Could iPad lift Apple revenues above Microsoft?

In late April, I posted a long analysis about how Apple revenue and profits had closed in on Microsoft -- to within $1 billion. Judging from pageviews, comments and e-mail responses, few people seemed to get it. I saw the trend as being much more important than Apple market capitalization nearing Microsoft's. A month and two days later, Apple's valuation topped Microsoft's, which made headlines everywhere. But still few people seem to get the significance of the revenue and income comparisons. Until yesterday. Finally somebody gets it, yet missed to connect the final dot: iPad revenue could push Apple above Microsoft during this quarter.

Business Insider's June 2 Chart of the Day, "Apple Races to Catch Microsoft's Profits," graphically depicts what I explained six weeks ago. Jay Yarow and Kamelia Angelova write: "Apple's operating income is still trailing Microsoft. But, boy is it growing fast. In the most recent quarter, Apple reported operating income of $3.9 billion, while Microsoft reported $5.2 billion." The Business Insider chart shows "operating income after depreciation," which is a nice touch. The approach also accentuates Apple's dramatic operating income rise from 2000 to 2010.

I will repeat some numbers presented in my April 23rd post. During first calendar quarter, Apple revenue trailed Microsoft revenue by $1 billion behind Microsoft, while net income trailed by a little less -- about $940 million. In the same quarter in 2009, Apple revenue trailed Microsoft by $4.57 billion and net income by $1.36 billion. The bigger gap was obviously revenue. In the same quarter in 2005, the difference between Apple and Microsoft was $7.01 billion revenue and $3.6 billion net income.

Angelova's and Yarow's "Boy is it growing fast" understates just how much Apple has closed on Microsoft. They assert: "It's a very real possibility that Apple's income could surge past Microsoft's in the new few years." For revenue, I expect Apple to surpass Microsoft much sooner. In April, I asserted: "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."

That assertion came before Apple shipped 2 million iPads within the first 60 days of availability. Assuming just $500 revenue per device, Apple opened a new product line worth $1 billion. On April 23, Wall Street analyst consensus for Microsoft revenue was $15.24 billion, with an estimate range between $14.59 billion and $15.91 billion. Apple was $13.7 billion with a much broader range of $11.6 billion to $15.08 billion. Today, the average analyst consensus for Apple is $14.02 billion, with a smaller range of $13.22 billion to $15.08 billion. For Microsoft: $15.22 billion, with range of $14.85 billion to $15.72 billion.

SAI Apple-Microsoft Income

These numbers are close, and I don't believe they fully reflect the revenue lift iPad will give Apple during second quarter. Assuming that iPad doesn't cannibalize iPhone, iPod or Mac sales, Apple could reap an unexpected revenue windfall of $2 billion, estimating conservatively -- 4 million units at $500 each. The added revenue would easily put Apple above Microsoft, unless the software giant reaps more than expected from back-to-school PC sales or late closings on business annuity license contract renewals.

Income is another matter. Apple already has indicated that iPad would drive down gross margins. Then there are new product-launch logistics. Profits tend to be less up front. Apple secrecy means that most major new products don't ramp up manufacturing until after the official announcement. As such, Apple incurs higher early manufacturing and shipping costs, which typically are recouped in part through higher pricing. As sales increase and manufacturing scales, Apple profits per device go up and, later on, the company brings prices down. The point: iPad revenue will likely widen the income gap between Apple and Microsoft.

My prediction: Apple and Microsoft revenue will be close during second calendar quarter. Based on the situation as it is today, I'd guess Apple revenue will pass Microsoft revenue in second quarter. If not, then the third. If I'm wrong, it wouldn't be the first time. You don't ever get to be right without taking the risk of being wrong.

So what's the significance of Apple topping Microsoft? Among the many scathing comments to my April 23rd post: "Apple makes hardware, Microsoft makes software, why even compare the 2?" To which another reader replied: "That's Mr. Wilcoxs' patented linkbait technology." Actually not. There are many reasons to compare the companies' performance. Among them:

  • The historical Mac and Windows PC competition that many people still obsess about -- Betanews readers among them.
  • Mobile devices are the future of computing, and it's a market where Apple and Microsoft compete and increasingly will do more so.
  • By market capitalization, Apple and Microsoft are the second and third most valuable public companies.

So what do you think? Could Apple revenue top Microsoft revenue during this quarter? Should anyone care? Please respond in comments.

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