Apple Q2 Earnings: Another Blowout Quarter

Apple (AAPL) reported another blowout quarter with revenues and gross margins far exceeding expectations and driving EPS to $1.33 vs. consensus of $1.09 and whisper numbers in the $1.15 to $1.20 range. Guidance is typically conservative and about 10% below current analyst estimates which is normal.

There is really very little to complain about. In my live Twitter commentary of the conference call I noted that the quarter was amazingly routine, especially given the economic headwinds. I see no reason the stock can’t move up toward $150 assuming the market cooperates. Positive catalysts ahead could include new products – iPhone and netbook, the return of Steve Jobs in June, and more positive earnings surprises.

I remain quite bullish on Apple but there were a few things worth pointing out on the cautious side in the quarter. First, desktop ASPs fell sharply. Management attributed this to a mix shift as weakness was more evident in Creative/Professional and Education. Second, U.S. Mac market share fell. Management says that they focus on long-term trends in market share and don’t put much stock in any single quarter. Third, cash flow was less robust than usual. Management explained clearly that one-time items impacted the quarter.

Guidance is what really matters to short-term trading in Apple. I would have liked to see it stronger given that the past several years saw flattish March to June revenue and EPS. This would mean June should come closer to $8.2 and $1.33. Thus, I would have liked to see guidance closer to these numbers and above current estimates. One explanation is that Apple is not going to recognize any revenue from iPhones sold after March 17th until new software is released in July. I still expect 3Q results much closer to the March quarter.

Estimates will go up toward $6.00 for 2009. Excluding interest income the figure is around $5.75. Cash is now at $33 per share and headed to the upper $30s by fiscal year end. Stock is trading at $90ish ex cash or 15-16 P/E. Adjusted earnings, if Apple were recognizing iPhone revenues at sale instead of over two years, is probably $9-10 putting the multiple at 10 times or in line with other large cap tech leaders. I think Apple deserves a premium. Looked at another way, this is a big cushion to estimates for the rest of 2009 and 2010 and 2011 from deferred revenues. That is comforting, but product momentum is more important. For now, the pipeline looks good.

While the quarter was a blowout and reinforces my faith in meaningful further upside in Apple shares, I think the stock could be due for a rest after the huge move this year. I am not selling and would buy any significant pullback. A move of $5 in either direction on Thursday from the $124 after hours level as I typed this would not surprise me.

Comments

[Mark Sigal:]

While I have no idea what the stock will do, I do think that this is one of those cases where no game-changing news on part of Apple (in the call) is actually GREAT news, and I blogged my analysis in:

ANALYSIS - Apple Quarterly Earnings Call: When No News is GREAT News
(bit.ly/2DmNZ)

Check it out if interested.

Mark

Apr 23 04:02 AM

[Moon Kil Woong:]

Despite my love for Apple I don't own the shares right now. 2009 will probably be the zenith for Apple. Remember we are talking about a company that squandered its huge PC lead years ago without Jobs at the helm.

As Jobs fades to the background there is a lot of entrenched bureaucracy there that will drive it to meritocracy again (like in most big companies). And the cell phone market is relentless.

If iPhone can't keep up a few years from now it may look as tired as Motorola. When predicting Motorola fall from grace people would have snickered at the thought some Scandinavian company could compete with them. The same way Palm thumbed its nose at the thought of some computer company making a cell phone.

It is true that the revenue recognition of iPhone is designed to smooth out earning for apple for 2 years, but creating a way to obscure financial results is more suited to Freddie Mac than a tech company. It's stock will fall well before it's earnings decline.

As for the rest of Apple, without Next OS technology Apple would have never come out with a decent update to it's OS. I used Next at Stanford. It was a wonderful OS way before it was folded into and morphed into Apple.

As a technologist, I would not want to bet on an Apple without Jobs running it. I hope he stays active in Apple and it thrives, but I just can't afford to be betting on a person's health.

Apr 23 04:41 AM

[Steve Biren...:]

Thanks for the comments. I'd agree that a calm quarter Apple is good news in this environment. Concern about owning Apple as it relates to Steve Jobs is warranted but to each his own. If he comes back to work in June, the stock will pop. If he does not it will fall, probably more than the opposite pop. However, I think investors have a long way on the Jobs issue and it is long-term that should be worried about. Short-term Apple appears to be in very good shape with the new iPhone OS, the next gen iPhone, and the possibility of some netbook type product. The growth of the touch as a mini-netbook is being overlooked. One thing I may have overlooked is future gross margins. While I was glad to see Apple admit that base gross marigns are higher -- 33% guidance is the highest I can recall -- there is tightening in the commodity markets for LCDs and memory. This could mean an end to massive upside driven surprises in EPS and put more focus on the top line. I still think the shares go higher assuming the market cooperates.

Apr 23 09:31 AM

[mollytjm:]

any company that can do this well in this kind of economy is a great company... and it still has 29 b cash! this is not the Apple of earlier years. it will not lose it's lead or ambition. there are no 'entrenched' leftovers who would hold Apple back. Apple is gaining share in all markets it has entered...and it's still a big world out there to conquer.
this is a great value stock to hold.
long APPL

Apr 23 01:44 PM

[KenC:]

One, Apple never had a "huge PC lead".

Two, what does "the cell phone market is relentless" mean?

Three, noone snickered when talking about Motorola's competition. Nokia and Ericsson were always well respected. When Palm, aka Colligan, thumbed his nose at Apple, Palm's PDA business and Treo line were already dying. Their nose-thumbing was seen for what it was, whistling in the dark.

Four, Apple has been releasing non-GAAP figures, not obscuring them like a FHLMC. Are you on drugs?

Five, what does the fact that Apple's OS is based upon NeXt have to do with anything? Are you trying to say MS can do the same, buy up another OS to replace its dog? Or, are you trying to say NeXt will leave, and that Apple will somehow lose its OS?

The statements you are making are hanging without any context. What are you trying to say? Or did you want to just drop the hint that you went to Stanford? I mean, you aren't the only person who went to Stanford, you know.

As a technologist, why are you betting on any tech companies at all? Virtually all of them were built upon the personality of one of their founders. That's what VCs bet on.

The fact is, your comment seems to say something, but in reality, says not a whole lot at all.

On Apr 23 04:41 AM Moon Kil Woong wrote:

> Despite my love for Apple I don't own the shares right now. 2009
> will probably be the zenith for Apple. Remember we are talking about
> a company that squandered its huge PC lead years ago without Jobs
> at the helm.
>
> As Jobs fades to the background there is a lot of entrenched bureaucracy
> there that will drive it to meritocracy again (like in most big companies).
> And the cell phone market is relentless.
>
> If iPhone can't keep up a few years from now it may look as tired
> as Motorola. When predicting Motorola fall from grace people would
> have snickered at the thought some Scandinavian company could compete
> with them. The same way Palm thumbed its nose at the thought of some
> computer company making a cell phone.
>
> It is true that the revenue recognition of iPhone is designed to
> smooth out earning for apple for 2 years, but creating a way to obscure
> financial results is more suited to Freddie Mac than a tech company.
> It's stock will fall well before it's earnings decline.
>
> As for the rest of Apple, without Next OS technology Apple would
> have never come out with a decent update to it's OS. I used Next
> at Stanford. It was a wonderful OS way before it was folded into
> and morphed into Apple.
>
> As a technologist, I would not want to bet on an Apple without Jobs
> running it. I hope he stays active in Apple and it thrives, but I
> just can't afford to be betting on a person's health.

Apr 23 05:28 PM

[Moon Kil Woong:]

I love to be challenged as much as any guy.

If you read the computer history, specifically the rise of the PC Apple was way ahead of the game to start while Microsoft was putzing around trying to steal, I mean convince a programmer to sell them DOS for $50,000 because Gates was too big of a newb to actually do programming asides from stealing things from programmer meetings. A funny take on this is "Revenge of the Nerds."

So yes, Apple was way ahead of the game.

My comments on Next is to show that without Jobs and his loyal followers Apple would have been toast, not the fact I went to Stanford. If you read my profile I went to SJSU. That still doesn't mean I didn't geek around with my friends in Stanford's computer room. The loss of him and his talent team would be like pulling the brain out of a person.

I suggest you try a Next computer. You will see how far ahead and how visionary Jobs was when Apple was bouncing around trying to sell their OS to clone makers. Stock punters these days really mistake how much Jobs added to Apple.

Also back in the day, Motorola had about 90% of the cell phone market. They did squander their lead.

Regarding investing in technology companies don't need VC's. That is a huge misnomer. there is plenty of upside and risk after tech companies go public. VC's make tons on Google type deals but also often loose 90-100% on their money on about 7 out of 8 ventures if they are good. If they are bad that ratio can go up to about 20 to 1 (not a field most people should dabble in due to the risk profile).

For current meat and potatoes if you look at Apple's filings store sales fell 17% and they got rid of 10% of their workforce down to 14,000 employees. Is this a sign of health? Their margins actually rose due to cost cutting, not as their execs said due to higher end and higher margin sales (aside the fact when people don't buy hardware software has higher margins).

There is a strong possibility they stuffed Wall Mart and the channel with inventory.

In the meantime AT&T is selling unlocked phones. Why? If they were is such utter demand why would they feel the need to rid them to users who don't pay for their terrible and overpriced service?

I love Apple and their products but investment is not about loving a company's products. Just ask all those stuck in Starbucks and Mrs. Fields cookies stock. That said, I hold to my position of not holding Apple.

Apr 24 03:34 AM

[Moon Kil Woong:]

Sorry: 10% of their retail division staff was axed, not to be confused with total staff.

Apr 24 04:31 AM

[Steve Biren...:]

Moon, you are off base with some of your facts. And I still don't get what the Apple/MSFT history has to do with the current situation. The issue surrounds when you wrote "how much Jobs ADDED to Apple." You used past tense. I don't think many would argue with your version of history. But the question is what does Jobs mean today and is the company positioned to thrive without him. I think a strong case can be made that Apple is at an evolutionary stage of product development whereas Jobs has been in the revolution game. I also think that it is unfair to assume that the rest of management is an inept as you imply.

As for the quarter, your comment on channel stuffing has no basis in support. Inventories were incredibly well controlled this quarter. Management commentary supported this across all product lines and channels.

I suppose back in the day Motorola could have had 90% share inthe U.S. only. But that day was when phones were analog. MOT screwed up when phones transition to digital. The RAZR made up for that blunder but market share leadership was never regained form Nokia on a global basis and US market share was never more than a plurality. If you are saying the parallel is that Apple may miss the next big transition because of Jobs being missing (not guaranteed by the way) I suppose that is possible. But what is the timing and what do you see as the next big thing. Smartphones are the next big thing and Apple is defining the market and likely to stay that way for the next few years.

Apr 24 08:53 AM

[KenC:]

Shocking amount of nonsense.

On Apr 24 03:34 AM Moon Kil Woong wrote:
> I love to be challenged as much as any guy.
>
> If you read the computer history, specifically the rise of the PC
> Apple was way ahead of the game to start while Microsoft was putzing
> around trying to steal, I mean convince a programmer to sell them
> DOS for $50,000 because Gates was too big of a newb to actually do
> programming asides from stealing things from programmer meetings.
> A funny take on this is "Revenge of the Nerds."

Dude, you said in your previous post that Apple had "squandered its huge PC lead". That's completely different that saying "Apple was way ahead of the game". Are you thinking of getting into politics? A lead, implies marketshare. When was Apple leading in marketshare? And when was this lead, "huge"?

> So yes, Apple was way ahead of the game.
>
> My comments on Next is to show that without Jobs and his loyal followers
> Apple would have been toast, not the fact I went to Stanford. If
> you read my profile I went to SJSU. That still doesn't mean I didn't
> geek around with my friends in Stanford's computer room. The loss
> of him and his talent team would be like pulling the brain out of
> a person.

Dude, you said, "I used Next at Stanford", clearly implying you went to Stanford, what else was it supposed to mean? Why even mention it if you weren't trying to imply something. Man, you are pathetic.

> I suggest you try a Next computer. You will see how far ahead and
> how visionary Jobs was when Apple was bouncing around trying to sell
> their OS to clone makers. Stock punters these days really mistake
> how much Jobs added to Apple.
>
> Also back in the day, Motorola had about 90% of the cell phone market.
> They did squander their lead.

Dude, you were making an analogy between Motorola's one-time lead to the iPhone's lead. The iPhone does not and has never had a 90% share of the market, so your analogy is NONSENSE. And, when exactly did Motorola have a 90% share of the cellphone market, back when DynaTACs ruled?

> For current meat and potatoes if you look at Apple's filings store
> sales fell 17% and they got rid of 10% of their workforce down to
> 14,000 employees. Is this a sign of health? Their margins actually
> rose due to cost cutting, not as their execs said due to higher end
> and higher margin sales (aside the fact when people don't buy hardware
> software has higher margins).

For REAL MEAT AND POTATOES:
Let's look at FTEs from a year ago, and then extrapolate for the additional stores.

Here are the numbers:
March 2008 = ~12,000 FTEs

March 2009 = ~14,000 FTEs

Both figures were preceded by the word “approximately”, so they are clearly + or - 500 FTEs. Around 17% more FTEs this year than last, HOWEVER…, you have to factor in the number of stores open.

March 2008 = 205 stores

March 2009 = 251 stores

So, number of stores increased by 22%, and FTEs increased roughly 17%, but given the vagueness, the range would be from, 8% to 26%.

In other words, the increase is in the margin of error. Much ado about very little. Did you even read the SEC filings or are you parroting what you read from some blog?

> There is a strong possibility they stuffed Wall Mart and the channel
> with inventory.

Dude, if you listen to the conference call, or even read the transcript here on SA, you'd KNOW that the analysts ALWAYS ask Apple about channel inventory. The inventory levels this quarter were normal, in the 4 to 6 week range. There is NO POSSIBILITY of stuffing WalMart's channel. Do you honestly think WalMart is going to let a mfr to stuff its channel? Are you serious?

> In the meantime AT&T is selling unlocked phones. Why? If they
> were is such utter demand why would they feel the need to rid them
> to users who don't pay for their terrible and overpriced service?

Wow, do you think "unlocked phones" are cheap?

> I love Apple and their products but investment is not about loving
> a company's products. Just ask all those stuck in Starbucks and Mrs.
> Fields cookies stock. That said, I hold to my position of not holding
> Apple.

This is not about loving a stock, this is about getting your facts right, and not spewing home-spun homilies that you read in a book.

Apr 24 10:12 PM