Apple's Mac strength could keep tech industry on a roll
Despite concerns over the economy, high-tech firms have reported solid earnings. A strong increase in Mac sales should ensure Apple keeps the party going.
Recession fears, rampant iPhone unlocking, and a pessimistic outlook dinged Apple at the beginning of this year, but surging Mac shipments appeared to have the company in good shape as it closed out the quarter.
Apple is set to announce its financial results for its second fiscal quarter on Wednesday after the close of the stock market. The company has not appeared overly bullish on this particular quarter, issuing guidance well below its usual conservative outlook in January and admitting at its shareholder meeting in March that the industry is going through "concerning times" right now amid a consumer credit crunch.
Nonetheless, Wall Street is expecting Apple to report earnings per share of $1.07 on revenue of $6.9 billion, while Apple's own guidance calls for earnings per share of 94 cents and revenue of $6.8 billion. Apple is notorious for underpromising and over-delivering when it comes to its own guidance, which probably accounts for the discrepancy. But with the overall tech industry reporting healthy numbers over the past few weeks, and Apple's Mac shipments appearing to be strong, the company should be in decent shape.
Apple has three main businesses driving its earnings potential these days. Let's look at the iPod division first.
It seems that while the iPod phenomenon is still chugging along, growth is slowing as the market becomes saturated. Gene Munster of Piper Jaffray, always one of Apple's biggest cheerleaders, thinks iPod sales will come in somewhere between 10 million and 10.5 million units for the quarter, which is a little less than Wall Street had forecast.
During the fourth quarter of 2007, iPod shipments grew slowly while revenue growth remained strong, suggesting that iPod buyers were shunning the less expensive models in favor of newer ones like the iPod Touch. Nonetheless, Munster thinks the price cut to the low-end iPod Shuffle in February was a bit of a catalyst for iPod shipments.
Apple's iPod numbers, and executive comments about that group, should also shed a little light on what's been going on in the flash memory industry this year. Prices have been plunging, and iSuppli reported earlier in the year that Apple's decision to buy less flash memory than the producers had expected contributed to the turmoil.
The second group, Apple's iPhone division, also contributed to some of the early-quarter swoon for Apple's stock after concerns rose about the "missing" iPhones. Those iPhones turned out to be running on networks in China, India, Sweden, and other sorts of countries where Apple has yet to pay an official visit.
The unlocked iPhones are bittersweet for Apple. They clearly demonstrate demand for the product, and will help the company meet its sales goals for 2008. But Apple's revenue-sharing agreements with its carriers allow it to make more money on the sale of a locked iPhone than an unlocked iPhone. Sure, Apple might not have sold an iPhone in the first place if the buyer wasn't able to easily unlock it, but the trend could lead to problems between Apple and its carrier partners who watch their rivals take in data revenue from iPhones without having to share it with Apple.
Unfortunately, AT&T declined to share the number of iPhones it activated on its network during the quarter when it reported its results Tuesday morning. That means that unless Apple chooses to report that number itself, it will be harder to track how iPhone unlocking has evolved so far in 2008.
Other smartphone industry players, such as Nokia and Texas Instruments, are a little skittish about the high end of the phone market looking forward over the rest of the year. Apple is still so new to this market that I wouldn't expect the broader trends to have necessarily filtered down to it, but Apple's statements about the iPhone group will be telling. In February, Apple COO Tim Cook reiterated the company's goal of selling 10 million iPhones in 2008.
Apple's third profit center, the Mac business, is still on a roll. Both IDC and Gartner reported huge increases in Mac shipments in the U.S. compared with last year, and it seems Apple is continuing to take share from its competitors.
Mike Abramsky of RBC Capital Markets expects Apple to have sold 2.2 million Macs for the quarter, which would be a 46 percent increase compared with the prior year. By any measure, Apple is enjoying perhaps its most successful run for the Mac, certainly the best since Steve Jobs returned to the company in 1997. I'm interested in seeing numbers on how the MacBook Air was received, but I'm not convinced Apple will break out individual categories of its portable Macs; it doesn't for MacBooks and MacBook Pros.
Apple's stock was down almost 5 percent Tuesday, amid a larger downturn in consumer stocks. However, Shaw Wu of American Technology Research also downgraded the stock based on the feeling that Apple won't get a significant boost until the second half of the year, when a 3G iPhone and new Macs are expected, and the potential for investors to punish Apple for anything short of outstanding results Wednesday.
The numbers will come out Wednesday about 1:15 p.m. PDT, and we'll have something up as soon as they're out. I'll be live-blogging the customary conference call, which starts at 2 p.m. PDT, so be sure to to follow the coverage.