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Tuesday, January 26th, 2010 | Posted by Editor - Blog News Service

IPhone at the Core of Apple

IPhone at the Core of Apple

IPhone at the Core of Apple

By MARTIN PEERS

Forget the tablet. Apple’s tree is truly phone heavy.

If anybody still questioned how much the iPhone has transformed Apple, the company’s release Monday of historical profit statements revised for new accounting rules provides a clear answer. The handset generates more revenue than any other Apple product group–including desktop and portable computers combined.

Under the old accounting rule, Apple had to defer much of the revenue and cost related to iPhone sales for two years. That masked the explosive impact of the device in its early years. Now Apple is recording virtually all of the revenue and costs as incurred.

In Apple’s fiscal 2010 first quarter, ended Dec. 26, iPhone and related product revenues were $5.578 billion, 36% of Apple’s total, compared with $4.45 billion for computers and $3.39 billion for iPods. The iPhone is largely responsible for doubling Apple’s sales over three years. While computer sales are up sharply, iPod sales are roughly flat over the period.

What’s more, Apple’s gross margin has risen to 40.8% from 31% in that period, courtesy of the iPhone. The device’s gross margin was about 60% in the quarter, estimates Sanford C. Bernstein, helping lift the overall number. So it should be no surprise that Apple’s cash from operations has skyrocketed to $5.8 billion in the latest quarter from $1.8 billion three years earlier.

Being this dependent on one device has a downside, of course, exaggerating the impact if there is any slowdown in sales. There has to be a chance of that, given intensifying competition in the smart-phone space as companies like Google wade in. But there is also plenty of room for growth if Apple continues to out-innovate its peers. The mobile-device market this year is expected to hit 1.32 billion units, estimates Gartner. Apple has sold only 42.4 million iPhones since 2007.

Apple has some structural advantages, too, which should stand it in good stead. First, the iPhone’s integration with Apple’s proprietary iTunes music software could hurt competing devices. Second, the iPhone has an enormous lead in the number of mobile applications.

Another advantage is Apple’s chain of retail stores, which takes much of the pressure of providing customer support and sales off wireless carriers. The value of that to the carriers could help allow Apple to maintain its pricing even as it broadens the number of carriers able to sell the device. Carriers now subsidize the phone’s average selling price, which Apple reported as $620 in the latest quarter, more than double what U.S. consumers actually pay.

As for the much-hyped tablet, Gartner projects the entire PC-laptop-netbook market will be only 336.6 million units this year. So it’s tough to see the tablet having anywhere near the impact on Apple’s bottom line immediately. Steve Jobs could yet create another new market with the tablet. But, for now, Apple is truly a phone company.

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