My, how time flies when you're having fun. A whole quarter has gone by, and Apple (AAPL) had started the day trading around the same level it was at on the heels of last quarter's earnings -- currently at about $422 a share, up about 4% for the quarter. In after-hours trading, Apple responded to earnings by rising 4%-5% on substantial volume. Investors are clearly amused by Apple's earnings, posted around 4:30 p.m. ET today with their call at 5 p.m.
The purpose for this article is to review what Apple reported vs. the expectations that I had for the quarter and provide an analysis of why Apple is still a buy going forward -- thanks, quite a bit, to Peter Oppenheimer's forward thinking. Last quarter, I was keen on the stockholder incentives offered by the company, even more cash in the bank, iPad and iPhone numbers, as well as sustained success from the No. 1 music store in the world: the Apple iTunes store. I called the company a buy heading into the third quarter, and I continue to reaffirm my bullish sentiment going into Q3 earnings.
I also toyed with the idea of a potential sneak release of Mavericks. I stated in a previous article:
It's been noted by a few analyst sites that the July call over the past few years was the call where Apple launched their OS X Mountain Lion and OS X Lion - but there really doesn't seem to be any indication that Mavericks, Apple's up and coming OS, will be announced this July.
Obviously, I was right here. The company reaffirmed on the call that Mavericks will still not be available until the fall. First, let's lay the groundwork for what analysts were expecting going into today's earnings call. The company had offered guidance of revenue between $33.5 billion and $35.5 billion and gross margins between 36% and 37%.
As reported by Seeking Alpha earlier in the day, analysts had been updating their Apple estimates ahead of the report. iPhone sales were expected to come in around 26 million, iPad sales are expected to come in around 18 million. Mac sales are expected to come in around 3.9 million, slightly lower than last quarter's total. Apple came through after hours and reported both earnings and revenue that beat - posting $7.47/share in EPS and revenue of $35.3 billion.
Here's how Apple fared for Q3, compared to 59 analysts and the company's guidance:
|Q3 2013 Actual||$35.3||$7.47||31.2M||4.6M||3.8M||14.6M||$4.00||36.9%|
Let's look at what I pointed out last quarter, that I'd be focusing on Q3:
-- Margins Needed to Improve in Q3
My comments looking forward to Q3 were:
The margins fell to 37.5% this quarter, which was on the very low end of the guidance given by the company. CFO Peter Oppenheimer attributed these margins to one of the best reasons you can give for earnings coming down: it sold too many iPads. Apple purposely gave a price break on the iPad mini in order to make it appealing, and it knew it was going to take a hit on margins. It sold a bit more than expected, therefore, margins suffered accordingly. Tim Cook noted upfront during the call that the margins from 2012 were exceptional and a poor basis on which to make expectations from for the future due to how extremely high they were. Apple commented that Q3 margins will come in a bit lower, mainly due to a different product mix.
How did Q3 fare? The margins didn't improve, but they're still great if this is going to be the new "normal" for the company.
-- Mac Sales Could Use a Boost
My comments looking forward to Q3 were:
Mac sales came in at just under 4 million, which represented a decrease of about 2% year over year. CFO Peter Oppenheimer cited that computer sales worldwide were down significantly, positioning a 2% loss in Mac sales as being ahead of the rest of the computing world. Also, as iPhone and iPad sales continue to flourish and the Windows computers of old continue to become obsolete, Mac sales will come up supplemental to other product sales and as home PC turnover continues.
How did Q3 fare? Mac sales, as I note below, were adequate -- the company remains happy with the progress that they're making on Mac sales.
-- Guidance for Q3 Was on the Low Side
My comments looking forward to Q3 were:
For the third quarter, Apple forecast revenue of between $33.5 billion and $35.5 billion, well below the $38.25 billion Wall Street was forecasting. It also expects its gross margin to continue to slide to between 36 percent and 37 percent.
It's worth noting that the upcoming quarter is usually Apple's slowest point of the year. Leading into product launches in the fall and the holiday season, I am fine as a long-term investor with the margins coming down. As we move into Q4 and 2014, I'd like to see these numbers stabilize.
How did Q3 fare? We had the same deal with guidance going forward, and it's my contention that this is still all part of Peter Oppenheimer's master plan to make sure that analysts do not get expectations too high -- something that has cost the Apple stock price dearly in the past in this investor's opinion. As I've previously noted with regards to Oppenheimer wanting control of guidance, not analysts:
On the heels of CFO Peter Oppenheimer saying last quarter that Apple will no longer sandbag guidance, this is a nice sign, to me, of stabilization in terms of calibration between Apple's guidance, analysts' guidance, and what they're capable of reporting.
Guidance offered by Oppenheimer and the company for Q4 was for $34-$37B, a bit below the Street's expectation of $37B.
Here's some of the other notables from Apple today:
1. iPhone Numbers Destroyed Estimates
So much for the worries about the smartphone category. I'd guess that this is the news that is fueling a lot of the after-hours rally that we're witnessing, as well. It was a record June quarter for iPhone sales. Not only did iPhone numbers impress, but the call reaffirmed that customer satisfaction with the phone and customer loyalty were top notch in the industry. Apple tooted their own horn for a good couple of minutes on the conference call, and after analysts painting a dreary smartphone picture, I don't blame them.
2. Macs Gained Market Share with 3.8M Sold
It was noted on the call that Apple remains happy with its Mac numbers, which fell lower than expectations for two quarters in a row. As they stated last quarter, the company feels that in a contracting PC market, they continue to pick up ground. If the company says they're satisfied in a shrinking market, I am, too.
3. Mavericks and Other New Products on Their Way
It's just going to be a matter of time now. We're going to have items to get excited about this Fall, although it doesn't seem likely for it to be the iWatch -- yet -- we know we'll have a cool new desktop and iPhone OS to play with.
4. No Assumed Cannibalizing
The statement that the Mac "ecosystem" is evolving that the way the company wants it tells me that there isn't any unexpected cannibalizing amongst Apple products. On the call, this was alluded to when Mac sales were mentioned; in a market that is starting to flood with tablet and phone sales, Macs are holding their own and there's balance in Apple's sales universe.
1. No New Products
It was in last quarter's call that Apple alluded to new products this fall. It seems like Apple doesn't want to be the "surprise" company anymore. Peter Oppenheimer says that margins on the new products, coming out this fall, will guide the quarter to be flat or slightly down -- as I'm assuming they can make up for some of the historically poor margins on new products through having a busy fall -- which Oppenheimer did allude to during Q&A.
2. Margins Not Extremely Impressive (But, Again, Not Bad -- at 36%)
In keeping with the fact that Apple probably isn't going to be the "surprise" company anymore, it's looking like 36%-37% are the crummy (that's a joke) margins that we're going to have to do with for the time being.
The bullish far outweighed the bearish for this investor -- for the second earnings call in a row. I'm telling you and you heard it here first, two quarters ago: Oppenheimer is the key here. He's still working on this recalibration of how people look at Apple -- it's almost finished and he's finding success, in my opinion.
I had said in my previous Apple article:
Also, let's not forget what Apple CFO Peter Oppenheimer announced after the last earnings miss. I wrote about this in a past article:
In their last earnings report, Apple announced $54 billion in revenue and a cash position of $137 billion that makes Donald Trump's net worth look equal to the net worth of a guy that changes the urinal cakes at the airport; they're not exactly worried about the power to the building being cut anytime soon. It's beginning to dawn on investors that analysts were a big catalyst in the downfall of the share price.
Apple's CFO Peter Oppenheimer obviously realized this was going to be an issue and, while accepting that it was going to lead to short-term recalibration, thought it would be better for the long term to offer guidance a bit more responsibly. As, this article notes:
In the past, Apple has provided a single point, (one revenue figure, for example), the company expects to hit over the course of the upcoming quarter. Apple is notorious for releasing conservative numbers then blowing them away when it reports earnings a few months later.
Now, things will change. Instead of offering a single point, Apple will begin offering a range.
Peter Oppenheimer explained the change on the Apple's Q1 2013 earnings call, which is going on right now:
'In the past we provided a single point estimate that was conservative. This quarter and going forward, we are going to provide a range of guidance that we're likely to report within.'
What does this mean? It means that the last guidance offered was a big recalibration for not only analysts, but the market and retail shareholders. Everybody is so used to Apple annihilating guidance as they'd done in the past, analyst expectations have gone astray and needed to be roped in by Apple executives. 18% year over year revenue growth and substantial recurring growth with impressive margins for years now -- and this kind of panic sets in on a small share of a miss on earnings? Simply baffling.
This was a savvy move for Oppenheimer. He's taking the analysts from a push to a pull, essentially saying: this is our company, we're selling our product, we have the best interest of the shareholders in mind; we're going to be the authority on guidance.
Oppenheimer is going to be praised in the future for this recalibration. There's no doubt he knew this last earnings call was going to be ugly, but from this point forward his new strategy will be kept in mind, allowing analysts and retail's expectations for earnings run commensurate with the company's.
So, it appears Oppenheimer's strategy of wanting to control the guidance for the company is starting to pay dividends, as Apple posted its second quarterly beat in a row. It's not the blowout that everyone is used to, but a massive sea change has taken place in terms of expectations and what constitutes a good vs. a bad Apple earnings call.
Oppenheimer's forward thinking from two quarters ago is the reason that Apple beat this quarter. It's also one of many giant macro-level moves; including taking on debt, a massive cash position, shareholder give backs and continued monstrous profits, that should continue to make Apple the most appealing investment on the planet.