iPhone premium comes out of Apple stock

So, what is the "iPhone premium" in terms of net profit to Apple per iPhone? I've cracked the numbers...$206 per phone.

I discovered this by isolating the profit from iPhones within the financial statements, which has been virtually
impossible…until now.

Let me preface this analysis by saying that I was only one cent off of
Apple’s Q3 net earnings and 3 cents off of Q4 (when you take into
account that I was still using 885m as the sharecount, not the 907m…I
need to find out where to get the correct info next time, but the net
was the same regardless).


Bragging Point: That puts my last two estimates, combined, closer than
Andy Zacky’s by 33% (I’ve only been off by a combined 4 cents
regarding earnings over the past two quarters vs Andy’s 6 cents).
Don’t get me wrong, Andy has the best analysis on the street, but brag
I must.


OK…on to how I got to $206 as the profit from each 3G iPhone in Q4.


In disclosing the additional income and profit that it could only
include in the non GAAP figures (1.14B net GAAP, 2.44B net non GAAP),
when one assumes this difference is primarily iPhone profit (Apple TV
and iPhone Apps could be a contributor, but would still make only a
percent or two difference among the figures I will outline below), one
can manipulate the information provided to come darn close to figuring
out the profit from each iPhone we see walking down the street.


Given/Assumed:
1- iPhones sold in Q4 = 6.9m
2- 2.44B – 1.14B = 1.30B net iPhone profit not included in GAAP
statement


Profit Recognition goes as follows:
July Sales: 1/8th of net profit of iPhones sold in July are recognized
for the quarter
(recognized for July, August, September = 3 months of the 24
months recognition is spread over)
August Sales: Net/12
September Sales: Net/24


Here are a few sales scenarios, meant to shed light on how, based upon
the 6.9m iPhones sold, there is a small range under which profit per
iPhone falls. I show greater detail in the two scenarios in which the
most and the least iPhones are recognized in full (this is not
necessarily how they are accounted for on the balance sheet, but is an
equivalent measure that makes visualization a bit easier than dealing
with so many fractions of the two year recognition period) in order to
show the range. The others come so close to .6m iPhones that I rounded
to one decimal instead of extending to two...my calculus, physics,
chemistry, biology, engines, naval engineering and English teachers
would be so proud.


Scenario 1
July: 2.9m sold = 362,500 iPhones net recognized in full (equivalent)
August: 2m sold = 166,667 iPhones net recognized
September: 2m sold = 83,333 iPhones net recognized


Total recognized = 612,500
Total unrecognized = 6.9m – 612,500 ~ 6.3m
Unrecognized net/unrecognized iPhone Sales = 1.3B/6.3m = $206.39


Scenario 2
July: 3.2m sold = 400,000 iPhones net recognized
August: 1.8m sold = 150,000 iPhones net recognized
September: 1.9m sold = 79,167 iPhones net recognized


Total recognized = 629,167
Total unrecognized = 6.27m (going out two decimals for highest
unrecognized total for variance purposes)
Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m =
$207.34


Scenario 3
July: 2.4m sold = 300,000 iPhones net recognized
August: 2.3m sold = 191,667 iPhones net recognized
September: 2.2m sold = 91,667 iPhones net recognized


Total recognized = 583,334
Total unrecognized = 6.32m (going out two decimals for highest
unrecognized total for variance purposes)
Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m =
$205.70


Scenario 4
July: 2.7m sold = 337,500 iPhones net recognized
August: 2.2m sold = 183,333 iPhones net recognized
September: 2.0m sold = 83,333 iPhones net recognized


Total recognized = 604,166
Total unrecognized = 6.3m
Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m =
$206.39


Scenario 5
July: 2.7m sold = 337,500 iPhones net recognized
August: 2.5m sold = 208,333 iPhones net recognized
September: 1.7m sold = 70,833 iPhones net recognized


Total recognized = 616,666
Total unrecognized = 6.3m
Unrecognized net/unrecognized iPhone Sales (units) = 1.3B/6.27m =
$206.39


Given these scenarios, one can determine the iPhone net profit
recognized is likely no less than 570,000 and no greater than 640,000
for the quarter. Therefore, the unrecognized iPhones should range from
6.26m – 6.33m.


The most iPhones that could possibly be recognized would be .125 (3
months in quarter / 24 months in recognition period) x 6.9m iPhones,
which is 862,000, and would require all iPhones to have been sold in
July, which didn’t happen. The least that could have been recognized
would be 371,000 (1m were sold in first 3 days, as per Jobs’
statement). I don’t want to delve too much into statistics, but to
fall out of the 570,000 to 640,000 range of recognized iPhones would
be improbable, assuming the iPhones were recognized according in the
full month in which they were sold and not to the day.


This results in a net profit range of $205.37 to $207.67. This can
vary depending upon expenditures related to the iPhone, future
decreases or increases in component costs, dollar exchange rates,
etc., but at least represents the snapshot on October 1st, 2008.


Therefore, $206 net profit per iPhone is a good…no, VERY good
estimate. I look forward to some good constructive criticism, and some
good bashing.


J.R.F

this is all rubbish

the stock is down because everyone is terrified and selling off to retreat to cash

what exactly is an iPhone "premium" ? they still sell iPhones, in fact the company is better off for including them in their product line

what, now that everyone has accepted how fantastic iPhones are the stock is not worth more than before this huge cash cow was introduced?

it's this mindless Apple bashing/rehashing of cute sayings like 'premium' in an unjustified way that drives the stock down over and over

Apple is in the best position of ALL handset makers. It released the iPhone 1 full year before the market crash and has 20+ billion to get it through the Recession/Depression. This is nearly as much as the entire Auto Industry is asking for in Govt. Loans "combined".

Because the iPhone has a Full Blown Developer Kit and App Store it is light-years ahead of RIM and Nokia and Samsung in terms of Market share of new Smart-phones.

What most people do not understand is that the iPhone is a singular unified platform unlike windows mobile or SYMBIAN or RIM there is only one interface model which works on all phones. Write your code once and it looks the same on all iPhones and iTouch iPods. Not so with RIM or SYMBIAN. Not all software will function the same on their various devices...QWERTY and touch interfaces do not play well together. users will have to keep their users guide nearby to figure out the QWERTY key stroke to send mail etc...

Because of the the iTouch Apple's iPhone full blown OS/Platform is actually in more users hands than Apples iPhone sales figures express. And with the new lower cost of the iPod Touch you can bet that the iPhone OS is running on at least 20+ million devices so far.

This is a HUGE user base to write apps for which is exactly what Apple has planned from the start. Continue to upgrade the user to the next higher model with more features. Apple now has a new platform with 20+ million users and growing with Thousands of applications that are easily purchased and installed on their OWN manufactured devices. Forget the old windows concept of selling the OS to anyone who wants to build a box. People want a reliable experience like McDonald's. It tastes the same every-time.

Apple is going to be the largest handheld computing platform in History. Because most users do not want to fuss with installing applications or searching all over the web for software Apple has created a closed system that can easily control Spyware, Virus's, etc...

As I see it RIM will be forced to cut Marketing and R&D costs in the coming economic times and Apple will be able to increase their budgets because of their Huge cash reserves.

I could go on for days but Apple is positioned to win the smart-phone wars. Especially in this down market.

Now wether the market will reward the shareholders is another story because stock prices are not a true reflection of a companies success or failure instead but of the investors fear or confidence.

One thing you can be sure of AAPL is not going out of business and at this rate will surpass RIM, Microsoft, Nokia, Samsung and all the rest in this smart-phone game because they waited for the market to mature and created the whole enchilada before releasing it for consumption. Apple is already in the lead if not in sales definitely in the Development Cycle.

Eventually the stock market will come back to life and Apple will be Bigger than Microsoft when it does.

Sorry Mr. Balmer but people really will buy a 600+ dollar smart-phone and carriers will happily subsidize it!

Let's see how many people want, a $199.00 handheld computer for Christmas with a Nice low price thats Easy to operate and has Tons of applications. I think it's going to be a Very GREEN CHRISTMAS FOR APPLE!

For someone who claims to have worked in the securities industry, the author isn't very well informed.

Apple's p/e is 15.4. Nokia is around 8. Dell is around 6.

Not all of that difference is due to the iPhone, but the iPhone is a big part of the reason. Apple sells great products that are in high demand at good margins. That's why they're trading at twice the multiple of their competitors.

Call it the iphone premium or the great product premium, it doesn't matter. Apple is doing well - no matter how many silly, un-informed 'analysts' say otherwise.

John Lee Hooker, you my friend are no Beltway Greg. Dig up my old posts and read my estimates and weep. Take 1Q 07. Predicted $150 in the after hours and it hit exactly $150. Predicted $200 in Dec. of 06 and it was there before Jan. of 08. Became bearish in Jan of 07. Apple is still a great company but nothing could withstand this macro mess. The one thing I am sucking on is my call for $260 this year which I now believe will be achieved by Jan. of 10. Oddly, it has all worked out this year as I exited commodities in June, shorted POT, and most recently, check the posts under Sheldon LIber's name, called attention to the demise of SKF Ultrashort Financials last week. Now this week some $120 down from the peak of $300 some 96 hours ago I'm still the man.

Beltway Greg