More reflections on Apple's 07Q4 earnings report

I've been catching up on the Apple financial news today after yesterday's nigh-incomprehensibly strong results and the analyst conference call. A few items that stand out:

A huge barrelful of unlocked iPhones. The announced estimate of phones sold to presumptive unlockers — 250,000 — was so high that some questioned whether I heard it correctly (including me). Apple, of course, knows both how many iPhones have been sold and how many AT&T contracts have been activated, so barring a large quantity of phones purchased as gifts and languishing in underwear drawers, that number has to be taken at face value. Our commenters also note that iPhone bulk purchases may be under tighter control now, and unlocked iPhones are readily available for purchase in the Far East.

With the fraction of iPhones sold to unlockers edging towards 20%, there has to be a powerful cognitive and contractual dissonance at work in the braintrust at One Infinite Loop. On the one hand, there's no subscription revenue from AT&T for those phones; on the other, hey, that's an additional 250K phones sold, not a bad thing. It will be very interesting to follow this number quarter-over-quarter and see if the legitimate EU introduction lowers the demand for unlocked devices.

More below...
December guidance: whatever they're smoking, we want some. Apple's earnings guidance over the past few years has been tight as a drum; if the CFO says (as he did for Q42006) the expectation is $0.48/share, they make $0.62. The discrepancy between guidance and actual results has gotten bigger over time, so that with the most recent results the forecast of $0.65 per share turned into an actual $1.01/share. Despite analysts' comparative optimism (consensus numbers for Q407 were around $0.85/share), Apple has consistently blown past both the whisper number and the extremely conservative official guidance.

All that said, looking at Apple's estimate for next quarter's results — the first holiday season featuring both iPhones and Leopard on sale — gives me goose pimples, a metallic taste in my mouth, and slight altitude sickness. The official, conservative, we're-totally-sure-we-can-hit-this earnings guidance is $1.42 per share, $9.6B in revenue. Leaving aside for the moment that those numbers are 2x or more versus the year-ago quarter, what happens when you apply the reverse Apple-CYA factor and make a wild guess at what the actual earnings will be? This quarter, actual results were more than 1.5x the predicted results. Apply that fudge factor to next quarter's estimate and you are comfortably past $2.00/share, a freakish number indeed.

MacObserver notes that analyst Shaw Wu is surprised Apple is guiding above Wall Street's estimates for next quarter (last time that happened: December 2005). Is Apple retuning the forecasting to get closer to real-world results? Or are we looking at another conservative estimate that is going to be absolutely shattered by the true outcome? Let me check my crystal ball over here...

No subscription accounting for iPod touch. John Gruber has wondered aloud whether revenue from the iPod touch is being handled on the same basis as the iPhone revenue; that is, spread out over 24 months for accounting purposes & to allow for substantial upgrades in functionality without charging the customer. Nothing in the call or in other news indicates that Apple is doing this for the touch, and I'm not surprised: the 24-month accrual for the iPhone has more to do with the duration of the AT&T contract, IMHO, than the forward-looking functional upgrade possibilities. I would expect that firmware and functional upgrades for the iPod touch will be handled much as they have been for the other non-phone iPods: free and frequent. Considering that the touch will be a valid target for the iPhone/iPod touch SDK, I expect that by next Spring we'll see lots of enhanced functionality for the touch, whether or not Apple changes a thing.

Who's keeping score, anyway? Meanwhile, assuming the status quo holds through the market close today, Apple's market cap will be higher than both Intel's and IBM's. We've seen this coming for a while now, but that doesn't make it less remarkable. Another side note, captured in the graphic: Google's lifetime gains are 513% since IPO. AAPL, since January 2001? Over 2300%... that's some serious shareholder value.

As always, for the latest coverage on Apple as an investment vehicle, swing over to our colleagues at Blogging Stocks. (For continuing coverage on Apple as a technology company/lifestyle choice/evil anti-hacker villain/hero of the people/fetish, you can stay right here.)