Majestic Research

Forbes.com

Earnings Preview: Economy may hurt Apple in 4Q

Published: October 20, 2008

Apple Inc. reports earnings for its fiscal fourth quarter on Tuesday after the market closes. The following is a summary of key developments and analyst opinion related to the period.

Investors will get more clarity on the iPhone’s adoption after a rocky launch day and persistent complaints about the iPhone’s performance, but the device isn’t likely to pump up results in the quarter because of the way Apple accounts for iPhone revenue over the lifetime of wireless contracts.

Apple overhauled its iPod line of portable media players in early September, in time for the holiday shopping season. Chief Executive Steve Jobs unveiled slimmer, sleeker nano iPods in a rainbow of bright colors and a thinner iPod Touch with a bigger hard drive.

Also during the quarter, Cupertino, Calif.-based Apple and NBC Universal announced a pact that brings NBC programs like “The Office” and “Heroes” back to Apple’s iTunes online store. NBC had removed its shows from iTunes last year in a dispute over Apple’s pricing policies.

BY THE NUMBERS: In July, Apple forecast earnings of $1 per share on $7.8 billion in sales.

Analysts surveyed by Thomson Reuters forecast income of $1.11 per share on $8.05 billion in revenue.

Apple also told analysts in July to expect weaker margins linked to forthcoming products. Last week, the company showed off laptops with casings built from a single large hunk of aluminum. That could explain at least part of the margin softness, as Apple’s investment in the new design and manufacturing process would cost more until production volume increases.

ANALYST TAKE: Soleil Securities analyst Daniel Ernst wrote in a recent note to investors that “While we believe Apple’s market-share momentum has insulated the company from economic pressures to a degree, we do not believe the company’s results this quarter and this holiday will prove entirely immune.”

Ernst wrote that back-to-school sales appear weaker this year than last, but that Apple’s share among new computer buyers has increased dramatically.

On Oct. 9, BMO Capital Markets analyst Jung Pak wrote in a research note that discussions with Apple retailers around the country indicated sales had slowed, and attributed the decline to consumer worries about the economy.

“Over the past five years of checking Apple stores, we have received consistently steady and/or improving sales comments,” Pak wrote. “This is the first time we have heard store reps describe slowing sales.”

Majestic Research analyst Richard Klugman wrote in an Oct. 6 research note that he expects “solid results” driven by aggressive back-to-school promotions and a spike in iPod sales, though he acknowledged the risk that weakening consumer-electronics spending overall could dampen Apple’s performance.

WHAT’S AHEAD: Apple touched up its laptops last week, adding more powerful graphics chips and redesigning the casings. But Apple kept prices at $1,000 or more, predicting that consumers will remain willing to pay a premium for Apple laptops despite the threat of a recession. Investors will have to wait three more months to see if the company’s theory holds up through the all-important holiday quarter.

MacWorld, a massive annual trade show scheduled for the first week of January, is the next big opportunity for Apple to show off its latest products. Industry watchers say Apple could announce an updated Mac operating system

STOCK PERFORMANCE: Apple’s shares shed nearly 25 percent to end the quarter at $128.24. Since then, the stock has fallen another 24 percent, hit hard by broader turmoil in the U.S. economy.