Yet Another Amazing Quarter

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Apple has announced their financial results for their 4th quarter 2007 (July - September 2007). Apple posted revenue of $6.22 billion and net quarterly profit of $904 million, or $1.01 per diluted share. These results compare to revenue of $4.84 billion and net quarterly profit of $542 million, or $.62 per diluted share, in the year-ago quarter.

Apple shipped 2,164,000 Macintosh(R) computers, representing 34 percent growth over the year-ago quarter and exceeding the previous quarterly record for Mac shipments by 400,000. Apple sold 10,200,000 iPods during the quarter, representing 17 percent growth over the year-ago quarter. Quarterly iPhone sales were 1,119,000, bringing cumulative fiscal 2007 sales to 1,389,000.

"We are very pleased to have generated over $24 billion in revenue and $3.5 billion in net income in fiscal 2007," said Steve Jobs, Apple's CEO. "We're looking forward to a strong December quarter as we enter the holiday season with Apple's best products ever."

"Apple ended the fiscal year with $15.4 billion in cash and no debt," said Peter Oppenheimer, Apple's CFO. "Looking ahead to the first quarter of fiscal 2008, we expect revenue of about $9.2 billion and earnings per diluted share of about $1.42."

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What an amazing quarter. I couldn't be happier. Yet we shouldn't be surprised at all. Jobs once said "we are not investing in a company, we are investing in people.". I can't agree more. If there is one company that innovate relentlessly, that'll be Apple. I started to have the confidence after following the iPod product line for several years. No one, I mean, no other company in the industry, going in a pace as fast as Apple, when its product is already the hottest in the market. I should attribute this to Jobs. He is a perfectionist, yes, and what a great perfectionist.

I love to analyze Apple's products and its strategies because they are so focused! Laser focus to be exact. (remember what Jobs did when he returned to Apple? He slashed most of the unimportant products and focus just on the Mac)

Mac: The turning point, as I pointed out earlier, starts with the Intel conversion. At that time most regarded the move to be bold and somewhat viewed as a "forced" decision. It's partially true since PowerPC just can't give Apple the thermal (or performance per watt) requirement for its modern thin and light design. The root cause, however, lies in the fact that Apple gradually realized the importance of compatibility to PC world. The logic is that in order to pursuade someone to switch, you have to give them a non-exclusive choice. (interestingly this is not true for the iPhone case, in which Apple sacrificed a lot by asking a lot). This logic couldn't be demonstrated better than moving to Intel platform. Suddenly Apple can let Windows and Mac co-exist on the same sleek Mac hardware. I felt the urge to buy one, but I'm not sure if I can represent the market. Now it seems it's true. People want Mac. The market share stood at 3.2% world wide as of now. I see huge potential in the next decade, even though "Computer" has been dropped off from its name.

iPod: Nothing more to say. It's a legendary story and should be written as a legend MBA case. For now, however, it's one leg out of three that has least expanding space. Apple could further differentiate and innovate but the focus would no longer be gaining market share.

iPhone: Good as the number it looks, I believe it's not up to the bar Jobs wanted it to be. One demonstration of this is the $200 price drop. Investors were scared to death when the price drop is announced. Yet people forget one thing, Steve Jobs has higher standard than anyone else, including you and me and all other investors. The only reasonable explanation is that Steve is not satisfied with the sales number of iPhone, albeit it's actually already quite good. Last night I saw the new iPhone ads. It's targeted at small-business. Evidently Apple see that as a big profitable market segment for iPhone to enter.

Software: This is not one of the "legs" Jobs mentioned. Yet it's actually THE secret receipe. People buy Apple products due to its top-notch user experience. If hardware design by Ive gives people the sleek satisfaction while sitting on the desk or in your hand, the software gives you the "feeling".

The sales/profit number is abstract when looking at a summary level. It's more meaningful if we look at geographically divided data. 40% of Apple's profit comes from overseas. I'm quite happy at that. Japan excluded, everywhere on the earth loves Apple's product.

The final question is, with current price as high as $186 a share, is AAPL still a good buy? My thoughts is that if the general market doesn't go south, it's a fair price. One thing investors might not realize is the profiting power of iPhone. The monthly pay-cut from carriers can be almost twice as the manufacturing cost of an iPhone. What that means is that when Apple sells you an iPhone for $399. They actually can get roughly $400 (price) + $400 (pay from carrier in two years) - $200 (manufacturing cost) = $600 pure gross profit per iPhone. 10 million iPhone to be sold in 2008 equals 6 billion gross income (although the number will be spreaded out gradually). This leg does seems will hold to itself quite well.

Disclosure: Holding AAPL, and 2009/2010 call options.