second-quarter earnings on Wednesday, and by coincidence its shares closed on Friday at just over $161 — almost exactly where they stood three months earlier, before Apple’s first-quarter earnings report.

Although the company in January posted the best earnings in its 32-year history, the Q1 report is remembered by investors as a disaster. In the weeks that followed, Apple (AAPL) shares fell more than 40 points — from above $160 to below $120 — knocking $36.5 billion off the company’s market capitalization. Recession fears were a big factor in what turned out to be a three-month bungee jump, but what really spooked the market was Apple’s Q2 earnings guidance: 94 cents per share, nearly 15% below the Street’s average estimate of $1.09. [Reader "Mick" points out that hedge funds dumping Apple to prop up their shaky financial positions played a major role in the sell-off. He notes that institutions held 71% of Apple's shares before the plunge and 68% after.]

So there are two things to watch for on Wednesday: 1) Apple’s sales figures for Q2, which should be stellar, and 2) what kind of guidance it gives for Q3, which is anybody’s guess.

All signs point to an excellent second quarter for Apple. The consensus of analysts surveyed Monday was looking for the company to earn $1.07 a share on $6.95 billion in sales, versus the company’s guidance of $0.94 on $6.8 billion

Strong sales of MacBooks led the quarter. IDC last week reported that, although growth in overall PC sales in the United States slowed last quarter to just 3%, Apple’s computer shipments were up 25.1%. Gartner, using slightly different methodology, reported Mac sales up 32.5%.

If Apple’s worldwide performance is anything like its domestic record, the company should easily beat the Street’s consensus of 1.95 million Macs sold in the quarter. Piper Jaffray’s Gene Munster is looking for Mac sales of 2-2.1 million; JP Morgan’s Mark Moskowitz expects them to come in even higher, at 2.11 million. Either number would represent a near doubling of sales in just two years, as Ars Technica’s handy bar graph shows.

The iPod picture is not quite as rosy. There is sure to be sharp seasonal falloff from the Christmas quarter, when Apple shipped 22.1 million units. JP Morgan’s Moskowitz estimates that Apple sold 9.68 million iPods in Q2; Piper Jaffray’s Munster is calling for somewhere between 10 to 10.5 million, reflecting a sales spurt late in the quarter sparked by a sharp price cut on the low-end iPod shuffle. According to Munster, the Street has already decided that the iPod’s days of growth are behind it, and that the consensus is looking for sales of just under 53 million iPods in 2008 — essentially unchanged from 2007. Munster’s more optimistic; he believes the iPod will evolve over the next 12 months from a stand-alone music player into a mobile Internet device that fits in your pocket, and he’s looking for iPod sales to grow 10% year over year.

iPhone sales are harder to predict, given the spot shortages in the United States, excess inventory in Europe, and a chaotic black market in jailbroken iPhones in Asia and the developing world. Analysts’ estimates are all over the lot. Moskowitz and Munster (to pick on those two one more time) differ by half a million units. Moskowitz expects Apple to report sales of 1.5 million iPhones; Munster is looking for 1.6 to 2 million. Charles Jade at Ars Technica’s Infinite Loop speculates that the release date of the 3G iPhone may hinge on what the actual number turns out to be. He writes:

With a prediction of 10 million iPhones sold in CY 2008 … Apple must sell, on average, 2.5 million iPhones per quarter. … If the iPhone sold less than 2 million units this quarter, expect a 3G iPhone sooner rather than later. Conversely, if the current shortages are a result of insatiable lust for the greatest phone ever made, expect Apple to milk that cow for all it’s worth before introducing a new model. (link)

When it comes to pricing Apple’s shares, however, Wall Street cares less about the past than the future. The guidance Apple gave last October hinting at a blowout Christmas surprised analysts and help drive the stock to a record $200 a share in December. Although Apple beat everybody’s expectations for the quarter, by the time the first quarter results came out, traders were focused on Q2. And when Apple shocked analysts in January with surprisingly pessimistic guidance, it triggered a 40 point fall.

Investors, some of whom lost millions in the debacle, were furious, and Apple was besieged by angry threats and e-mails. (”Straight out, bald face, criminal lying,” was how one described Apple’s Q2 guidance). Few expect the company to respond such complaints by sweetening its numbers; if anything, it is more likely to offer no guidance at all, especially for a quarter that is so hard to call. Although investors can look forward to a new iPhone and software developers kit in June, back-to-school sales in late summer, and Christmas sales before the end of the year, none of those expectations will show up in Q3 earnings.

If Apple does offers Q3 numbers, they are sure to be, as always, conservative. Apple, more than most companies, likes to make only promises it knows it can keep. But despite recent complaints, the fact is that its results do tend to track its guidance. The spreadsheet at left, produced by a member of TMO’s Apple Finance Board who calls himself “awcabot,” shows guidance and results quarter by quarter since 2002. Past performance is no guarantee, but over that time, revenues have exceeded guidance fairly dependably by an average of 5.7% and earnings by an average of 43.8%.

Take all this for what it’s worth. Apple is a volatile stock, and it’s especially volatile before and after earnings reports. We may not be in for another bungee jump, but for the next few days it could be a bumpy ride.

I think that Apple is definitely a good stock to watch. Apple’s products seem to all be well-received and with a new iphone on the way along with rumored new designs on their laptops, the stock could soar.

http://www.get-a-free-macbook.blogspot.com

Posted By Evan - Columbus, OH : April 26, 2008 3:35 am

Blogitforu….Although you sound like a highly educated individual, what you are proposing, and what you seem to have found on the internet, is a hacked copy of LEOPARD (Not ‘Leopards;) OS X. This hacked version is not only illegal, it is NOT compatible with a Windows platform PC…nor should it be.

Please, take your educated self and your promotion of pirated software elsewhere.

Posted By anonymous Philadelphia,PA : April 24, 2008 11:40 am

The war of the computer world is still going on and the question people still ask is which is better a mac or a pc. Now that u can run leopards on a regular pc and mac can run windows on an apple does this mean the war is over? From people experience they say running leopards on a regular intel or amd computer is much better than running it on a mac because of hte processor speed and everything and its much more smooth. Then u got windows running a mac people say that runs better too but who knows i never tried it personally myself but it is pretty cool that leopards can run a regular desktop now and people dont have to go out and spend thousands of dollar on a mac. What is everyone feedback on this situation and which do u prefer more. Tune in later for a video on how ot install mac on a pc.

Posted By blogitforu : April 22, 2008 8:19 pm

Before I start up the guide of Dual Booting, Please be aware that installing Leopards on Window Machine is Illegal. If you wanted to have a legal copy of Leopards you may purchase it by clicking here. Sometime is so hard to understand because window is not legal in installing it to a Mac Machine, it’s just a thought. A day after Apple release Leopards on the market, hackers have managed to create a patched DVD for everyone to use without buying a copy of this software to install on a PC Machine. Please be aware that this instruction is not on its own capacity for a perfect install, it is still an experimental and things may not work the way you wanted it. Now let get into the real deal, and dirty of this software phenomenon.

Posted By blogitforu : April 22, 2008 8:09 pm

Apple seems to have lost the momentum. iEtc is getting to be passe’. The new laptop is soso. iPhone is too expensive. Only thing driving the sale is people making money by sending those to Asia. Apple and ATT probably lost money that way.

Posted By Tom, portland, OR : April 22, 2008 2:45 am

Buying Apple should be like buying any stock: buy and hold what you like. Then you can weather price drops with equanimity and ignore the speculators. I like Apple stuff. As has been noted, market saturation (and mathematics) dictated that iPod sales could not continue to increase at the former pace. By the same token, flip side, Mac sales can increase strongly for the foreseeable future. Through iTunes, Apple is also a growing provider of digital information and entertainment.

Posted By David Johnson, South Bend, IN : April 21, 2008 5:29 pm

Munster called for 1.65 million iphones for the quarter, not 2 million units.

http://www.businessweek.com/technology/ByteOfTheApple/blog/archives/2008/04/gene_munster_so.html?campaign_id=rss_blog_byteoftheapple

ex ped: The chart on Munster’s March 31 report “Apple’s 3 Cylinder Engine: Part 1 — iPhone” shows 2 million.

Posted By John Toronto Canada : April 21, 2008 3:12 pm

Just FYI, Charles Jade writes for Ars Technica, not Apple Insider.

ex ped: So he claims. Thanks for noticing. Fixed now.

Posted By Jacqui, Chicago, IL : April 21, 2008 2:18 pm

Charles Jade has not yet been fired from Ars Technica and gone to work fro AppleInsider, just FYI.

ex ped: Yikes! Well, at least I spelled your name correctly. Fixed, with apologies.

Posted By Charles Jade, San Francisco, CA : April 21, 2008 1:57 pm

As a long term investor in Apple I guess I don’t worry too much about quarterly reports. Apple is kicking serious butt and the report will be glowing as usual and the stock will fall $6-7 the same day. With Apple no news is good news as far as the stock price goes. We just had another nice run up in the price lately on what news? None.

IPod sales slowing and that means doom and gloom for the company? LOL. It’s hard to increase those numbers when you own 80+ % of the market and the biggest threat to iPod sales is the iTouch iPhone which I view as just a deluxe iPod and could be considered iPod’s anyways.

This is an exciting run for Apple fans and long term investors. I bought at $22.50 and got in on the stock split so the price would have to drop to $11.25 before I start losing money which doesn’t seem likely any time soon.

Posted By Nodack Phoenix AZ : April 21, 2008 1:36 pm

This is one of the better articles I have seen on Fortune regarding Apple. It actually contains some real information and not just a rehash of a press release or PR campain. It doesn’t make wild predictions about competitor elimination and still has a fairly positive spin. A real breath of fresh air.

Posted By Heywood, Heywood Ohio : April 21, 2008 12:15 pm

The article notes that “investors were furious” These individuals were (are) not investors - they are speculators and deserve all of the pain that accrues to mindless gambling. They are however, worse than gamblers who typically harm only themselves and their families. Because few companies have the discipline to ignore their insensate braying, business decisions are made for their benefit and are, almost always, wrong.

Posted By Alan Schwartz Baltimore, MD : April 21, 2008 11:06 am

I don’t see how RIMM will be around in 5 yrs. It’s going to be line SunMicro.

Posted By Pete Kusnick, MD. : April 21, 2008 10:13 am

Why is this article annoying? Because it plays into the hands of people who thrive on a volatile stock. People buy and sell for two primal reasons: fear and greed. And every once in a while a stock comes along where certain “players” can “bounce” the buying public between these two extremes.

It is simplistic to state, as this article does, that the reason Apple stock took a nosedive last quarter was because of Apple’s “low guidance”. There was a LOT more going on than that. Far more important was the finally dawning perception of the true potential depth of the recession, and the incredible and, IMHO, purposeful “bad press” that Apple got about the “likely” non-sustainability of its profit rise. Frankly, various “players” took the opportunity to severely “bounce” Apple stock, reap huge profit by selling at the top, and then setting themselves up for more gain by re-buying at the bottom. All along they knew that Apple was a major long-term play that would inevitably rise in value.

Anyone who buys Apple for the short run is just setting themselves up for the idiots who “bounce” the stock to milk it of its “volatility”. The smart money is to buy the stock and forget about it for at least two years. IF YOU HAVE NO INTENT ON DOING THIS THEN DON’T BUY APPLE STOCK!!! All you are doing is rewarding the players and damaging the reputation of this incredible company.

In the long run, this stock is due for a HUGE run-up. They are doing everything right. They are also doing exactly what they’ve been doing for years and years, which is to say they are focusing on quality and TRUE innovation. This is a recipe for long-term success.

If enough people commit to the long term, you will foil the “players”, who will end up selling their stock to “force” a downturn, but end up missing the boat as the stock continues to go up! That’s the best way to get even with these parasites!

Posted By sacto joe, sacramento, ca : April 21, 2008 10:05 am

When will analysts get over the significance of raw numbers of ipods sold? This might matter if Apple had the same ipod line up as it did a year ago, but it doesn’t. Since then it has added the ipod touch - a one-of-a-kind MP3 player for which there is no direct competition that I know of. It is the number 2 seller on Apple’s website for ipods and has the highest selling price ranging from $299 to $499 (interestingly the least expensive ipod - the shuffle - starts at $49 and is the worst selling of the four ipod models according to Apple’s website).

My argument would be that we should be more interested in total dollar sales for ipods instead, because as Apple focuses more and more on advanced mp3 players, average selling price will go up even when number of units sold stagnates. And although we’ll never find out, I would guess the ipod touch has a higher profit margin too in part because of the lack of direct competition of units that do all the things a touch can do.

If I were Apple, I think I would rather sell one $499 ipod touch than 10-15 ipod shuffles because I should make more money on just that one touch. But Wall Street would freak out because my ipod sales are down 90%!

And as far as the iphone goes, I think we know that unit sales have been solid even if they might turn up a little under where they should be at to reach Apple’s 10M unit goal. But that isn’t the story! The story is impending 3G units which is what much of the world - including many Americans - have been waiting for. It is hard to believe that Apple won’t shatter that 10M mark.

Posted By N.S., Lebanon, Ohio : April 21, 2008 9:59 am
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Philip Elmer-DeWittSilicon Valley veterans like to joke that Steve Jobs must be surrounded by a reality distortion field; if you get too close to him, you start to believe what he's saying. Thanks to the success of the iPod, the launch of the iPhone and the renewed interest in the Mac, Apple has made believers out of millions of customers - and made a lot of investors rich. But Philip Elmer-DeWitt believes that an ounce of skepticism never hurts when writing about the company. He should know. He's been covering Apple - and watching Steve Jobs operate - since 1982, first for Time Magazine, then for Business 2.0, and now for Fortune.
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