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Apple’s Momentum Will Continue

Posted on Monday, Nov 19th 2007

I have written extensively on the iPhone. You can find them under the iPhone and the Future series as well as the iPhone’s Component Ecosystem series. My last post on Apple (NASDAQ: AAPL) was just a month after the release of iPhone. A month or so later on September 5, it announced a $200 reduction in the price of the 8GB model. The 4GB model has been discontinued. For its early iPhone customers, it is offering a $100 store credit for buying Apple products at its stores. The announcement was met with mixed reactions.

Soon after on September 10, it reached the milestone of 1 million iPhone sales. It started selling iPhones in UK and Germany on November 9, partnering with O2 in the U.K. and with T-Mobile in Germany. It will start selling the iPhones in France from November 29th, partnering with Orange. [I have covered the iPhone’s impact on the US carriers in some detail before.]

Its price is £269 ($567) in the U.K. Though this is cheaper than its launch price in the U.S. in June, it is much higher than the current U.S. price of $399. In Germany, the price is even more: €399 ($585). Early reports show that the response was not as overwhelming as in the US. (They are probably waiting for a price reduction as well.)

Apple posted its earnings for the fourth quarter recently on October 22. As per the release, iPhone sales for the quarter were 1,119,000, bringing the total iPhone sales in 2007 to 1,389,000. Total revenue from the sales of iPhones, iPhone accessories, and payments from AT&T was $118 million.

Total revenue for the quarter was $6.22 billion, up 28.5% y-o-y and 15% sequentially driven mainly by record Mac sales and strong demand for iPods. Net quarterly profit was $904 million, or $1.01 per diluted share, compared to $542 million, or $.62 per diluted share in the year-ago quarter. Gross margin was 33.6 percent, up 29.2% y-o-y.

Apple shipped a record 2,164,000 Macs, reflecting a 34% y-o-y growth. It sold 10,200,000 iPods during the quarter, up 17% y-o-y.

For fiscal 2007, revenue was $24 billion and net income was $3.5 billion. For the first quarter of fiscal 2008, Apple expects revenue to be around $9.2 billion and earnings per diluted share of around $1.42. Its stock is trading around $166 after hitting a 52-week high of $192.67 on November 7. Its market cap is around $145 billion.

So what is the outlook for the foreseeable future? Mac Sales will continue to gain momentum, I think, given that the Apple brand is getting such visibility across the iPhone and the iPod. Also, the much anticipated Vista, Microsoft’s new OS, is now in the market, and will be for the next decade, probably, and is not a very good OS. It is quite possible, that this will be decade of Apple establishing itself in the PC business once again.

Furthermore, iPod’s international potential has not been explored yet. With the growing wealth in volume markets like India and China, it is likely that the iPod’s momentum will continue.

Finally, the iPhone’s early numbers are good. The product will get better with iterations, and the convergence device movement is more than real right now, and the smartphone market is steaming hot.

In summary, Apple has 3 businesses, all of which, in my opinion, will continue to grow well. If you believe that, then Apple is still a growth stock.

Apple Inc. (AAPL)

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Sramana – I agree with (most of) the views expressed on your blog. I love the company period. I do think, however, that the iPhone growth in India and China is questionable at this stage. Lets take India as an example. It is absolutely the case that mobile phones are ramping fast in India (~6-7M new subscribers being added each month!) BUT most of these are voice customers, and ARPUs are very low. Use of handhelds for emails, let alone web surfing is virtually zero. This is a texting market and people are happy to text with “normal” phone keypads. India is a highly value-sensitive market and therefore expensive gadgets like iPhone, Blackberry and even the recent Nokia music phone have limited potential. Obviously, the upwardly mobile, affluent upper middle class and upper class will need a status symbol but the volumes aren’t going to come from there… The volumes and attractiveness of Indian market is in the lower-middle income class and they will not use the iPhone in the forseeable future as far as I can tell. I suspect a similar dynamic exists in China. To add icing to the cake so to speak, in China and India, the issue of unlocked phones vs locked phones, and revenue sharing is also a big roadblock for Apple…

Therefore, in the next year or two, I believe the potential of the iPhone is much greater for markets such as Japan, Europe and US.

I do believe that the market for iPhone is large even just in Western countries simply because the additional product upsell opportunity to existing iPhone customers is wide open for Apple as of now.

Nimish

Nimish Mehta Monday, November 19, 2007 at 11:25 PM PT

the article said IPOD’s in India and China not Iphones

jwcleslie Tuesday, November 20, 2007 at 6:26 AM PT

And jwcleslie is right. My mistake – and my apologies. I (obviously) mis-read the article.

iPod, iPhone same difference. Just kidding.

Nimish

Nimish Mehta Tuesday, November 20, 2007 at 7:35 AM PT

What Nimish said applies for ipods also. Indian and Chinese market is price sensitive. Indians and Chinese may buy alternative cheap MP3 players in the market instead of the expensive ipods. In Europe, Vodafone is giving Nokia N80 free. BTW, N80 has better rating than iphone in CNET review. Apple is making money now on PCs. PC market is undergoing an upturn as evidenced by the result of HP. Otherwise, iphone is a flop outside US and ipod market is saturating.

sane_man Tuesday, November 20, 2007 at 8:26 AM PT

Guys,

Yes, what I wrote is about iPods, not iPhones.

I disagree completely about the iPod’s market potential in India and China. You should look at how much money the upwardly mobile classes have there. I assure you, they can afford iPod Nanos at $99.

And the number of the cash rich upper middle class is rising by the day in both geographies.

Soon, the logic may even apply for the iPhone, although for the purpose of this article, I was thinking primarily of the iPod Nano.

Sramana

Sramana Mitra Tuesday, November 20, 2007 at 10:55 AM PT

Apple is hitting on all cylinders. Good reports and sales figures for iPhone sales in the US. And customers are overjoyed as well. :)

Partners in Grime Saturday, November 24, 2007 at 8:36 AM PT
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