Apple will Beat 2009 Revenue Consensus by $900 million per Quarter

Four months ago, the analyst consensus estimate for 2009 had Apple earning $6.36 in EPS on approximately $40 billion in revenue. Since that time, the economy has gone through a major financial crisis, which has led many analysts to revise their estimates down quite dramatically. As of today, the analysts are now looking for Apple to earn $5.35 in EPS on approximately $37.5 billion in revenue in 2009. The consensus has Apple literally contracting on the year—down from $5.36 in EPS in 2008. These extraordinarily bearish consensus estimates have set Apple up to beat revenue expectations by approximately $900 million each quarter in 2009.

I expect Apple to earn about $6.63 in EPS on $41.2 billion in revenue beating expectations by $1.28 in EPS and $3.63 billion in revenue. This amounts to an average quarterly beat of $907 million in revenue and $0.32 in EPS. Even before this recent bout of downward revisions to the estimate, I saw the consensus as already pricing in a moderate to severe recession.

The biggest problem with the current consensus estimate is that it either contemplates flat growth in unit sales across all of Apple’s product lines (including Macs and iPhones), or it fails to realize that Apple has a massive current deferred revenue pot that it will fully recognize in 2009. Sitting in a small corner of Apple’s financial statement, current deferred revenue is something that can easily be overlooked by analysts who either don’t fully analyze the company, or don’t normally cover the company.

Due to the subscription method of accounting for iPhone and Apple TV sales, Apple recognizes the revenue it receives from the devices over a 730-day period (rather than at point of sale). At the end of every accounting period, Apple reports its total current and non-current deferred revenue for the iPhone and Apple TV on its consolidated schedule of deferred revenue. Current deferred revenue is revenue that Apple will recognize over a 365-day period from the date of the financial statement, while non-current deferred revenue is revenue that Apple will begin to recognize starting 365 days after the date on the financial statement.

Thus, at the end of Apple’s fiscal fourth quarter, current deferred revenue is literally revenue that Apple will recognize in the ensuing fiscal year. At the end of 2007, for example, Apple had $346 million in current deferred revenue which it got to recognize equally over the 365 days of fiscal 2008. That averages to about $86.5 million that Apple got recognize for each quarter of 2008 without having to sell a single item in the period. Now compare that number to 2009.

Current deferred revenue at the close of Apple fiscal Q4 2008 was $3.518 billion—over 10 times the amount going into fiscal 08. This means that if Apple didn’t sell a single product in 2009, it would automatically get to recognize $880 million per quarter (compared to the $86.5 million that Apple got to recognize each quarter in 2008). Now here’s where things get complicated, and where the flaw in the analyst consensus is revealed. It’s important to follow this point very closely.

Since Apple went into 2008 with a revenue benefit of $346 million, while going into 2009 with revenue benefit of $3.518 billion, one must back out these benefits to get an idea of what the consensus is really indicating about Apple’s business in 2009. By backing out these benefits, one gets a clearer picture of how Apple actually performed in 2008 (without regard to benefits from sales in 2007) and how the analysts think Apple will actually perform in 2009 (without regard to benefits received from sales in 2008). By doing this, one will be able to determine the actual growth rate estimates in unit sales and revenue by the analysts. It basically answers the question of what will 2009 sales contribute in total revenue minus deferred revenue benefits.

Here’s the basic math. If one subtracts the $346 million benefit Apple received in 2008, Apple would have reported $32.133 billion in revenue ($32.478 billion – $.346 billion). If one subtracts the $3.518 billion revenue benefit that Apple will recognize in 2009 from the analyst consensus estimate of $37.57 billion in revenue, he or she would arrive at a $34.052 billion figure. What this tells us is that the analysts believe that Apple will grow its revenue by only $1.919 billion in 2009 when backing out the current deferred revenue benefit.

That’s a mere 5.9% growth rate in revenue despite the fact that Apple’s Mac sales are growing at over 3 times the industry average, and despite the fact that iPhone unit sales grew over 400% in Q4 alone. Even iPod sales are still growing at nearly 5-8% per period and iTunes continues to grow at over 30% on a YoY basis each quarter. Also, it’s important to note that any time Apple sells over 5 million iPhone within any given quarter, Apple not only gets to recognize $400 million in revenue in that particular period, but it gets to recognize roughly $400 million in revenue each quarter for 7 quarters thereafter. This literally means that iPhone sales in Q1 alone could add about $1.6 billion in revenue for the year, which would make up almost all of the $1.919 billion in sales growth that the analysts are expecting for 09.

This fact single-handedly suggests that the consensus is plainly factoring in negative revenue growth for all of Apple’s products in 2009 save the iPhone. Because even if Apple sells only 2.5 million iPhones in Q2 after selling 5 million Q1, Apple would have already surpassed analyst revenue growth estimates for 2009—even if sales are exactly flat across all of its other product lines. Basic common sense should tell any investor that such estimates are entirely irrational. While a moderate to deep recession will undoubtedly affect Apple’s business, the natural growth rate and penetration in even a flat economic environment will offset the negative effects of a slowdown. Unless we’re talking 10-12% unemployment and 5-6% negative GDP growth throughout 2009, the analyst consensus simply makes no sense.

Andy Zaky’s GAAP-Based Earnings Estimates for FY 2009 (in Millions)

 

Q1 2009

Q2 2009

Q3 2009

Q4 2009

FYE 2009

Revenue

$11,290

$9,489

$9,794

$10,623

$41,196

Cost of Goods Sold

$7,395

$6,405

$6,464

$6,926

$27,190

Gross Margin

$3,895

$3,084

$3,330

$3,697

$14,006

Operating Expenses

$1,510

$1,460

$1,510

$1,600

$6,080

Operating Income

$2,385

$1,624

$1,820

$2,097

$7,926

OI&E

$150

$160

$150

$170

$630

Net, Before Taxes

$2,535

$1,784

$1,970

$2,267

$8,556

Taxes

$748

$535

$591

$657

$2,531

Net Income

$1,787

$1,249

$1,379

$1,610

$6,025

Earnings Per Share

$1.96

$1.38

$1.52

$1.77

$6.63

Diluted Shares

912

908

908

908

909,000


Andy Zaky’s Expected Growth Rate for FY 2009

 

FYE 2008

FYE 2009

Growth

Revenue

$32,479

$41,196

$8,717 (26.8%)

Cost of Goods Sold

$21,334

$27,190

$5,856 (27.4%)

Gross Margin

$11,145

$14,006

$2,861 (25.7%)

Operating Expenses

$4,870

$6,080

$1,210 (24.8%)

Operating Income

$6,275

$7,926

$1,651 (26.3%)

OI&E

$620

$630

$10 (1.6%)

Net, Before Taxes

$6,895

$8556

$1,661 (24.1%)

Taxes

$2,061

$2,531

$470 (22.8%)

Net Income

$4,834

$6,025

$1,191 (24.6%)

Earnings Per Share

$5.36

$6.63

$1.27 (23.7%)

Diluted Shares

902

909

6,861 (0.01%)


Andy Zaky’s Estimates Compared to the Consensus for FY 2009

 

Consensus

Andy Zaky

Upside Surprise

Revenue

$37,570

$41,196

$3,626 (9.7%)

Cost of Goods Sold

$25,923

$27,190

$1,267 (4.9%)

Gross Margin

$12,398

$14,006

$1,608 (13.0%)

Operating Expenses

$6,000

$6,080

$80 (1.3%)

Operating Income

$6,398

$7,926

$1,528 (23.9%)

OI&E

$600

$630

$30 (5.0%)

Net, Before Taxes

$6,998

$8556

$1,558 (22.3%)

Taxes

$2,133

$2,531

$398 (18.7%)

Net Income

$4,865

$6,025

$1,160 (23.8%)

Earnings Per Share

$5.35

$6.63

$1.28 (23.9%)

Diluted Shares

909

909

-

44 Responses to Apple will Beat 2009 Revenue Consensus by $900 million per Quarter

  1. Andy – I appreciate your insights as an individual investor. You have shown me that the “experts” might not be so. Thanks

  2. Andy,

    Is this GAAP or non-GAAP? And if GAAP, what does Apple’s non-GAAP look like for the year ahead?

  3. Hey anonymous above,

    Andy notes that it’s GAAP in the chart.

    Still, I agree with the anonymous above: What about non-GAAP?

  4. The entire article is about the affect of non-GAAP when added to GAAP.

    Good grief.

  5. Andy,
    All the work you’re doing here reminded me of my original valuation model I made for AAPL in Sept 07. I had FY08 revenues at $31.6 billion (pats self on back), but getting the revenue number is only worth so much – all I’m suggesting is, be very conscious of your margin assumptions. And while I hate saying this because of consumer spending concerns and having not touched this model in about 14 months, the FY09 revenue number I have is very, very close to yours.

    Last thing – as someone who became quite bearish on AAPL and growth tech in the fall last year, my figuring suggests these stocks are quite cheap. But you probably already knew that. :-)

  6. Andy:

    HPQ gives guidance this am using non-Gaap. When do you think the media will get the apple non gaap story. HPQ is due to restructuring charges but Apple’s is on real profit that is just deferred.

  7. To hayweed:

    Its a good question. It all depends on Apple. I’ve been hoping for this for ages. If Apple stops giving GAAP-based guidance and guides in Non-GAAP instead, analysts will be forced to join the party and so will the media.

    I wouldn’t count on this anytime soon however. Apple is known to be conservative and is know to not give much of a crap for its stock price. Thus, they have no motivation to shift to non-GAAP guidance.

  8. andy..what you make of apple at $80? i know apple cant go up when the market is falling 5% a day…but do you have any reservations about apple able to see 100 or above?

  9. Orlando, you will not have an answer to that kind of questions.

  10. andy
    the analysis is good but even if deferred revenue comes due in 2009-won’t the analysts look for tends in non-defered revenue?

    apple is a great company with the best software available in its products, but it fails to market its computers to the average consumer– so will never be a behemouth–no matter how it spreads out its revenues
    rob

  11. How much would Apple’s iphone business be worth if it were hypathetically separated from the rest of Apple business, including the app store? Where might it’s stock be trading at?
    How much would the ipod business be worth if it were sold now, minus the itunes.
    Would Apple’s present share price reflect the value of Apple if it were only selling macs?
    With or without Mac OS.
    I think if people would wrap their heads around those questions, it could help Apple Shareholders realize the true value of their investments. You would be the man to do it.

  12. Anonymous said…
    “How much would Apple’s iphone business be worth if it were hypathetically separated from the rest of Apple business, including the app store? Where might it’s stock be trading at?
    How much would the ipod business be worth if it were sold now, minus the itunes.
    Would Apple’s present share price reflect the value of Apple if it were only selling macs?
    With or without Mac OS.
    I think if people would wrap their heads around those questions, it could help Apple Shareholders realize the true value of their investments. You would be the man to do it.”

    You know. Those are some incredible insights. Haven’t really thought of it that way, but its certainly a good way to think about things. Let me get back to you on that. Its hard to tell exactly what any one part of Apple’s business is worth without thorough examination. The big problem, as I see it, is that Apple’s iPod business has simply come to halt in terms of growth. It’s really not even growing anymore. But Apple’s Mac and iPhone business is simply booming. Also, its hard to parse out exactly how much in terms of operating expenses can be attributed to any one part of Apple’s business. I’ll think on this for a bit.

  13. I think this boils down to what you want to happen compared to actually will happen.

    Apple will suffer like everyone else in 2009, in fact they may suffer more than the bottom feeders.

  14. Nickname unavailable

    good report. Now if only analysts would relate to detail instead of trying to score points that further their irrational opinions, they might learn from it too that they haven’t a clue.

  15. Andy,

    There is incredible terror that Jobs is ill again, and the stock is dropping like a rock today, even after Rimm gave good guidance on Friday. This could be no more than the result of options expiration. But there is also a rumor that Apple will WARN! Right before Christmas. Seems odd.

  16. Andy,

    Given the terrible economy, do you intend to modify your forecast? Apple’s shares seem very weak, even in a holiday week; they are depressing to watch. As I write the market seems to be rolling over for one of its horrible days. Depressing what’s happening in this country.

  17. Daniel, the problem is that all Apple products are “frivalities” when things go really bad. They haven’t gone really bad yet but they will, so the figures this time will be not terrible.

    If there is a long term recession then Apples products will not help feed a family. Apples products are geared towards the goodtimes with paying for the brandname the be all and end all of their margin.

    I think this time next year will be the real deal for Apple and not January.

  18. Hey Andy, thanks for the insights. You were the one who originally clued me in to how poorly AAPL analysts cover this company.

    I saw some recent comments that indicated that you might be a bit down on Apple. Not down on the business per se, but down on how Apple manages its share price and certainly down on how it’s covered in the media. Can you comment on you feelings at the moment?

    Again, thanks for the analysis.

  19. Didn’t you talk a little early ?

    http://seekingalpha.com/user/205444/comment/310628

    “Shoulder at 1,542.45; head being made right now; and I imagine we see a massive rally in December as hedge funds try to cut their losses on the year. I could see the NASDAQ testing the neck line at 1700.”

    “And you want to short here? You’re playing with fire.”

    Nice play, I must say.

  20. "AAPL has been steadily outperforming the market over the past few weeks and while the NASDAQ continues to make new lows"

    Not anymore.

    http://finance.yahoo.com/q/bc?s=AAPL&t=3m&l=on&z=m&q=l&c=^IXIC

    So, what's happening now ?

    "AAPL has yet to break its low set in the first week of October."

    Almost there.

    Apple is great, Apple makes a lot of money, but not its shareholders, you can count on that.

    85.

  21. In your “Where is Apple Headed?” poll something is missing.

    Where is the option “below 80 ?”

    I cannot vote as it is.

    What did you vote ?

  22. Andy ?

  23. Wow! Lots of comments. I go on vacation for a few weeks and bombs start dropping. Here we go…

    To TimboM:

    Thanks for reading. I’ve always been somewhat displeased with how Apple manages its stock price. While management of the company itself has been exemplary, I think management of the stock has fallen nothing short of a complete failure. Article coming.

    ———————
    “Anonymous Said…
    Didn’t you talk a little early ?

    http://seekingalpha.com/user/205444/comment/310628

    “Shoulder at 1,542.45; head being made right now; and I imagine we see a massive rally in December as hedge funds try to cut their losses on the year. I could see the NASDAQ testing the neck line at 1700.”

    “And you want to short here? You’re playing with fire.”

    Nice play, I must say.”

    Andy Says: And? So the NASDAQ didn’t go all the way to 1700. I went to 1600. If you look at my comment I said it was inadvisable to short in the low $80′s. AND IT WAS! If you went long when I made the comment and exited your long position in the high 90′s, you would have made a 20%+ gain. This is a trader’s market. And you have to be in and out with part of your position and for the long term with another part of your portfolio. If you went short in the low $80′s as this author was advocating, you would be in the red right now!

    As to the latter two comments by “Anonymous” I will not respond until you have some guts to post your name. We’ll see whether someone who takes a position in the $80′s will fair over the next few years. The only thing is, you won’t be around when you are dead wrong.

  24. “As of today, the analysts are now looking for Apple to earn $5.35 in EPS on approximately $37.5 billion in revenue in 2009.”

    AAARGH ! According to yahoo now we have reached (34 analysts) 5.08 !!!

    Aloisio

  25. Andy, how do you feel about the upcoming earnings report? when do u think the street will start to focus on non-gaap? Turley had a nice blog over the weekend, I haven’t seen anything from you since Nov. Please fill us in on your insights. I myself think AAPL will have a RECORD fiscal year (above $5.36 share they earned in 08)and then people will start to focus on 2010 earnings after that and push the stock back to normal 35-40 PE that it’s traded in the last 6 years. My target is $180 by Oct and $250 the following 6-9 months after that..today’s prices are a GIFT ! looking forward to your update!

  26. December 27, 2008 9:32 AM

    “85.”

  27. “Apple will Beat 2009 Revenue Consensus by $900 million per Quarter”

    And no one will care.

    Back to speculate on Job’s healt and to trade the stock at 50% of its value. No matter what.

  28. December 28, 2008 6:01 AM

    “Where is the option ‘below 80′ ?”

  29. Apple will beat (how much is irrilevant).

    It will pop in after hour.

    The guidance will be conservative again. Extremely.

    At the opening, since no one want to risk AGAIN to own AAPL long term, ther will be profit taking.

    The shorts knowing that, will short the pop (easy money AGAIN).

    AAPL will drift to the price it was before the earings in the coming days.

  30. “My target is $180 by Oct and $250 the following 6-9 months after that..today’s prices are a GIFT”

    The comic hour

  31. Andy: You stated in one of your articles that you would have a better idea on your predictions as sales data was released. Do you still believe that Apple will beat by 900m?

  32. So, last time Apple guided conservatively and the stock got hammered. As usual. Since then they’ve beaten their estimates, again, and the stock has gotten hammered. Apple will again beat analysts but still get hammered because of Jobs. Meanwhile the company still outperforms. It’s a frustrating mystery to me. I’m waiting for Andy Zaky’s take on this.

    BMWTwisty

  33. @Quinn

    “Do you still believe that Apple will beat by 900m?”

    TimboM already asked that.

  34. I expect Apple to beat revenue estimates this quarter by anywhere from $850 million to $1 billion. I’ll be posting an earnings preview shortly. Stay tuned.

  35. Dear Editor,

    I was wondering if you’d be interested in having live stock quotes on your blog. We just launched a free tool that allows bloggers to have updated prices next to any mention of a company or its ticker, for example – Goldman Sachs (GS 88.78 ↑2.33%). We’d be thrilled to have Bullish Cross as one of our launch partners.

    Please check this link to find out more:

    http://www.wikinvest.com/blogger/Wikinvest_livequotes

    Thank you for reading this and have a great day!

    Marcus
    marcus@wikinvest.com

  36. @Marcus

    SPAMMER

  37. Obviously the key factor is future earnings, not trailing. I’ll have more this Wednesday when Apple reports its fiscal Q1 earnings. This will almost certainly be Apple’s first report of lower earnings in over five years. Sales will probably be flat.

    Eddy Elfenbein

    http://seekingalpha.com/article/115190-looking-at-apple-s-staggering-financial-performance

  38. @Eddy Elfenbein: Bullshit! You are posting this stuff on multiple sites with no basis in fact.

    You are a shorter with an agenda.

  39. To Eddy:

    Read the article before commenting.

    Also, I think you will be quite surprised on earnings if you believe that sales will be flat. Quite surprised indeed.