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Thursday, October 23, 2008

The day Apple released its iPhone revenue bomb

[Originally posted Oct. 23, 2008 on]

Some Apple watchers have complained almost since the launch of the iPhone that Wall Street doesn't understand the device's value to the company. Analysts consistently underestimate Apple's revenue, these investors insist, because they fail to fully account for iPhone sales.

The problem has been festering for so long — and the gap has grown so large between Apple's actual earnings and the Street's grasp of those earnings — that Apple finally let the cat out of the bag Tuesday during its quarterly earnings call.

Measured by so-called generally accepted accounting principles (GAAP), the company earned $1.26 a share in 2008 Q4 on revenue of $7.9 billion. This is the form in which Apple (AAPL) has always reported its income.

But on Tuesday, for the first time, the company went one step further. CFO Peter Oppenheimer told analysts that when measured by actual revenue — counting the full value of every iPhone and Apple TV sold in the quarter — the company earned a good deal more: $2.69 per share on sales of $11.68 billion (see transcript here).

The consensus among analysts before the earnings call was that Apple's revenue for the quarter would be about $8.05 billion. Some traders looked at $7.9 billion and thought Apple had fallen short of the Street's target by $150 million. The smart ones looked at $11.682 billion and realized they'd underestimated Apple's earnings by nearly $3.8 billion. They're probably the reason Apple's share price jumped 12% in after hours trading.

How could the analysts have been so wrong?