Both companies beat expectations last week, but only one of them was growing

Click to enlarge. Source: Company reports, Oct. 2009.

A year ago we ran a bar graph similar to the one at right. It showed that Apple (AAPL), despite the Mac's tiny market share compared with Microsoft (MSFT) Windows, was gaining on the software giant. The main reason: revenue pouring in from the iPhone but hidden as deferred earnings in Apple's balance sheet. (That chart is posted below the fold.)

Last week Apple and Microsoft once again reported quarterly earnings — and enjoyed nice pops on the stock market. But their growth rates turn out to be very different.

This quarter, deferred iPhone revenue isn't as big a deal for Apple as it was last year (non-GAAP earnings actually grew more slowly than GAAP; see here for why). Ironically, it was Microsoft that had to use deferred revenue from Windows 7 to show any growth at all. Otherwise, Microsoft's revenue for the third quarter was down 14% year over year and its earnings down 17%.

Apple's revenue, meanwhile, grew 25% and its income 46.6%.

Apple's war chest, in terms of cash and cash equivalents, is larger than Microsoft's, $34 billion to $33 billion, taking long-term debt into account (Apple has none).

And as far as market share, that depends what market you're looking at.

The bar graph above shows the Mac's share of the U.S. personal computer market, which has inched up to 9.4%, according to IDC.

Meanwhile, the iPhone's share of the worldwide smartphone market has grown from 2.8% to 13.3%, according to Gartner, while Windows Mobile has been relegated to "Others." And the iPod continues to command roughly 70% of the MP3 player market; Zune's share hovers around 2%.

The consensus on Wall Street is that Microsoft has turned a corner, and both Apple and Microsoft rallied last week. But over the past year — since we last did this exercise — Apple's shares have grown four times faster.

Below, as promised, last year's version of the bar chart:

Date: Oct. 26, 2008

Click on the chart to see last year's post.

Thanks to reader Mark Taylor for the suggestion.

[Follow Philip Elmer-DeWitt on Twitter @philiped]

Everybody failed to predict Cupertino's blowout quarter, but some failed worse than others

Smackdown: See full spreadsheet below

"Well, that was quite embarrassing!" writes "deagol," a widely read amateur analyst whose estimate of Apple's (AAPL) fourth quarter earnings fell 16% short of the record profits the company reported Monday.

The irony is that deagol, who filed a long post-mortem mea culpa on his website Monday night, had less to be embarrassed about than 18 of the 19 Wall Street analysts we polled in advance of Apple's fiscal 2009 4Q earnings report. (See The Street awaits Apple's earnings.)

Once again, the amateurs and independents out-performed the professionals in our quarterly Apple analyst bake-off. The color-coded spreadsheet is pasted below the fold.

But first, some general comments about why everybody failed to predict that Apple's profits would grow 46% or that the company would sell a record 3 million Macs — up 17% in a quarter in which its competitors, selling cut-rate Windows boxes at razor-thin profit margins, grew an anemic 2%. (See here.)

The key misses:

• Macs. Apple was right and Microsoft's (MSFT) Laptop Hunters ad campaign was wrong. Consumers — or at least enough of them — were shopping for user experience, not low prices or spec lists.
• iPods. Although Piper Jaffray's Gene Munster dismisses the iPod as "no longer an investable theme" due to cannibalization from the iPhone, iPod touch sales were up 100%, suggesting that there may be still be life in the category.
• iPhones. A record 7.4 million sold even though Apple couldn't build them fast enough to meet demand. We won't even talk about Jim Cramer, who told his Mad Money audience that because of this, Apple's share price was going to fall — not explode as it did in after-hours trading.
• ASPs. Average selling prices actually went up a bit, rather than down as you might have expected after back-to-school sales and price cuts on iPhones and MacBooks. Deagol attributes it to 15" and 17" MacBook Pros getting "crazy popular" among college students.
• Taxes. For reasons I can't begin to explain, Apple's effective tax rate was 25.6%, not the 30% they had guided.

Without further ado, our Analyzing-the-Analysts spreadsheet, with best results highlighted in green and worst in red. Responding to reader requests, this time I've also highlighted second worst in pink and second best (and in one category third best) in light green.

Revenue in billions; earnings in dollars/share; unit sales in millions; Gross margin in %. Source: Philip Elmer-DeWitt

A tip of the hat, as Stephen Colbert might say, to Brian Marshall at Broadpoint AmTech, who scored the most greens by filing the most bullish report. And as always to our three independent analysts, who managed to stay entirely out of the red. You can read Turley Muller at Financial Alchemist, Deagol at Deagol's AAPL Model, and Andy Zaky (when he's writing) at Bullish Cross. These guys are too good not to be making a living at it.

A wag of the finger to the insufficiently bullish: BMO Capitol's Keith Bachman, Needham's Charlie Wolf and most of all Oppenheimer's Yair Reiner, whose last-minute warning of iPhone production "hiccups" sent the Mad Money in precisely the wrong direction.

See also:

• Apple's Q3: Analyzing the analysts
• Apple's Q2: Analyzing the analysts
• Apple's Q1: Analyzing the analysts
• Apple's 2008 Q4: Analyzing the analysts

[Follow Philip Elmer-DeWitt on Twitter @philiped]

So much for expectations. Apple (AAPL) blew past them all — its own and those of a crowd of increasingly bullish analysts — by reporting its most profitable quarter ever, earning $1.82 a share on revenue of $9.87 billion for the fourth fiscal quarter of 2009.

The Street was expecting quarterly earnings of $1.42 on revenue of $9.2 billion, according to Thomson Financial.

Apple's shares exploded in after-hours trading. Having closed at $189.86, shares leaped more than 13 points in the next hour and 40 minutes to $202.87 — one thin dime away from the all-time high of $202.97 set in intraday trading on Dec. 27, 2007.

Sales for the year were a record $36.5 billion, up 12.5% from 2008. Earnings per share for the year topped $6.29, up more than 17% from the year before.

Strong sale of iPhones — following price cuts and the introduction of a new model — helped boost Apple's earnings.

But the big surprise was the Macintosh. Apple sold 3.05 million Macs for in Q4 — a 17% increase from same quarter last year — thanks to its new Snow Leopard operating system, re-energized back-to-school sales and a big order from the state of Maine.

"We are thrilled to have sold more Macs and iPhones than in any previous quarter," said Steve Jobs in a prepared statement."

Highlights from Apple's earnings report include:

• Mac sales: 3.05 million units, up 17.3% year over year
• iPhone sales: 7.4 million units, up 41% from last year
• iPod sales: 10.2 million, down from just over 11 million a year ago
• iPod touch sales were up 100% from last year
• Gross margin: 36.3%, up from 34.7% last year
• Cash: $34 billion, up $2.9 billion from $31.1 billion last quarter
• Guidance for the December quarter: revenue between $11.3 and $11.6 billion, EPS between $1.70 and $1.78, gross margin 34%

Apple's press release is available here.

A replay of the conference call will be available for the next two weeks, starting at 5 p.m. PDT. The instructions are here. Seeking Alpha has published a transcript here.

See also:

• The Street awaits Apple's earnings
• Retail data show Mac sales up 13%
• Will iPhone sales disappoint investors?

[Follow Philip Elmer-DeWitt on Twitter @philiped]

What's Wall Street expecting this quarter? The 22 analysts we polled are all over the lot

Merck, McDonalds, Microsoft, Boeing, Coca Cola, Dupont and AT&T are among the bellwether companies reporting earnings next week, but when the markets close on Monday, all eyes will be on Apple (AAPL).

Wall Street blows hot and cold on Cupertino. Apple shares have been on fire for most of the year, and after see-sawing for much of the day they rose up sharply in late afternoon trading to close at $189.86, up 0.96%. The stock has rocketed more than 120% since January, outpacing the Dow by nearly 9 to 1 and leaving analysts scrambling to keep up. Nearly all have adjusted their estimates in advance of Monday's report, some rather dramatically (one of them raised his price target from $70 a share to $250 in the space of seven months).

Apple analysts scramble to catch up

With the stock hovering within 10 points of its all-time high ($202 per share, set nearly two years ago), the question for many traders is whether it has much further to go — which is one of the reasons they'll be closely watching Monday's earnings report.

The Street is looking for Apple to earn $1.42 a share on revenue of $9.2 billion, according to Thomson Financial's consensus, although the revenue estimates of the 20 analysts we polled ranged from $8.37 billion to $9.72. That's a difference of $1.35 billion — enough to fund a small land war — but this time the most optimistic estimates come from big Wall Street firms, not the unaffiliated analysts who have tended in the past to be the most bullish on Apple.  (See chart below the fold.)

The biggest discrepancy in the chart below is the column showing estimated iPhone unit sales. Since June, when Apple introduced the iPhone 3GS and lowered the iPhone 3G's price to $99, the company hasn't been able to make the things fast enough to meet demand.

Whether that is good news or bad remains to be seen. The bulls are looking for Apple to report sales of 7.5 million to 8.02 million iPhones — numbers that would both boost its revenue and sweeten its gross margins. The bears are expecting unit sales in the range of 5.2 million to 6.0 million. If the numbers are that low, you can expect the stock to get clobbered in after-hours trading.

Will iPhone sales disappoint investors?

Another number to watch Monday is Apple's so-called non-GAAP revenue, especially now that the generally accepted accounting principles (GAAP) rules have been rewritten to allow the company to book revenue from iPhone sales as it comes in, not spread out over two years. Not every analyst publishes non-GAAP revenue numbers, but those that do are looking for them to come in somewhere between $10.4 billion and $11.65 billion. Anything more than $11 billion — even though that's less than the "truly stunning" $11.68 billion Steve Jobs reported last year when deferred revenue for the original $599 iPhones were still pouring in  — would probably be considered a pretty strong showing.

Apple's gap is closing quickly

Finally, there's Apple's guidance to consider, which as usual is anybody's guess. Piper Jaffray's Gene Munster, for one, is expecting Apple's predictions for the December quarter to be typically conservative. He's looking for them call  for earnings-per-share around $1.68 (12% below the Street's $1.91 consensus) on revenues of  $10.98 billion (4% below the Street's $11.44 billion).

A guide to Apple's guidance

After falling nearly two points in early morning trading, Apple bounced back at $189.86, up 1.81 points (0.96%). The company's shares had closed Friday at $188.05, down 2.51 points (1.32%), and fell another 0.45% in after-hours trading. Traders may have been spooked by one analyst's report — given prominent play on cable TV Friday night — that production "hiccups" could have cut into iPhone sales last quarter. (See here.)

Below: The published estimates of 19 professional analysts — updated to include several reports issued Monday morning — and three closely-watched independents. To find out who was closest to the mark, check in here after the markets close.

Revenue in billions; earnings in dollars/share; unit sales in millions; Gross margin in %. Source: Philip Elmer-DeWitt

Apple is scheduled to report its earnings for fiscal Q4 and 2009 after the markets close Monday, Oct. 19. A conference call with analysts is scheduled to begin at 5 p.m. Eastern (2 p.m. Pacific) and will probably last about an hour. Tune in here for our analysis.

[Follow Philip Elmer-DeWitt on Twitter @philiped]

Production "hiccups" may depress next week's earnings, warns one analyst

Compared with the increasingly sunny predictions streaming from his competitors, the note Oppenheimer's Yair Reiner sent clients Friday morning was something of a buzz kill.

"We believe Apple could report in line to slightly disappointing [fiscal fourth quarter] revenue," he wrote, advising investors to hold off buying shares until after Monday's quarterly earning's report.

The focus of his concern: the iPhone.

Reiner's estimate for Apple's fourth quarter iPhone sales was already the lowest of all the analysts we surveyed — 6 million, compared with a consensus just over 7 million and a high estimate (from Citibank's Richard Gardner) of 8.05 million.

But even 6 million, he says, could prove too high, due to what he calls "component/manufacturing hiccups."

"The first hint of trouble," he writes, "surfaced during the iPod event on Sept. 9, when Apple implied that ~3.5M phones had been sold with only 21 days left in the quarter. Subsequent checks showed the iPhone 3GS sold out in many markets. Something was clearly preventing Apple from shipping to demand… Consensus estimates imply that 3.5M phones flowed out to customers in the final weeks of 4Q09, which may be too aggressive."

But Reiner is hardly an Apple (AAPL) bear. The thrust of his advice is to "keep some powder dry" and buy like crazy if the stock price falls.

"We'd use any pull-back as an opportunity to aggressively accumulate additional shares ahead of several near-term catalysts: a potentially gargantuan December quarter for iPhone (assuming no further component issues); re-acceleration of Mac growth with the release of the new MacBook and iMacs; and the likely announcement of the tablet in early 2010."

Apple is scheduled to announce its fourth quarter earnings after the markets close on Monday, Oct. 19. Tune in here for our analysis of the results.

[Follow Philip Elmer-DeWitt on Twitter @philiped]

Turley Muller has been arguing for more than a year that Wall Street seriously underestimates the impact of the iPhone on Apple's (AAPL) bottom line.

Muller, a former mortgage trading analyst, currently unemployed, tracks Apple's performance in his blog Financial Alchemist, where his estimates of Apple's earnings put the Street's consensus to shame. Over the past four quarters, he has missed reported EPS by 4 cents, 2 cents, 1 cent and 0 cents, respectively. (In those same four quarters, the Street underestimated Apple's EPS by 15 cents, 40 cents, 24 cents and 18 cents.)

In fact, in our latest Analyzing the Analysts report, Muller's predictions were closer to actual results than any other analysts' in four categories out of seven — including the tricky non-GAAP revenues non-GAAP earnings.

On Wednesday Muller issued his third detailed report on the iPhone's profit margins, and it's an eye opener. Bottom line: Apple's gross margins on the iPhone are now so high — Muller's estimate is 58.4% — that the company can use them to subsidize price cuts on the rest of its product line without any noticeable impact on overall gross margins.

It's striking, says Muller, that Apple's typically conservative gross margin guidance for the fourth fiscal quarter, which ends in September, is an enviable 34%, despite all the mitigating factors pushing margins down — some of Apple's own doing, some coming from outside the company. Muller lists a few:

• [Apple] transitioned entire notebook line.
• Cut prices across entire notebook line and/or added increased performance.
• Back to School promotion (Mac discounts plus free 8GB iPod touch).
• Revenue mix shifted towards lower margin Macs from weak business spending affecting the Mac Pro line.
• Component prices increased, coupled with higher commodity and energy prices.

Offsetting all this are the iPhone's steadily rising gross margins, due to a complex mix of current and deferred revenue from several generations of iPhones — each with their own individual margins.

This is not an easy thing to explain. Muller takes a crack at in the full report — which you can read here. But the takeaway message is that profit margins from current iPhone sales are extraordinarily high, despite the $99 price tag on the original 8GB model, as summarized in Muller's final spreadsheet:

(Key: ASP = Average selling price; IP = Intellectual property; COGS = Cost of goods sold; GP = Gross profit)

See also:

• Apple’s Q3: Analyzing the analysts
• How to predict Apple’s gross margins
• Spotlight on Apple's hidden revenue stream

Tuesday was not a good day for professional analysts as a class — and Merrill Lynch's in particular.

Not only were most caught off guard by the strength of Apple's (AAPL) record third-quarter results — see here — but the men and women who track the company for banks and brokerage houses were bested once again by a bunch of bloggers, day traders and amateurs analysts.

In the color-coded chart excerpted above — and pasted in full below the fold — the estimates that were closest to the mark are highlighted in green and the worst highlighted in red.

The first thing to note is the number of green rectangles at the top, in the amateur's portion of the chart, and the number of reds scattered below, among the pros.

All three of our "unaffiliated" analysts did well. Deagol, a pseudonymous indie who has developed almost a cult following on the Apple investor boards, came closest on the big $8.34 billion revenue number. Andy Zaky, a day-trader who writes the Bullish Cross blog, was within a penny on EPS and on the money for the number of iPhones sold — along with several of the analysts he berates as "clueless."

But the prize this year goes to Financial Alchemist's Turley Muller, a former mortgage trading analyst who is currently unemployed and has plenty of time on his hands to create complex spreadsheets that model company performances.

Over the previous three quarters, Muller missed Apple's earnings per share number by 4 cents, 2 cents and then a penny. This quarter he hit Apple's $1.35 EPS right on the nose to score the first of his four greens.

Turley Muller on how to predict Apple's gross margins

The other three came for correctly predicting iPhone unit sales (5.2 million) and making the best estimate of both Apple's non-GAAP revenue ($9.78 billion) and non-GAAP earnings per share ($2.14), pro-forma numbers that take into account deferred revenue and costs on sales of iPhones and Apple TVs.

(GAAP stands for generally accepted accounting principles, something Apple must follow in order to comply with SEC regulations. They provide non-GAAP numbers to give analysts a better feel for what's really going on in their accounting books.)

Spotlight on Apple’s hidden revenue stream

Among the pros, Piper Jaffray's Gene Munster was a bit of a puzzle. A favorite among Apple bulls for his enthusiastic support of the company, he took at face value Apple's gross margin guidance — even though he regularly warns clients that Apple always guides conservatively — and missed the earnings number by a full 32 cents a share. He's particularly good at counting iPod sales, however, and his estimate came within 30,000 units of the number Apple reported (10.2 million).

Otherwise there is not much to praise in the work of the professional analysts. Several came within 100,000 units on the Mac sales number (2.6 million units) — but in the case of Morgan Stanley's Katy Huberty and Bernstein Research's Toni Sacconaghi that was only because they revised their estimates after Monday afternoon, when NPD reported surprisingly strong June Mac sales.

MacBooks flew off the shelves in June

Broadpoint.AmTech's Brian Marshall, inexplicably, estimated highest on iPod unit sales and lowest on Macs and was proved wrong on both counts.

But the booby prize this quarter goes to Merrill Lynch's Scott Craig, who scored a record four reds, missing Apple's GAAP revenue by $380 million and its non-GAAP revenue by nearly $1 billion. Two of his bad calls, surprisingly, came in categories he correctly predicted in January: iPhone sales and non-GAAP revenue.

In Craig's defense, he published his estimates six weeks ago, on June 8, before the launch of the iPhone and the flood of MacBook sales triggered by Apple's price cuts. He did issue a report to clients Monday after the NPD data came out noting that Mac sales seemed to have grown 5% for the quarter, as opposed to the -7% his model predicted. But he never got around to publishing revised estimates before the actual results were released.

Better luck next time.

UPDATE: With bit of 20-20 hindsight, a bunch of banks and brockerages raised their Apple price targets on Wednesday, including Morgan Stanley, Kaufman Bros., Caris & Co., UBS, Pacific Crest, AmTech, BMO Capital, Susquehanna Financial and FTN Equity Capital. Tiernan Ray has a rundown of the upgrades, with price targets, at Barron's Tech Trader Daily.

See also:

• Apple reports record Q3 earnings
• Apple's Q2: Analyzing the analysts
• Apple's Q1: Analyzing the analysts
• Apple's 2008 Q4: Analyzing the analysts

Apple (AAPL) blew past expectations — its own and Wall Street's — to report record third-quarter earnings Tuesday.

Buoyed by strong sales of its new iPhone, an explosion of iPhone applications and price cuts on its flagship MacBook line, the company earned $1.35 per share on revenue of $8.34 billion — up nearly 12% year over year.

Analysts were expecting earnings of $1.17 on revenue of $8.2 billion, according to Thomson Financial.

Apple's shares, which had closed at $151.51, down 0.91% for the day, rose sharply in after-hours trading. By 5:49 p.m. its shares had climbed 4.3% to $158.03.

The stock has been one of the market's best performers of 2009, having risen nearly 80% against the Nasdaq's 21%.

The strong results in the face of a global economic slump could be viewed as vindication of the company's decision to stay out of the market for low-cost netbooks — which now dominate the consumer PC business and are squeezing the profit margins of Apple's competitors.

Apple did cut prices a bit in June. It knocked $100 off the retail price of the older iPhone 3G and trimmed prices on most of its MacBooks by 10%.

But basically, Apple stuck to its long-term strategy: selling high-margin machines that offer better support and superior end-user experience.

It's a strategy that seems to have paid off in spades this quarter.

“We’re making our most innovative products ever and our customers are responding,” said Steve Jobs, Apple’s CEO, in a prepared statement. “We’re thrilled to have sold over 5.2 million iPhones during the quarter and users have downloaded more than 1.5 billion applications from our App Store in its first year.”

Although it was rumored that Jobs might participate in the earnings call Tuesday afternoon, he was not among the listed speakers.

Highlights from Apple's earnings report include:

• Mac sales: 2.6 million units, up 4% year over year
• iPhone sales: 5.24 million units, up 626%
• iPod sales: 10.2 million units, down 7%
• Gross margin: 36.3%, up from 34.8% last year
• Cash holdings: $31.1 billion, up $2.2 billion for the quarter.
• Guidance for the September quarter: revenue between $8.7 and $8.9 billion, EPS between $1.18 and $1.23, and gross margins of 34% — considerably higher than expected.

COO Tim Cook, who ran Apple while Steve Jobs was on medical leave, was asked repeatedly during a conference call with analysts how he plans to compete with netbooks that cost $399 to $499.

Cook stuck to his mantra: that Apple's goal is not to build the most computers, but to build the best computers.

"The Mac," he pointed out, "has now outgrown the market a staggering 18 out of the last 19 quarters."

Apple's press release is available here.

A replay of the conference call will be available for the next two weeks, starting at 5 p.m. PDT. The instructions are here.

For our analysts of how the analysts did, click here.

See also:

• All eyes on Apple's earnings
• How to predict Apple's gross margins
• A guide to Apple's guidance

Apple (AAPL), one of the most closely watched stocks on the Nasdaq — and one of the engines driving the market's midsummer rally — reports its fiscal third quarter earnings today.

None of the three dozen analysts who follow the stock think it will have any trouble beating its guidance numbers. The question is by how much.

The consensus, as reported by Thomson Financial, has been inching up and stands this morning at $1.17 earnings per share on revenue of $8.2 billion. As usual, the unaffiliated analysts — a ragtag group of bloggers, day traders and amateur analysts who track the stock as closely, if not more so, than the professionals — are considerably more bullish, predicting earnings in the $1.27 – $1.35 range. (See the chart below the fold.)

There is actually surprising agreement among both groups on the number of iPhones, iPods and Macs Apple sold this quarter. So why do their earnings numbers diverge so sharply?

Gross margins. Many of the pros seem to be following Apple's guidance (33%). The amateurs believe the company's margins will prove to be considerably higher — in the 35% – 37% range — thanks largely to the mark-up on the iPhone and the complicated way Apple books that revenue. (See How to predict Apple's gross margins.)

"If you look at the past three years of earnings," says Bullish Cross' Andy Zaky, "there has never been an instance where Q2 gross margin percentage surpassed Q3 gross margin percentage."

MacBooks flying off the shelves

Apple's gross margins in Q2 were an enviable 36.4%. Zaky is putting his bet for Q3 on 36.9%, which would translate to an EPS of $1.34.

Below: The published estimates of 17 professional analysts — updated to include several reports issued Tuesday — and three closely-watched amateurs. To find out who was closest to the mark, tune in here after the markets close.