Apple makes $206 profit per iPhone.

I discovered this by isolating iPhone earnings within the financial statements, which has been virtually impossible…until now.

Let me preface this analysis by saying that I was only one cent off of Apple’s Q3 net earnings and 3 cents off of Q4 (when you take into account that I was still using 885m as the sharecount, not the 907m…I need to find out where to get the correct info next time, but the net was the same regardless).

Bragging Point: That puts my last two estimates, combined, closer than Andy Zacky’s by 33% (I’ve only been off by a combined 4 cents regarding earnings over the past two quarters vs Andy’s 6 cents). Don’t get me wrong, Andy has the best analysis on the street, but brag I must.

OK…on to how I got to $206 as the profit from each 3G iPhone in Q4.

In disclosing the additional income and profit that it could only include in the non GAAP figures (1.14B net GAAP, 2.44B net non GAAP), when one assumes this difference is primarily iPhone profit (Apple TV and iPhone Apps could be a contributor, but would still make only a percent or two difference among the figures I will outline below), one can manipulate the information provided to come darn close to figuring out the net for each iPhone we see walking down the street.

Given/Assumed:

1- iPhones sold in Q4 = 6.9m

2- 2.44B – 1.14B = 1.30B net iPhone profit not included in GAAP statement

Profit Recognition goes as follows:

July Sales: 1/8th of net profit of iPhones sold in July are recognized for the quarter

(recognized for July, August, September = 3 months of the 24 months recognition is spread over)

August Sales: Net/12

September Sales: Net/24

Here are a few sales scenarios, meant to shed light on how, based upon the 6.9m iPhones sold, there is a small range under which profit per iPhone falls. I show greater detail in the two scenarios in which the most and the least iPhones are recognized in full (this is not necessarily how they are accounted for on the balance sheet, but is an equivalent measure that makes visualization a bit easier than dealing with so many fractions of the two year recognition period) in order to show the range. The others come so close to .6m iPhones that I rounded to one decimal instead of extending to two.

Scenario 1

July: 2.9m sold = 362,500 iPhones net recognized in full (equivalent)

August: 2m sold = 166,667 iPhones net recognized

September: 2m sold = 83,333 iPhones net recognized

Total recognized = 612,500

Total unrecognized = 6.9m – 612,500 ~ 6.3m

Unrecognized net/unrecognized iPhone Sales = 1.3B/6.3m = $206.39

Scenario 2

July: 3.2m sold = 400,000 iPhones net recognized

August: 1.8m sold = 150,000 iPhones net recognized

September: 1.9m sold = 79,167 iPhones net recognized

Total recognized = 629,167

Total unrecognized = 6.27m (going out two decimals for highest unrecognized total for variance purposes)

Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m = $207.34

Scenario 3

July: 2.4m sold = 300,000 iPhones net recognized

August: 2.3m sold = 191,667 iPhones net recognized

September: 2.2m sold = 91,667 iPhones net recognized

Total recognized = 583,334

Total unrecognized = 6.32m (going out two decimals for highest unrecognized total for variance purposes)

Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m = $205.70

Scenario 4

July: 2.7m sold = 337,500 iPhones net recognized

August: 2.2m sold = 183,333 iPhones net recognized

September: 2.0m sold = 83,333 iPhones net recognized

Total recognized = 604,166

Total unrecognized = 6.3m

Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m = $206.39

Scenario 5

July: 2.7m sold = 337,500 iPhones net recognized

August: 2.5m sold = 208,333 iPhones net recognized

September: 1.7m sold = 70,833 iPhones net recognized

Total recognized = 616,666

Total unrecognized = 6.3m

Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m = $206.39

Given these scenarios, one can determine the iPhone net profit recognized is likely no less than 570,000 and no greater than 640,000 for the quarter. Therefore, the unrecognized iPhones should range from 6.26m – 6.33m.

The most iPhones that could possibly be recognized would be .125 (3 months in quarter / 24 months in recognition period) x 6.9m iPhones, which is 862,000, and would require all iPhones to have been sold in July, which didn’t happen. The least that could have been recognized would be 371,000 (1m were sold in first 3 days, as per Jobs’ statement). I don’t want to delve too much into statistics, but to fall out of the 570,000 to 640,000 range of recognized iPhones would be improbable, assuming the iPhones were recognized according in the full month in which they were sold and not to the day.

This results in a net profit range of $205.37 to $207.67. This can vary depending upon expenditures related to the iPhone, future decreases or increases in component costs, dollar exchange rates, etc., but at least represents the snapshot on October 1st, 2008.

Therefore, $206 net profit per iPhone is a good…no, VERY good estimate. I look forward to some good constructive criticism, and some good bashing 

J.R.F

Disclaimer: Long too much AAPL

Don't people remember that 2009 is the 25th anniversary of the Mac??? Would you care to place a large wager that the anniversary will be the actual time of any big announcements?????

Since Apple has a nice hoard of cash, and no debt, they can easily ignore mere analysts. How much debt does Riener have? What, no comment?

Regarding Jobs' medical condition, the man is over 50, and all people over 50 have the physical ailments that it takes way longer to rest up from physical activity than it did when they were in their 20s. Jobs' surgery has removed a lot of his body's physical strength so he has to manage his time much more carefully. Perhaps now long trips require more stops for stretches, jet lag requires more time for adjustment. And there may be a problem for him making sure medical attention is adequate for his needs, so far from home and medical professionals familiar with his medical history.

Regarding a succession plan, Apple probably has one. I figure that Jobs is well aware he could be disabled or killed by an idiot running a red light. Living in a large city, I seen red-light runners at about 5% of the intersections, and I mean the ones that sail through 5 or more seconds after the light turns red.

However, I cant fail to notice that just like any religious movement, the members of Apple can not comprehend the mortality of their messiah. Instead, they pick on the messengers, they find their own Judases, etc. And above akk, they keep the mantra "Steve is irreplaceable".

As I always say, people who go to Mac from PC are said (by Applehead bloggers) to have "converted"…

I do hope that Steve Jobs is fine.

Is there any wonder why the Public Relations business is held in such low esteem ?

Ah, excuse me, Apple PR Flak, but this isn't just any trade show with Biff somebody giving the usual "Hi, how are ya'" spiel, it's Steve Jobs at Macworld, and the Keynote address literally heard around the world.

If this is to be the last round up, Trade Show-wise for Apple, fine, but this sort of Public Relations foot in mouth move is disturbing when it comes from a business so attuned to the customer and fan base and how best to present itself.

"One scare too many"

"We can no longer continue to recommend Apple as a long-term investment"

"[ Apple's ] apparent lack of a succession plan"

“The problem is the absence of any sense of what happens when he leaves.”

"I don’t know how I can continue to recommend the stock on a long-term basis.”

Wow–I've never before seen such a concentration of cluless and/or malicious statements from an analyst. You're the best, Yair. You go, girl…

If Reiner and Oppenheimer are not successful at pushing Steve Jobs into "disclosing all" perhaps some of their clients will move to firms that can see past a simple announcement

Publicly stated succession plans are horrible ideas in most cases.

A company is typically better served by allowing the CEO's underlings to fight a Darwinian ordeal to determine who is the best. In the meantime, the company gets all of their best efforts.

Once you anoint someone as the successor, the company will almost certainly lose candidates #2 through #n who'll head off to greener pastures.

reinharden