Apple Inc. is expected to show a 35 percent surge in quarterly profit this week, but the focus will be on just two days: the last 48 hours of June when its highly anticipated iPhone went on sale.
The iPhone contributed virtually none of the $637 million Apple is forecast to have earned, but investors are eager for the first official word on how many of the combination phone, Web browser, media player devices were sold at launch.
Perhaps the most significant catalyst from the report will be feedback regarding initial iPhone demand, Deutsche Bank analyst Chris Whitmore said in a research note. We believe initial iPhone demand is very robust.
Wall Street reckons Apple sold up to 700,000 iPhones in the first weekend, but the company is booking sales from the $500 and $600 handsets as subscription revenue over two years, so only one-eighth of that will show up in the income statement when it is released on Wednesday.
Optimism over the iPhone's prospects have helped push up Apple shares nearly 50 percent, to $143.75, since Chief Executive Steve Jobs unveiled the product in early January.
But analysts say that until iPhone shipments reach tens of millions of units a year, Apple's underlying financial performance will still be driven largely by its Macintosh computers and iPod music players.
For Apple's third fiscal quarter, analysts are looking for unit shipments of Mac computers to rise more than 25 percent from a year earlier, led by new laptops with upgraded parts.
The Mac growth rate is more than double that of the overall PC market, thanks partly to iPod buyers switching to Mac computers, and recent industry figures show Apple gaining share against PCs running Microsoft Corp.'s Windows operating system software.
We believe that Apple is gaining share in PCs and that its growth continues to outpace the PC market, Lehman Bros. analyst Harry Blount said.
Shipments of iPods are expected to have risen more than 20 percent from a year earlier, but fallen short of the previous quarter as consumers postponed purchases in anticipation of the iPhone and new iPod models expected later this year.
Profit margins would be helped by stable or falling prices of memory chips, though few expect Apple to match the 35.1 percent margin it saw in its second quarter.
In addition, strong demand for higher-end Macs should also support better-than-anticipated gross margins, Deutsche Bank's Whitmore said.
All that adds up to an expected profit of $637.5 million, or 72 cents per share, compared with $472 million, or 54 cents per share, a year earlier, according to the average forecast on Reuters Estimates.
Sales are seen coming in at $5.29 billion, up 21 percent from $4.37 billion a year earlier.
One place where Apple will see instant benefit from iPhone sales is in its balance sheet.
While iPhone revenue is spread out over two years, that is ultimately an accounting trick and Apple will still bank the cash from each sale right away.
We expect Street focus to be on iPhone units and 'booked' revenue, PiperJaffray analyst Gene Munster said.
Munster also estimated that AT&T Inc., the exclusive iPhone network provider for two years, is paying Apple $3 a month for each subscriber, plus $8 for customers who switched from another carrier.
On Friday, Munster raised his price target on Apple shares to $205, saying that was justified by an iPhone tidal wave that would see 45 million units sell in 2009 at an average price of $330.
One thing we learned with the iPod is that when a device is game-changing, the demand will come. However, it is difficult to predict the inflection point, when a product moves beyond niche appeal to widespread market success, Munster said.
He noted that investors over the past month have shown little awareness of just how big an impact the iPhone will have on earnings down the road.