Apple closes the revenue, income gap with Microsoft to just $1 billion

What a difference 12 months and an accounting change make. As I briefly noted yesterday, only about $1 billion separated Apple from Microsoft results in the first calendar quarter. With so many blogs obsessed about when Apple's market capitalization might exceed Microsoft's, perhaps the focus should be on earnings.

Some people might not understand the significance. The comparisons here are real, because they're not fudgy market share or market capitalization comparisons. Apple has closed a huge revenue gap on Microsoft and lessened the lead in net income. This year promises the most visceral competition between Apple and Microsoft ever.

Yesterday, Microsoft announced fiscal 2010 third quarter results: $14.5 billion revenue, $5.17 billion operating income and $4.01 billion net income, or 45 cents a share. On Tuesday, Apple announced fiscal 2010 second quarter results: $13.5 billion revenue and net profit of $3.07 billion, or $3.33 a share. Apple revenue is $1 billion behind Microsoft, while net income trails by a little less -- about $940 million.

The year-ago comparisons show just how far Apple has closed the gap. A year ago, Microsoft reported 13.65 billion revenue, $4.4 billion operating income and $2.98 billion net income, or 33 cents a share. Apple: $9.08 billion revenue and $1.62 billion income, or $1.79 earnings per share. Apple revenue trailed Microsoft by $4.57 billion and net income by $1.36 billion. The bigger gap was obviously revenue.

In some ways, it's an, ah, apples and oranges comparison. In fourth calendar quarter 2009, Apple changed its accounting to accomodate a new rule that lets the company realize most iPhone revenue in the given quarter. Before, Apple had to defer that revenue and recognize it over 24 months. Related, Microsoft still defers revenue from annuity licensing, which accounts for about 40 percent of total revenue. Apple gets a big bang that Microsoft defers. However, Microsoft typically realizes about 30 percent deferred revenue per quarter, making differences smaller.

Still, the $1 billion gap was unthinkable a year ago and unimaginable a half decade ago. In the same calendar quarter of 2005, Microsoft reported revenue of $10.9 billion, operating income of $3.89 billion and net income of $2.98 billion, or 29 cents a share. By comparison, Apple reported $3.24 billion revenue and $290 million net income or 34 cents a share. The difference between the two: $7.01 billion by revenue and $3.6 billion by net income.

Mac shipments are up from about 1 million units to 2.94 million units over five years (Note: Mac shipments were higher in other recent quarters). In first calendar quarter 2005, Apple shipped 5.3 million iPods compared to 10.9 million in calendar Q1 2010 (which was a decline from recent quarters). But the real difference maker isn't rocket science: iPhone, which generated $5.5 billion during the recent quarter, or about 41 percent of total Apple revenue -- and, of course, the accounting change helped.

The question: What will happen in second calendar quarter? Or even the third? Wall Street analyst consensus for Microsoft is revenue of $15.24 billion, with an estimate range between $14.59 billion and $15.91 billion. By comparison, consensus on Apple is $13.7 billion with a much broader range of $11.6 billion to $15.08 billion. However, Apple hugely beat the Street during the last two quarters -- by $1.46 billion during fiscal Q2. It's not a stretch of the imagination or reasonable speculation for Apple to close the distance during second calendar quarter or sometime later in 2010.

Second calendar quarter will be tough competing all the way around. The June quarter is typically Microsoft's best of the year because of the larger number of annuity license renewals. This year, Microsoft has some spice for the mix: New products launching during second calendar quarter, including Office 2010, and ongoing Windows 7 deployments among businesses. However, much of the annuity licensing revenue will carry forward as deferred revenue.

Second calendar quarter promises to be big for Apple, too. It's the beginning of back-to-school buying season, and Apple is banking on iPad and Mac -- particularly the tablet -- despite public budgets being crimped by the recession's lingering effects on taxes. Apple upgraded MacBook Pros during the quarter, which should boost laptop shipments. If iPad sales are strong, Apple will likely get a revenue turbo charge but see net income fall. On Tuesday, the company warned that margins would fall to 36 percent from 41.7 percent, in part because of iPad.

Some people will point out that it's just one quarter. What about the year? During calendar 2009, Microsoft generated revenue of $58.69 billion. Apple: $41.36 billion. However, for calendar 2010, based on one quarter's results and analyst estimates for another, Apple has hugely closed the revenue and earnings gap on Microsoft. Because analyst estimates are for fiscal years and Apple's and Microsoft's don't line up, 2010 forecasts are useless for comparison.

The news media, computer enthusiasts and pundits have railed about Apple-Microsoft competition for years. But for more than two decades Microsoft beat Apple by most every measure. Windows PCs may have the greater market share, but the measure is suddenly outdated. What matters with public companies is revenue and profits. Market capitalization is another measure, but also not a good one because of inflecting differences, like the number of publicly available shares from either company.

Microsoft has been hugely profitable, but now suddenly so is Apple, by comparison. For all the talk of Microsoft-Apple competition, it's now starting to manifest in the most meaningful way for any public company: Money.

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