Apple profit soars, but outlook 'challenging'

Updated throughout at 3:15 p.m. PT after Apple's conference call.

Apple's fourth-quarter profit soared past expectations on extremely strong sales of the iPhone, but revenue was a little light, and the company left itself a lot of wiggle room heading into what it called a "challenging" environment.

For the company's fourth fiscal quarter, or the period ended September 27, Apple reported revenue of $7.9 billion, compared with revenue of $6.2 billion in the same quarter last year. Net income was $1.14 billion, or earnings per share of $1.26. Analysts had been expecting revenue of $8 billion and earnings per share of $1.11.

iPhone sales were astonishing during the quarter: Apple sold 6.9 million iPhone 3Gs during the quarter, which was far more than analysts had been anticipating and more than the total number of original iPhones sold in a year. Apple lifted the kimono a bit on just how much revenue the iPhone is contributing to the company's future prospects, explaining just how much revenue the iPhone would have contributed to Apple's results if the company didn't use subscription-based accounting methods for that product.

In a rare appearance on the conference call, Apple CEO Steve Jobs noted that Apple outshipped Research In Motion during the quarter and called the iPhone results "stunning." "Some remarkable things are happening at Apple," he said.

But the most eagerly awaited number was Apple's guidance for its first fiscal quarter, which coincides with the all-important holiday shopping season. Apple said it expects to record revenue between $9 billion and $10 billion and earnings per share between $1.06 and $1.35.

Analysts had been expecting more, of course, as Apple seems to always provide guidance under what the analysts had sought. The Wall Street group had expected revenue of $10.6 billion and earnings per share of $1.65.

Executives were cautious about predicting the future in the company's press release and on the conference call. "We don't yet know how this economic downturn will affect Apple. But we're armed with the strongest product line in our history, the most talented employees, and the best customers in our industry. And $25 billion of cash safely in the bank with zero debt," Jobs said in the press release.

One slight worry could be Mac shipments, which came in at 2.6 million units for the quarter, which was a little below the consensus estimates of 2.7 million units. Apple COO Tim Cook explained the results by noting that the K-12 education market for computers fell 7 percent during the quarter compared to last year--28 percent in budget-strapped California--and also opined that "speculation" concerning the new MacBooks introduced earlier this month could have caused potential customers to delay their purchases in late September. He cautioned that it was difficult to tell whether the delays in September were due to the economic conditions as the stock market crashed in late September or by hesitant customers, but noted that notebook sales took off in the first week since the new models were introduced.

iPod units were about as expected at 11 million units during the quarter. This was the best non-holiday quarter for iPod sales in Apple's history, said CFO Peter Oppenheimer. Apple generally sells about twice as many iPods each holiday shopping season, with the bulk of those purchases coming in December, Cook said.

The fourth quarter marked the first time Apple began breaking out the sizable amounts of deferred revenue from the sales of the iPhone and Apple TV, which are being treated with subscription-based accounting methods. Apple is using a non-GAAP (generally accepted accounting principles) reporting method to outline the deferred revenue amounts, which are meant to provide a picture of what iPhone sales would look like if Apple recognized all the revenue from the sale of an iPhone at the time the purchase was recorded--like it does with the Mac--rather than recognizing that revenue over a 24-month period.

Apple recorded $3.5 billion in current deferred revenue related to the iPhone and Apple TV during the quarter, compared with $1.4 billion in deferred revenue during the third quarter of this year. It recorded $2.3 billion in noncurrent deferred revenue related to those two products. Those numbers pushed Apple's non-GAAP revenue for the quarter to $11.7 billion and its net income to $2.4 billion.

I'll examine the impact of those numbers more closely in a follow-up post, but they basically show that the iPhone has turned into a huge money-maker for Apple. If Apple had used standard accounting treatment for the iPhone, it would have accounted for 39 percent of Apple's business during the quarter, Jobs said.