Apple defies gravity

October 20, 2009

Here’s how bullish Steve Jobs and his colleagues at Infinite Loop in Cupertino feel: After a blowout September quarter, the forward guidance they are offering for the December quarter is comically modest. In the tech world, people have long known that Jobs loves messing with the expectations of both competitors and his legions of Apple fanboys. He plays his games with the financial world as well.

In the middle of a global recession, Apple has reported its biggest ever quarterly net profit, $1.67 billion, on revenue of $9.87 billion, its second highest quarterly total ever. Gross margins of 36.6 percent were the highest ever.  Apple sold more than 3 million Mac computers, up 17 percent in a global market that grew just 2 percent. It also sold 7.4 million iPhones. Apple’s cash pile grew to $34 billion, which it still plans to use for preservation of capital.

After a quarter when revenue soared 25 percent from a year ago, Apple’s forward guidance calls for the brakes to be slammed in the next quarter with growth of only around 10 percent. The guidance is for margins to fall as well because of the different seasonal mix, more air freight and higher component costs. No one believes either of these forecasts.

You have to be very dark-hearted to see clouds ahead for Apple, but there are two areas where doubts might arise. Microsoft (don’t laugh) introduces Windows 7, its latest operating system, on Thursday. After the justly maligned flop of Windows Vista, independent reviews of Windows 7 have been generally positive. The Wall Street Journal’s influential Walt Mossberg declared in his assessment, “In recent years, I, like many other reviewers, have argued that Apple’s Mac OS X operating system is much better than Windows. That’s no longer true.” Microsoft and the makers of Windows-based computers will be pouring money into promoting their computers, which are generally less expensive than Apple’s offerings. That should slow some of the growth in Macs.

On the phone side of the business, more phones are coming out that use Google’s Android operating system, a smartphone rival to the iPhone. RIM’s BlackBerry continues to hold its own in the corporate market. Microsoft continues to invest in Windows Mobile, although its gains have been harder to spot. But the iPhone is overwhelmingly the standard to beat. On the earnings call, Apple chief operating officer Tim Cook said, “People are trying to catch up with the first iPhone which we launched two years ago. We’ve moved way beyond that.”

His comments weren’t just bravura. Apple’s huge advantage comes from the ecosystem they have built around the iPhone, just as previously they built an unbeatable ecosystem around the iPod. The AppStore, where iPhone users can download new applications for their phone, now lists 85,000 applications (by contrast, RIM’s BlackBerry has perhaps 2,000 applications and Android applications have just crept into five figures). There were 2 billion AppStore downloads in the last year, and a half billion of those were in the September quarter. “That’s a country mile more than anyone else,” Cook said.

The entry into China should also provide a significant boost for the iPhone business. Cook declined to quantify the China effect, but the arrangement with China Unicom calls for the iPhone to launch at 1,000 points of sale. The world’s largest mobile market isn’t yet the largest market for smart phones.


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