Not long ago, The Jaded Consumer ran a piece criticizing Apple as hard-to-value due to earnings opacity. Apple's recent conference call, though surely not intending to respond to The Jaded Consumer's inquiry into whether Apple's price has a safety net, made an argument that $25 Billion in cash was a solid reason to think Apple would weather the current storm better than most. In response to the hard-to-value argument, Apple has offered something new: a non-GAAP earnings measurement that backs out the effect of subscription accounting, so that investors can see the true impact of iPhone sales on Apple's profit.
The materiality of iPhones to Apple's bottom line is clear: abandoning the pretense that iPhone revenue occurs over twenty-for months in favor of recognizing revenue in the month of sale more than doubled Apple's earnings per share from $1.26 to $2.56 (per the conference call statement that sales adjusted to eliminate subscription accounting were for the quarter "$1.68 billion, 48% higher than the reported revenue of $7.9 billion, while adjusted income was $2.44 billion, 115% higher than the net reported income of $1.14 billion"). The fact that Apple's iPod units maintain Apple at the apex of the music player market (and music vendor market), and that its Mac units show consistent strong unit growth, are strong assurances that Apple's brand remains valuable and that its customers continue to respond to its products and promotions. Despite fears of margin erosions, and Apple's own guidance, Apple has managed to increase gross margins over the quarter to 34.7%; Apple turned in unexpectedly high profit despite total GAAP revenues lower than some expected.
Apple's retail stores continue to expand the worldwide footprint of the Mac, selling an all-time quarterly record of 596,000 Macs, a 26% increase -- half of them to buyers who'd never owned a Mac. Folks buying an iPhone and activating it in the store spend about one minute longer doing so than they'd spend buying an iPod.
The phones have exploded. Apple sold 6.9 million of the phones, beating RIMM in units (6.1M Blackberries v. 6.9M iPhones) and becoming the world's third-ranked phone vendor by revenues (with $4.6 Billion in sales, third behind Nokia's $12.7B and Samsung $5.9B; Apple stood ahead in the quarter of Sony/Ericksson's $4.2B, LG's $3.4B, Motorola's $3.2B, and RIMM's $2.1B). Apple's sales included both expansion into new countries (a growth that won't happen twice) and initial channel fill (a few million units that won't ). Over 5,000 iPhone applications are available on the App Store globally, enabling third parties and Apple to make each others' products more valuable. The iPhone platform will only get more valuable.
Apple's position in music is strong. A relative's new car had built-in support for iPods and iPhones -- not through an audio-in jack, but through a special iPod connector licensed from Apple, allowing control of the player from the steering wheel. Apple music players are featured in third-party promotions featuring high-profile music brands. Apple's music store offers millions more tracks of music than competitors, making it an attractive place to shop.
Apple generated $9.1 Billion in cash over the year. Apple achieved this while increasing sales, expanding product lines, growing international stores, and maintaining strong gross margins. Apple's cash creation per share was $10.27 over the year, and its accounting profits higher. Apple claims that it will use this downturn as it did in the last one to invest its way forward. During the last downturn, Apple developed retail stores, for example -- an expensive undertaking, but ultimately extremely positive. The ability to afford to take risks in R&D to compete effectively going forward will help Apple, and Apple's current management has shown the ability to capitalize on these opportunities.
Assuming that Apple's annual easy-to-understand profits are in the neighborhood of $10, and depressions are associated with a P/E around 8, then Apple might be viewed as having a "floor" of $80. Panic selling substantially below this level might indicate the kind of buy opportunity The Jaded Consumer failed to identify earlier. Remembering Apple's cash of $25 Billion, Apple may have an effective shock absorber against some of the crazier pricing shocks that may come to the market over the course of this downturn.