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Apple (AAPL) has decided to discontinue their usual EPS guidance. Instead, Apple will give a revenue and profit margin range where they believe they'll hit.

Apple is providing the following guidance for its fiscal 2013 second quarter:

• revenue between $41 billion and $43 billion
• gross margin between 37.5 percent and 38.5 percent
• operating expenses between $3.8 billion and $3.9 billion
• other income/(expense) of $350 million
• tax rate of 26%

Source

Let's use those numbers above to make some simple calculations and come up with a potential EPS range for Apple's second quarter results.

Best Case EPS:

  • Revenue= $43 billion
  • Gross Margin = 38.5%
  • Operating Expenses = $3.8 billion
  • Other Income = $350 million
  • Tax Rate = 26%

EPS Formula = ((Revenue x Gross Margin) - Operating Expenses + Other Income) x (100% - Tax Rate)

  • = (($43 billion x 38.5%) - $3.8 billion + $350 million) x (100% - 26%)
  • = ($16.555 billion - $3.8 billion + 350 million) x (74%)
  • = (13.105 billion) x (74%)
  • = $9.6977 billion

Worst Case EPS:

  • Revenue= $41 billion
  • Gross Margin = 37.5%
  • Operating Expenses = $3.9 billion
  • Other Income = $350 million
  • Tax Rate = 26%

EPS Formula = ((Revenue x Gross Margin) - Operating Expenses + Other Income) x (100% - Tax Rate)

  • = (($41 billion x 37.5%) - $3.9 billion + $350 million) x (100% - 26%)
  • = ($15.375 billion - $3.9 billion + 350 million) x (74%)
  • = (11.825 billion) x (74%)
  • = $8.7505 billion

Based on the current 947,217,000 diluted outstanding shares, Apple would produce a second quarter EPS in the range of $9.24 - $10.24.

As you can see, EPS can be easily calculated from the above figures. So the question you should be asking yourself is why didn't Apple just give us that range for EPS. Therein lies the twist - Apple could be planning to use their cash horde to buyback a substantial amount of outstanding shares during the second quarter. Something Apple could have been doing a lot of already this quarter.

Apple could easily buyback 10% of their outstanding shares right now. Let's say Apple does that and pays an average share price of $475 for 95 million shares, totaling $45.125 billion. Total outstanding shares remaining would then become 853.217 million.

If we then recalculate the profits for the second quarter and calculate the EPS based on the new outstanding share amount, we would be left with the following:

Based on the current 853,217,000 diluted outstanding shares, Apple would produce a second quarter profit in the range of $10.26 - $11.37. That EPS is a lot closer to last year's second quarter of $12.30. And as we have seen in the past, Apple has a record or underselling their EPS and over delivering.

Conclusion

Apple's reluctance to share exact EPS guidance for future quarters will leave Wall Street in the dark, and even more so by using their $137 billion cash horde to buyback shares. Through those buybacks, Apple could easily set a floor under the stock and drastically increase EPS for future quarters.

Source: How Apple Gave Wall Street The Middle Finger