Daniel Eran Dilger
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Apple earnings, profits, and cash embarrass Microsoft

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Daniel Eran Dilger

While Microsoft executives like to talk about Apple as an insignificant company with less than 5% of the worldwide market share of all PCs and servers sold, the company now has more cash than Microsoft and earns more than half of its profits and over three fourths Microsoft’s revenues.
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For the quarter ending in September, Microsoft released revenues of $15.06 billion, net profits of $4.37 billion, and a reserve of cash, cash equivalents, and short-term investments that added up to $20.7 billion.

Apple reported $7.9 billion in revenues and $1.14 billion in net profit, but those numbers don’t include most of its iPhone business, which is hidden away in subscription accounting under GAAP rules. For that reason, Apple also released its real earnings: $11.68 in revenue and $2.44 billion in net profits. The company also reported a cash position of $24.5 billion.

Microsoft’s quarterly revenues grew by 9%, compared to Apple’s non-GAAP revenue increase of 75.1% year over year.

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  • http://johnsessays.blogspot.com John Muir

    Quick: licence OS X, release ultra low end Macs, buy AMD … Apple is dooooooomed!!!

    Ah, the 90’s. Great to see how MS is still living in them.

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  • http://home.comcast.net/~daguy daGUY

    I wish pundits and so-called “analysts” just looked at these simple facts for five minutes before writing anything about Apple. This is why it makes no sense for Apple to license OS X, or release an $800 laptop, or whatever else the pundits say they “must” do to stay competitive.

    WHY would Apple do any of those things? They have only 5% of the market compared to Microsoft’s 95% dominance with Windows, yet they have MORE cash on hand than MS, and almost match them in revenue and net income! Clearly, their strategy of selling an integrated hardware/software product to the mid/upper-range of the market works exceptionally well.

    Doing anything that the pundits suggest, like licensing OS X for use on generic PCs, would be a disaster from Apple’s perspective. They might be able to expand their market share, but they’d lose more money than they’d gain, due to the lack of hardware sales.

  • The Mad Hatter

    Doing anything that the pundits suggest, like licensing OS X for use on generic PCs, would be a disaster from Apple’s perspective. They might be able to expand their market share, but they’d lose more money than they’d gain, due to the lack of hardware sales.

    Apple is doomed if they continue to follow this flawed business model, after all, all those pundits can’t be wrong… Of course a lot of pundits said that Toyota would fail in the North American market, because North Americans wouldn’t buy cheap Japanese cars.

  • The Mad Hatter

    The Mad Hatter { 10.25.08 at 10:53 pm }

    Microsoft’s quarterly revenues grew by 9%, compared to Apple’s non-GAAP revenue increase of 75.1% year over year.

    Hum if Apple maintains a 75% increase in sales per annum, and Microsoft maintains a 9% increase in sales per annum, Apple’s sales will exceed Microsoft’s in 2010.
    2 The Mad Hatter { 10.25.08 at 10:55 pm }

    Note that I used the GAAP numbers, that I am not an accountant, and that anything except straight numbers are bullshit as far as I’m concerned.

    Note that this was copied from the duplicate article, so that Daniel can delete it.

  • theskeptic

    This is a false comparison Daniel. GAAP is used for a reason. The revenue is not recognised immediately because it is “unearned”, as service remains to be delivered to justify the income received.

    Apple’s financial strength does not change the fact that OS X is only 5-8% of the world market, and that Windows is 90%+. I would love for this to change… but it seems unlikely… unless Windows 7 is as bad as Vista (I don’t think they will do that twice!).

    There is nothing for Microsoft to embarrassed about on a financial basis (other than the outrageous prices they gouge out of Mac users for a half-baked implementation of Office).

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  • PXT

    My biggest concern as a consumer is that Apple could be tempted out of its current winning formula by its increasing ability to compete with Microsoft. I think that is one of the reasons that Steve Ballmer sometimes taunts Apple with his ‘advice’.

    Microsoft wins through dominance and customer lock-in through proprietary data and system standards. So their ideal market share is 100%.

    But Apple’s premium product positioning means that there’s a sweet spot. Say 10% globally may be plenty for them.

    By supporting open standards they can play in the bigger pool with a modest market share, cherry-picking the best ideas, and offering the premium product that I want to buy.

  • http://www.adviespraktijk.info Berend Schotanus

    So the big question is: will Apple start to behave like a market leader?
    Will they start to put their own benefits in the first place (like in Jony Ive’s Al-You-Me-nium instead of Cnet’s Brian Tong’s a-Luuuh-minum; you better get used to it!)
    Or will they continue to emphasize Microsoft flaws (like cheap Bake Sale ads)?

  • sharp_jiang

    Unbelievable .
    fact speaks for Apple !

  • fatbarstard

    Well the comprison with cash piles is real, but Microsoft has been paying dividends and doing share buybacks whereas Apple has just been putting the cash in the bank – so you can’t really compare the two companies because their balance sheet strategies are different.

    What would be more interesting is a comparison of free cash flow.

    On the point about GAAP – Apple has to defer revenue because the iPhone is sold on a contract and when accounting for that contract you have to amortize the revenue over the life of the contract. It gives accountants something to do I suppose…

    On the point about Apple’s business model – well it is working extremely well at the moment and there is absolutely no reason for the company to change – the pundits who say license Max OSX to el cheapo manufacturers are just plain ignorant.

    however, and its a big rider, the current business model may not be relevant or even viable in 5 year time – they key with any tech company is adapting their business model as the tech and business environments change… Microsoft only exists because it has carved out a viable monopoly. This is now under threat from not only Apple but numerous other parties who can innovate faster and have a much greater incentive to innovate.

    And anyway, who cares if Apple only has 5% of the world market. it clearly has the best part of the market and that is the best place to be…

  • qka

    “Of course a lot of pundits said that Toyota would fail in the North American market, because North Americans wouldn’t buy cheap Japanese cars.”

    Actually, it is my understanding that Toyota entered the US car market in the early 1960’s, selling what they were selling in Japan. The US market promptly handed them their own head on a platter. Toyota went home, studied what it would take to succeed in the US, developed the appropriate products, and then came back to the US. They haven’t looked back since.

  • KenC

    @theSkeptic, you wrote:
    “This is a false comparison Daniel. GAAP is used for a reason. The revenue is not recognised immediately because it is “unearned”, as service remains to be delivered to justify the income received.”

    There WAS a reason last year, when Apple got monthly fees from AT&T, on the unsubsidized EDGE iPhone. Those fees were estimated to be between $8 and $15 a month.

    Now, the 3G iPhone is subsidized by the carrier, and the monthly fees from AT&T and other carriers have been dropped. In other words, Apple gets their $200, in-store price, and they get their $360 subsidy in the quarter the phone is sold. There’s no subscription fees afterward. The past main reasoning for deferring revenue over GAAP has disappeared. The sole remaining minor reason is if Apple releases updates that may require a payment under SOX rules. So, far in over a year, they’ve only delivered one of those.

    Honestly, there no longer remains any good reason for the iPhone’s revenue to be deferred. Does Blackberry defer revenue? Does Samsung? Does Nokia? Does Motorola? Most of the analysts who cover Apple, also cover other tech companies in the PC and/or cell business. These guys, except for Munster and Wolf, are confused by deferred revenue. That’s why Apple reported their non-GAAP figures, to help those poor guys out.

    In a year, those GAAP numbers will increase and approach the non-GAAP ones, and the confusion will disappear, but right now, people are missing the boat, that Apple’s true sales and earnings are “stunning”. $2.4B in profit in a quarter, is equal to all the profit Apple earned in a year in 2006. $2.4B in profit in a quarter puts them not only right up there with MS, but also the Walmarts, the Berkshire Hathaways, etc. Just go look at their income statements. There aren’t that many companies in the world that make over $2B in a single quarter.

  • John E

    Nah. yes, Apple had a terrific quarter. but MS, with a profit margin of over 25% (fantastic by any standard) also had a very good one. to say Apple “embarrassed” MS is rhetorical over-the-top.

    what the numbers really tell us is that MS is more and more becoming an enterprise-focused business (that’s where its high profit margins are), while Apple is growing rapidly now as a consumer products company (that’s where its big sales growth is). MS refuses to admit this, still hoping for its fantasy of “Windows everywhere.” Apple has a more coherent strategy, better integrating its sexy new consumer products with its desktop OS both functionally and stylistically (but it ain’t all working yet, cf: AppleTV). Apple does just enuff enterprise stuff to support this goal, not really to ever challenge MS there.

    MS’ current theory to pull all its disparate bits and pieces together is an integrated web net for users, Windows Live. and they will get something finally together by 2010. but they will be just one of several such options. U-Verse already exists, with more telco/CATV based services to come. Google and Amazon and the rest are already well-positioned too. So are all the Facebooks and Hulus. Sony is trying to emulate Apple. etc., etc.

    bottom line is MS will wind up being just one of many options, hoping to get 20% of that overall market. and Apple will probably have 20% too.

  • nelsonart

    There’s plenty good reason to amortize the revenues over 8 quarters. Every time Apple puts out an update and charges $19 for it, the crowd turns on Apple and the whining starts anew.

    It’s all the same and there is no conspiracy. In quarters that don’t have fantastic sales, the numbers will be propped up by previous quarter #s.

    I like that Apple broke out the non-GAAP #s because they really blew my mind. Even if you can’t really compare Apple with Microsoft anymore, it still feels good to see the gap closing. If Windows 7 is another bust, MS will fly into a downward spiral.

  • Netudo

    I think licensing MacOSX doesn’t help Apple. It will expand market share, but will lower income per machine running OSX. Besides, If they do that, they may be in danger of being accused of monopolist practices easily.

    Right now nobody can do that (for real) because they sell MacOSX for their own machines. Nobody can complain that MacOSX works better in Apple hardware than in generic hardware; because you can’t legally run MacOSX on generic hardware.

    If they license OSX, it will only benefit other PC manufacturers escape vistacalipse.

    Not helping your competition is not the same as being monopolist .

  • roz

    Well if Apple did want to license OSX they have done a lot of things that would put them into position to do that:
    1) Cut software dependences to MSFT: Safari (IE), Mail+iCal+Address Book (Entourage), iWork (Office)
    2) Shift to Intel removing technological barriers
    3) Focus hardware on high-end devices where design differentiates. No low cost laptop. No vanilla white box tower.
    4) Build revenue outside of PC hardware sales: Software iLife, iWork, OSX, ProApps. iPod/iPhone/AppleTV. Services like MobileMe, Pro-Care, AppleCare, Retail.

    I for one don’t think Apple would lose that much hardware sales if they allowed OSX on other PCs. Ask yourself what your next hardware purchase would be if you could choose any maker? Bet its still Apple.

    Also note that when Dells sells a laptop Apple gets nothing from that purchase. If it sold with OSX, besides the license fee, there is a lot of potential upside to Apple. Software, services and the potential of a follow-on hardware purchase.

    Sure Apple is doing amazing, who can argue with that. But its not as cut and dry as some may want it to be.

  • http://johnsessays.blogspot.com John Muir

    @roz

    At least 90% of Apple’s income is from hardware sales: be it Macs, iPhones or iPods. They take their cut from iTunes and the App Store, and have some discrete software business going on with Mac OS X updates and the iLife/iWork and Pro apps; but compared to any other company with as much action in software Apple is unique in being so hardware dependent.

    Apple is indeed unlike Microsoft or Dell. It is in fact a poor fit for working with either. Apple’s strength is the “whole widget” thing, vertical integration, a complete experience. Apple dropping either hardware or software is so counterintuitive and runs against the company’s genes as to be the ultimate computer industry pipe dream.

    There is a persistent demand outside of Mac users for OS X on generic hardware. But is that market big enough and lucrative enough to be worth the risk which was exposed in the clone wars of the mid 1990’s? Not a chance. The PC industry already has Linux as a Windows competitor and the uphill struggle that has encountered is the ongoing epic of our age!

    The truth is: OS X was already offered to the x86 mass market, years before it even became the heart of the Mac. NeXT’s history with OpenStep (and rival Be’s disastrous downfall with BeOS on Intel) speaks volumes for those who try to be a better Windows than Windows. (To borrow a phrase from IBM and OS/2, yet another notable piece of roadkill.) Just because Dell and others are realising the Mac is more attractive than pumping out Vista boxes does not mean Apple could suddenly become the new Microsoft, even if that was its aim. These days, you get the feeling that even Microsoft doesn’t want to be Microsoft. Not for too much longer anyway…

  • roz

    @Muir

    I was talking only about their PC business, not iPods or iPhones so the 90% does not apply. Of course they are hardware dependent. The question is will they remain that way.

    Who said that Apple would drop hardware or software? My argument is that licensing the OS could be compatible with their hardware business.

    I am well aware of the history. How well does it apply to today is the question? OS/2 and NeXT happened when Windows was in a position of growth and strength. Also, MSFT had more market power, most of which has been striped from it by litigation. PC makers were strong armed not to offer another OS even if there was customer demand, which there wasn’t

    Today is very different. Consumers and PC makers are desperate for an alternative to Windows. OSX is much richer than Linux. All three will proceed. The question is: is it better in the long run for OSX and its software developers to be limited to one brand of hardware?

    Yes, indeed its true that Apple has succeed with the whole widget. You are correct there. We’ll just have to see where they go with it. The whole widget thing certainly applies to the iPhone and the iPod. It just seems to be that 10.6 with its tight Exchange integration, its jettison of all PPC code and its optimization would make a great licensed OS for Core2Duo and later Windows hardware. Sure it would change Apple but it would also move it into the center of the action, a position we seem to be seeing more and more from the company.

  • http://johnsessays.blogspot.com John Muir

    @Roz

    Hmm…

    The main thing you overlook is that Apple makes a whole lot of profit from every Mac sold. Microsoft make a lot less per PC. For Apple to start making money from licensing OS X, each lost Mac sale would need many licences gained in order to pay for it. It’s not as simple as just making money from software sales: the highest concentration of demand for generic hardware running OS X would be from people who are buying Macs today. Mac Pros in particular would bleed from the non-Apple branded xMac below.

    This all happened before of course. All the cloners concentrated on pushing out generic, barely designed, but very competitively priced desktop hardware, often outperforming Apple’s own high end kit. Any licensee would 100% do the same. Why compete with Apple’s strengths when you can go the Dell route instead? The trouble then would be that Mac hardware sales would be under heavy pressure even if the OS X market as a whole was growing. Apple would be doomed to become the new Microsoft.

    I certainly agree that this is less of a zero-sum game than it was during Apple’s dark days in the 1990’s. But I recognise that the risk is still very real. Too much so to trade for the blazing success Apple has on its hands using the polar opposite strategy today. And doubly so in a dodgy economy where consumers are increasingly looking for price savings anywhere they can get them.

    The dream of being able to buy your own highly customised Mac from among a range of manufacturers is just that and will remain so. It would be nice for us on the buying end, but a nightmare for Apple which would suddenly be exposed to competitive, homogenising pressures it doesn’t want or need.

    If you want something other than Windows on that custom box: Linux is where it’s at. Maybe one day Google or HP or someone else with a vested interest will make it the successor to the old and rotten Windows empire. I’m just sure it won’t be a licensed generic OS X.

  • roz

    @Muir

    I really am not overlooking the profit from Mac sold. Licensing involves risk for sure. And yes the effect you are talking about did occur with the clones and a similar scenario would occur now too. That is the cost – Apple’s hardware business would be certainly exposed to more competition – no way around it. And I also agree that Mac Pro’s would be especially vulnerable.

    All that having been said, the point is that there is also a significant upside to be considered. More hardware competition but also revenue from the sales of other companies, that side of the business is hard to measure since it does not exist today. If Macs have 3% globally, the addressable market for OSX is 33X current sales. That is a pretty huge market compared to what they are doing now, as good as things are, as rich as the offerings are now. There are not a lot of companies who have a product that could reach a 33x market who do not take it there.

    While some hardware sales would be lost, there would potentially be new opportunities for Mac system sales. Consider corporate sales. An IT department that switches to OSX might also buy a bunch of Macs to go with their existing systems. People experience OSX at work and buy a premium machine for home. Executives buying OSX machines. If iPod and iPhone have a halo effect, imagine that of OSX for Mac hardware.

    Also, if what you say is true, and Linux does ultimately replace windows, then its even harder for Mac to have a role in the future. Do developers and consumers really want to support 3 OS’s? I’d rather have OSX out there as a commercial option than not.

    I am not saying Apple will do this, its a leap and I think they are drunk on the success of the Mac and everything else they do. Still I think they have successively over a long time made moves to create it as an option.

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  • elllroy

    as nice as it looks the comparioson is misleading. microsoft is also deferring revenue so you have to use their non-gaap numbers too. compare gap to gap and non-gaap to non-gaap. not apples to oranges.

    [Problem is that Microsoft’s differed revenues have been in play for so long that their GAAP and non-GAAP figures aren’t any different. In a few years, Apple’s won’t be either. But they are today, so no, it’s not a false comparison at all. ]

  • http://coderad.net StrictNon-Conformist

    This is a silly comparison: Apple and Microsoft are almost inverses of each other in terms of product strategies where Apple is manufacturing all the hardware and software for *all* of their products to work together, and with the exception of the Zune and XBox 360, the only other hardware Microsoft sells (they probably just rebrand things) are small parts (keyboards and mice) and not part of a total system. Add all that in addition to the previously mentioned accounting differences and strategies, and it makes for an Apple-to-la la comparison in many respects. It makes more sense to compare Apple to GM: they’re both designing and building their own custom hardware and software and selling the TUE. Of course, nobody would seriously compare a car company to a consumer electronics company, would they?

    The most accurate comparison you’ll likely find, even though Apple is catering towards mass consumers instead of the enterprise, is Sun: they design and manufacture their own hardware, and write their own software, all of which is to gain sales of the hardware they design and build for the TUE, though there’s a difference that Sun does a bit more in terms of consulting than Apple does, and also, Solaris is available for free to all comers, as opposed to being locked down to Sun hardware exclusively.

    Now, when you compare the two, Apple is definitely beating them hands-down for profitability.

  • http://www.roughlydrafted.com danieleran

    @StrictNon-Conformist : No, it’s not a silly comparison at all. Sun is a silly comparison. They don’t make any consumer products at all, which is primarily what Apple is doing.

    Comparing Microsoft with Apple is valid because for years, pundits have been insisting that Apple needed to adopt Microsoft’s models. Instead, Apple has proven that its original model can work and work better than Microsoft, while Microsoft has been proving that its Windows windfall can’t be duplicated in media players, smartphones, and in other areas.

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