iPhone is Already Nearly 40% of Apple’s Business

Apple on Tuesday reported fourth fiscal quarter and year-end results that exceeded analyst expectations, and would have been even more stellar had it not changed its method of accounting.

For the fiscal fourth-quarter ended September 30, Apple reported a profit of $1.14 billion, or $1.26 a share, on revenue of $7.9 billion, up from of $904 million, or $1.01 a share, on $6.22 billion in sales in the same quarter last year.

Analysts surveyed by Thomson Reuters forecast income of $1.11 per share on $8.05 billion in revenue. In July, Apple gave its own forecast of earnings of $1 per share on $7.8 billion in sales.

Those numbers alone are impressive, but they omit the enormous gain Apple has seen from its iPhone business. For the quarter, Apple sold 6.9 million iPhones, more than the 6.1 million total it sold of the first generation iPhone which was on the market for over a year.

Because Apple changed the way it records revenue for the iPhone and Apple TV, which CEO Steve Jobs refers to as the company’s “hobby,” revenue is now realized over the two-year lifespan of the product, not fully at the time of sale. Apple explained the changes in a rather lengthy press release for the Q4 and year-end numbers.

As such, if iPhone and Apple TV revenue were included in the pile, Apple would have seen revenue of $11.68 billion and net income of $2.44 billion. In a conference call with financial analysts, Chief Financial Officer Peter Oppenheimer said the iPhone would account for 39 percent of Apple’s revenue.

Jobs made a rare appearance on the conference call, perhaps to assure people he’s still healthy. He couldn’t contain his glee at the iPhone’s success.

“If this isn’t stunning, I don’t know what is,” he said. “Apple beat RIM [Research in Motion]. RIM sold 6.1 million BlackBerries, Apple had 6.9 million iPhones in the current quarter. This is a milestone for us. RIM is a good company that sells a good product, so it is surprising to us that after 15 months in the market, we could outsell them.”

By revenue, Apple is now third in the world behind Nokia and Samsung. But Jobs, returning to Earth momentarily, acknowledged that this was the quarter for the 3G launch and that momentum may not be sustained. “We realize this is the result of expanding in 50 countries, and there is no guarantee of sustaining it,” he said.

Strength across the board

Apple didn’t just ship a lot of iPhones, it shipped a lot of everything, except maybe Apple TV. The company shipped 2.6 million Macintosh computers during the quarter, a 21 percent unit growth and 17 percent revenue growth over same quarter in 2007.

Oppenheimer said that came on the heels of some slowness due to softness in education, where Apple has traditionally been strong, and also as customers held back in anticipation of the new MacBooks announced last week. He said he could not gauge corporate impact due to the current economic climate.

On the music side of the house, Apple sold 11 million iPods, a new record for non-holiday quarter. New iPods were introduced in September near the tail end of the quarter. iTunes now has 65 million accounts, a catalog of 8.5 million titles and the fall TV lineup from all four networks in high definition.

The Apple Stores continue to do bang-up business, with revenue up 37 percent year-over-year to $1.72 billion in revenue. Apple opened 31 new stores to 247 stores total at the end of the quarter. Two new stores opened in Switzerland. The stores account for 596,000 of the 2.6 million Macs sold in the quarter, and more than half of those customers were new computer buyers.

Apple ends its fiscal year with $32.5 billion in sales, a 35 percent increase over the $24.0 billion in fiscal 2007. Net income was $4.8 billion, a 48 percent improvement over the $3.5 billion in fiscal 2007. Cash from operations was $3.7 billion in the quarter and the company is sitting on $24.5 billion in cash with no debt.

For the upcoming quarter, which means Christmas, Oppenheimer gave a wide range of guidance, similar to what other CFOs have done with recent announcements. He forecast revenue of between $9 and $10 billion and a margin of between 30 and 31 percent, down from the 34 percent in the current quarter.

Operating expenses will between $1.45 and $1.47 billion. Apple is targeting earnings per share of between $1.06 and $1.35, owing to the huge potential revenue range.

Next page: Jobs’ surprise appearance

Jobs’ surprise appearance

Steve Jobs isn’t known for appearing on the conference calls, it’s usually Oppenheimer and Tim Cook, chief operating officer, who handle the analyst questions. So his presence on the call was a bit of a surprise.

“Some remarkable things are happening at Apple, but everything is set against the backdrop of this global economic slowdown, so this seemed like a good time to go back and answer some questions,” he said.

Among the news from Apple’s head honcho: tomorrow, the App Store will cross the 200 million mark in downloads. Currently, the App Store, which serves iPhone and iPod Touch customers, has been up for just 102 days but has 5,500 apps and is in 62 countries.

As to the economy, Jobs prefaced his comments with “let me say we are not economists.” He then said that Apple has “the best customers in the world” who are more likely to delay a purchase than switch to something cheaper. He also said Apple has a minority share of its markets (except the iPod) and it only takes a few percentage points of customers to increase its position substantially.

“This downturn may also present some extra opportunities for companies that have the cash to take advantage of them like Apple does,” he said, but would not say what those opportunities were.

Don’t expect an iPhone family of phones anytime soon

He shot down creating a “price umbrella” for iPhone, meaning there would not be multiple models as is standard in the cell phone industry.

“The traditional game in the phone market has been to produce a voice phone in a hundred varieties. As software becomes the differentiating factor in this market… I think developers will find that creating a hundred variations of a product isn’t very appealing. We’re comfortable with a strategy of being a software platform company,” he said.

There will also be no low-end Macs. “We don’t know how to make a $500 computer that’s not a piece of junk. Our DNA will not let us ship that. We’ve seen success focusing on certain segments of the market. Will stick to it and add more value to those products in those customer bases we choose to serve,” said Jobs.

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