Apple Shines on Earnings, Still Two Steps Ahead

Better than the result, is the "not crazy" reaction like a bunch of rabid coyotes, either up or down after hours. As expected Mac sales were simply ridiculous and the iPod and iPhone were good enough so people do not cry and sell the stock off 20%. Guidance was set low (AGAIN) but this is the Apple game. Whatever they say for guidance, they beat by 20-25 cents of late. Case in point, I wrote 3 months ago when they gave $0.94 EPS as their guidance

Again, people may obsess over this, but this is the Wall Street game - under promise, over deliver. They say $0.94... which means $1.10 or so in dog years. So the stock will tank. We'll look back in 3 months and see they squashed the $0.94 estimate just like they squashed their $1.42 estimate 3 months ago. But none of that matters now of course as in a nervous market, people will find any excuse to call for End of Days.

And what did they report? $1.16. So much for my $1.10... Yet the stock dropped 30-40% due to this "guidance" last time around (we took a big hit). Again, this shows you, you can be intellectually correct, nail a call, but still get destroyed short term by owning a stock and having the herd run over you.

So now they have guided for $1.00 next quarter - in Apple speak that means $1.22 or so. At least the lemmings are taking it better this time around, since this "guidance" is below analysts estimates of $1.10.

I liked everything about this report except for the gross margin degradation, down from both last quarter's 34.7% and last year's 35.1%% - no specific reason given in the earnings report so we'll have to listen to the conference call to find out. Everything else was quite spectacular for a company of this size. Whatever the spin is today, tomorrow or the next day (or where the stock goes) - this company is becoming the de facto entertainment (slash) fashion accessory company for the next generation. They are 2 steps ahead of everyone else. Period.

• The Company posted revenue of $7.51 billion and net quarterly profit of $1.05 billion, or $1.16 per diluted share. These results compare to revenue of $5.26 billion and net quarterly profit of $770 million, or $.87 per diluted share, in the year-ago quarter.
• Gross margin was 32.9 percent, down from 35.1 percent in the year-ago quarter.
• Apple shipped 2,289,000 Macintosh® computers during the quarter, representing 51 percent unit growth and 54 percent revenue growth over the year-ago quarter (that's just ridiculous, up from 44%/47% respectively last quarter - amazing)
• The Company sold 10,644,000 iPods during the quarter, representing one percent unit growth and eight percent revenue growth over the year-ago quarter. Quarterly iPhone(TM) sales were 1,703,000.
• International sales accounted for 44 percent of the quarter's revenue.

Remember, iPod at this point is a cash cow, not a growth driver. It did its job - to reinvent the company and drive a new generation of people to the Mac and make it the "cool company" that people will pay a premium for. With the 3G iPhone and lower prices, this is set to move into the mainstream in the next generation...

... and I continue to believe Mac will be taking more and more share from PCs as this generation of preteens, teens, and 20 year olds moves up in age. And yes, there will be stress from the US consumer but things like this and video games will be the last to go.

This is simply one of the few areas in the much overhyped tech area that has real secular growth >15%. Now we wait 3 months and await the same dog and pony show next quarter, as short- sighted investors miss the forest for the trees and overreact to every line item in a multi-year story. This is the type of stock I don't even go to Yahoo Finance to read any daily news about, except for maybe once a month - I am that confidant of the "long term" (i.e. in this era long term being more than 48 hours) prospects. We'll keep buying this on the inevitable dips; still pricey at 30x this year's estimates but the scarcity value of this type of growth deserves some premium.

Disclosure: Long Apple in fund; no personal position

Comments

[Anthony Dadlani]

So true.....the company sold 2.3 Million Computers......repeat 2.3 million computers !!

Market share growth people......this is a $300 stock.

thecreatingwealthblog....

[All Day Breakfast]

Well done, I agree with your analysis.

[KenC]

About Apple's guidance:

Apple's CFO stated forward revenue guidance was $7.2B, inline with expectations, and EPS of "about $1", while expectations are $1.10. Let me be clear, Oppenheimer stated clearly, "ABOUT one dollar". He didn't say one dollar and zero cents. He said, "about". In other words, people are assuming he meant $1.00, when he said nothing of the sort.

Imagine, what else he said, forward guidance on GM was 33%. That's almost exactly what this quarter's GM was at 32.9%. While it's indirect, there's no reason why we can't do a quick-and-dirty calculation on what EPS Apple is really expecting. Last quarter they had $7.5B in sales. Next quarter they expect 96% of that with $7.2B. Well, they just had $1.16 eps, and 96% of that is $1.11. Add a fraction for the GM difference between 32.9% and 33%, and you can see, Apple's actual eps guidance is about $1.12, with analysts expecting $1.10.

In the conference call, you definitely get the impression that Oppenheimer does NOT want to do the math for you. He snippily answers the Bear Stearns analyst by essentially saying that. Here are the numbers, you can do the math. "Well, you’ll have to make your estimates but we sold 1.7 million phones during the quarter. We made the announcement on March 6th. You know what we sell the phones for and we recognize the revenue over 24 months."

Additionally, the analysts didn't know because Apple hadn't announced it, so they couldn't factor in that Apple was not going to factor in iPhone revs after March 6th until the Software ver 2 is delivered in late June. That's going to cost about $100M if they sell another 1.7M iPhones. So, comparing apples to apples, you'd have to adjust Apple's revenue number up $100M to $7.3B, to compare it to the analysts' $7.2B.

The bottom line is once the analysts look carefully at what Oppenheimer said, they'd realize that Apple's guidance exceeded analysts' expectations. Adjusted revs were $7.3B to the analysts $7.2B and eps was $1.12 to the analysts' $1.10. These are minor details, but the story in the media changes significantly when Apple's actual guidance is a little higher than analysts' expectations rather than 12% lower.

[PK de C'ville]

Trader Mark!

Great minds think alike! I have a target of $600 in Jan 2011. You?

[brewer]

You think this will be an 'de facto entertainment (slash) fashion accessory company for the next generation'. That is laughable. Apple will be the _computing_ company for the next generation first, and those other things as well.

Apple is making serious inroads into corporate america. IT is still fighting the good fight, but are increasingly unable to deny workers the obviously superior Apple products. Already, OS X is anywhere from 50% to 1100% (no typo there) faster than Vista on comon tasks such as (ahem) installing Office, copying files, launching programs, etc... it's 'ridiculous'. (This is not from a Mac web site either, in fact, Pop Mechanics has a great article on this.) Finally, the iPhone has better outlook/exhange support with the next generation iPhone II firmware (which works in all iPhones FREE as soon as it's released) than any other smartphone. And none of them have internet that is even close to the iPhone. (Kind of an important feature...)

[jmmx]

A few observations here...

1- HOLY FLYING MACKEREL! 51% increase in Mac sales! Even the most outrageous fanboy would never have predicted this rate.

Implication of this:
a) Apple is becoming a Computer company again, and the iPod business will recede to a sideline business - a very profitable sideline, but with a much smaller percentage of bottom line.

b) Computers have higher gross profits (not margin) than iPods so growing the Mac business at 40 - 50% is much greater than growing the growing the iPod business at that rate. (Hey - sooner or later businesses will wise up to the fact that Apple's Xserve servers are more than $1,000 cheaper than Dell's.)

c) Does anyone here see a hockey stick?

2- In conference call: one reason for reduced margin was iTunes store which has very low margin. So those analysts who complain about the margin are basically saying "Hey Apple, stop selling so many songs/videos!" RIGHT! (Wouldn't Dell love to have ONLY 32% GM?? - lol)

2- iPhone

a) This delay of recording iPhone revenues is positively weird. Reason given ("People are buy because expect v2.0") is in the "My parakeet ate my homework" category. So what is going on? It must be something big.

b) Company know for conservative guidance repeatedly insists on 10M iPhone sales this year. They must be pretty dog-gone confident in that. One analyst (sorry, forgot her name) is thinking 13M.

Finally: iPhone is the only REAL internet-in-your-pocke... device out there. they will therefore ultimately move to the 70% market share range of smartphones, like the iPods. This will also help to open up the

Anyone see hockey stick?

[jmmx]

Correction: iPhone only real internet-in-pocket..

Aside from the iPod touch, of course!