Apple investors await iPhone numbers

All the products that Apple sold for 90 days last quarter won't get nearly the attention Wednesday as the one that was on sale for two days.

It's earnings time again for Apple. For the past several quarters, company shareholders have enjoyed a pleasant afternoon and it is not expected to be any different this time around on Wednesday afternoon after the close of the stock market. Wall Street analysts are predicting a 21 percent rise in revenue to US$5.3 billion and a 34 percent increase in profits to 72 cents a share for Apple's third quarter.

Mac sales grew faster than the industry average in the second quarter, which is usually a slow quarter for everyone in the PC industry. But all eyes will be on what the company has to say about the iPhone, which went on sale during the last two days of the quarter, June 29 and 30.

"The quarter, it's a total sleeper. But the iPhone makes it one of the most anticipated quarters from Apple," said Gene Munster, an analyst with Piper Jaffray.

Analysts are waiting for Apple to disclose iPhone data for those two days even though few expect those numbers to make a meaningful difference to the company's overall performance. Still, official word from Apple would help narrow the speculation over the initial weekend's iPhone haul, which has been put at anywhere from 200,000 units to 700,000 units.

Apple will break out iPhone units and revenue in its earnings report, said Shaw Wu, an analyst with American Technology Research. Don't expect the actual revenue reported to match up with the unit sales, he cautioned.

The company has already said that it doesn't plan to recognize all the revenue from the sale of an iPhone at the time it was sold. Instead, it will spread out the revenue gained from an iPhone over 24 months.

This subscription-based accounting method allows Apple to roll out upgrades and fixes over time without having to charge customers an additional fee. This prevents a repeat of the Wi-Fi fee controversy: since Apple recognized all the revenue from sales of MacBooks and MacBook Pros with hidden 802.11n chips at the time they were sold, it had to charge users a US$1.99 fee to unlock that performance, to establish a value for the upgrade under accounting rules.

But as a result, iPhone revenue won't line up exactly with unit sales during a given quarter. The revenue category will also include revenue from iPhone accessories and a revenue-sharing plan with AT&T that Munster believes could add as much as US$11 per month for each iPhone sold to Apple's revenue.

The exact details of the arrangement between Apple and AT&T have not been disclosed, but Piper's Munster thinks it's a key part of Apple's future iPhone business.

"That sums up what's different about the iPhone, this is a revenue share that's pretty unique. They are really changing the rules of the game, and how much is of big interest for long-term (investors)," Munster said.

The iPhone sales game is really more about charting growth for the second half of Apple's year and beyond, once iPhone hype starts to recede, supply starts to firm up and new models are introduced. The two segments that pay the bills at Apple--Macs and iPods--are still of interest to Apple shareholders.

The iPod delivers the most revenue for Apple of any of those segments. American Technology's Wu is projecting Apple will have sold 9.7 million iPods during the quarter. That's fewer than Apple sold in the first, but the same seasonal trends that affect the PC market are at play with iPods as well, he said. That shipment total would be a 20 percent increase compared with last year.

On the Mac side of the house, the introduction of new MacBooks and MacBook Pros is expected to have helped boost shipments. IDC reported that Mac shipments increased faster than the overall market, and Wu said that he's expecting the most interesting data to come out of the Mac division's numbers.

But, it still comes back to the iPhone, as nearly everything Apple related has for the past few months. Apple's stock has risen about US$30, or 50 percent, since its last earnings call. It closed at US$143.70 Monday.

The iPhone mania has had much to do with that meteoric rise, which means that early iPhone shipment numbers will be as closely followed as Apple's other metrics, such as iPod and Mac sales. Apple itself has said nothing about expected iPhone sales for the two days it was on sale during its third quarter, only offering projections for 2008.

And the company's projections for the third quarter are less ambitious than the Wall Street figures. When it reported earnings in April, Apple said it would record US$5.1 billion in revenue and earnings per share of 66 cents. But that seems to be standard practice at Apple: to provide conservative guidance. And that seems to be what analysts are expecting the company to do again in projecting the second half of the calendar year.