Last month, I noted that the 5-year-old iPhone is already the most profitable product in the world. The iPhone, I estimated, is so profitable that it generates more profit than just about any other company on earth, not just product. The iPhone generates more profit than GE, for example (all of GE). It generates more profit than Microsoft. It generates more profit than Google and Walmart. It generates almost as much profit as Exxon-Mobil!Well, it turns out I was too conservative.
The iPhone is likely even more profitable than I thought!
In fact, new information suggests that the iPhone is so profitable that it is responsible for the vast majority of Apple’s profits.
Last week, in a lawsuit with Samsung, Apple was released documents that showed the relative gross profit margin for its iPhones and iPads.
This information allows us to estimate, to an extent never before possible, just how much profit Apple derives from the iPhone.
The bottom line?
The iPhone likely accounts for almost two-thirds of Apple’s profits.
The iPad, meanwhile, likely accounts for almost a relatively paltry 10%-15% of Apple total profit–less than most people probably think. Macs, iPods, Apple TVs, and other Apple products, meanwhile, likely account for about 30%.
I’ll walk through the estimates below, but here are the key points and implications:
- The iPhone will likely generate more than $30 billion of operating profit for Apple this year
- Apple’s bottom line is much more dependent on the iPhone than most people realise
- The iPad contributes much less to Apple’s profit than most people realise (It’s a much less profitable product)
- If the iPhone stumbles, or if Apple becomes “an iPad company,” the company’s profit margin will get walloped
- The increasing price pressure and lengthening upgrade cycles in the smartphone and tablet markets increase the risk that Apple’s overall profit margins will soon begin to decline
- The iPhone 5 is an absolutely critical product for the company: If it’s a blowout hit, Apple’s earnings will soar; if it’s a dud, Apple’s earnings will disappoint
Based on my estimates, this is what Apple’s profit-by-product looks like. As you can see, Apple truly has become “the iPhone” company.
Let’s Go To The Numbers…
Working with Apple’s financials can be confusing, because the company’s fiscal year ends in September. To make the numbers more intuitive, I’m using calendar years.
The source of some of the reported numbers is a recent report by analyst Gene Munster of Piper Jaffray, the most influential Apple analyst on Wall Street. Others came from Apple’s SEC filings. The estimates of profit per product, meanwhile, are mine, and they’re based on information that recently came out in the Samsung lawsuit.
Let’s start with the iPhone’s revenue, both in absolute numbers and as a per cent of Apple’s total revenue.
CY 2007 (Actual): $1.7 billion, 6% of total revenue
CY 2008 (Actual): $8.6 billion, 22% of revenue
CY 2009 (Actual): $15.7 billion, 34% of revenue
CY 2010 (Actual): $30 billion, 40% of revenue
CY 2011 (Actual): $61 billion, 48% of total revenue
CY 2012 (Estimate): $83 billion, 51% of total
As you can see, in the past 6 years, Apple’s iPhone has come to account for more than half of Apple’s overall revenue.
Now let’s look at the likely profit contribution for the iPhone and Apple’s other main product lines.
The information produced in the Samsung lawsuit reveals something startling:
- iPhones likely account for more than 60% of Apple’s profits
- iPads likely contribute about 10-15% of Apple’s profits
- Macs and Other likely contribute just under 30% of Apple’s profits
Again, these are my estimates. I am basing them on the “gross profit” percentages for iPhones and iPads revealed in the lawsuit documents.
One assumption I am making that some analysts might quibble with is that the relative contribution percentages of gross profit for each product (profit after direct product costs) are the same as the relative contribution percentages for net profit (profit after all costs and taxes). I think this is a reasonable assumption, but some analysts might disagree.
Specifically, the lawsuit documents reveal that the iPhone had gross margins of 49%-58% from 2010-2012 (I’ve used 53%).
Meanwhile, the iPad had gross margins of 23%-32% (I’ve used 28%).
When you apply these numbers to the revenue for each product, you get the gross-profit shares I described above.
Here’s a screenshot of the spreadsheet that shows all this. You can also see a web-based version of it here.
Photo: Business Insider
The Bottom Line
The bottom line is that Apple’s profits are much more dependent on the iPhone than most people probably think. This means that the company’s financial and stock performance over the next couple of years will be highly correlated to the iPhone.
If Apple’s iPhone 5 is a monster hit, Apple has room to blow away Wall Street’s current forecasts, especially in 2013.
If Apple’s iPhone 5 is a dud, meanwhile, Wall Street may have to cut its Apple estimates.
The difference between these two scenarios would likely affect not only Apple’s earnings, but the price investors will be willing to pay for those earnings. So the difference between a “hit” and a “dud” iPhone 5 would likely be hundreds of dollars per share.
So all eyes are (and should be) on the iPhone 5…