Apple: Our Fair And Balanced Analysis Of Apple's Performance

| About: Apple Inc. (AAPL)

All of Apple's (AAPL) detractors let out a loud, collective cheer when the company reported results that missed consensus expectations. While we did not publish a Q3 2012 estimate for Apple, we were more than content with the $8.68 EPS estimate provided by Apple's management. We were satisfied with this estimate because Apple's management guidance called for a 11.4% increase in its EPS during the quarter and the company generated 19.65%. Apple reported quarterly revenue of $35B and quarterly profit of $8.8B, or $9.32 EPS. Apple saw strong corporate-wide growth due to strong sales growth from its key product lines. Revenue enjoyed a mammoth 59% increase versus Q2 2011 and EPS grew by over 92%. EPS Growth was also aided by a higher gross margin, which was aided by lower commodity input costs associated with Apple's products.

Source: Apple's Q3 Financial Supplement

The iPhone remains Apple's best-selling product. Revenue from the iPhone increased 22% to $16.25B on a year-over-year basis. Units sold increased by 28% to 26M, which was impressive in light of the challenging macroeconomic environment.

This certainly outshined the revenues and units sold by Nokia (NOK) and Research in Motion (RIMM), even though we previously wrote about how those companies have lower wholesale and retail costs associated with phones from those two vendors. Unlike Nokia and RIMM, Apple's iPhone sales volumes actually increased in the last quarter on a year-over-year basis. According to executives with mobile phone companies, the iPhone has lower churn than other smartphones sold by the carriers. Sprint Nextel (S) reports July 26th and we are interested in what Sprint reports for iPhone sales, especially given its recent promotion efforts to attract iPhone users to switch to its network. Sprint is also the online carrier that offers unlimited data for smartphones in order to attract customers away from AT&T (T) and Verizon (VZ). AT&T sold 3.7M new iPhones and Verizon sold 2.7M new iPhones. Sprint sold 1.8M iPhones in Q4 2011 and 1.5M in Q1 2012. Assuming Sprint maintains its Q1 iPhone sales volumes, then iPhones sales to just the big three US carriers (AT&T, Verizon and Sprint) in the recent quarter eclipsed the number of Blackberry smartphones sold worldwide. Apple's iPhone volumes not only exceeded Nokia's but iPhone sales at just AT&T and Verizon significantly exceeded Nokia's Lumia sales worldwide.

Source: Most Recent Quarterly Earnings Releases from the companies

The iPad also saw gargantuan growth during the quarter. On a year-over-year basis, iPads sold increased by 84% and revenues from the iPad increased by 52%. We believed that Research in Motion should be embarrassed that Apple's iPad revenues in the first quarter of Calendar Year 2012 exceeded RIMM's total company revenues for that period and low and behold, iPad did it again. This time, Apple did it with style as its Portable Macintosh computer product line is now generating more revenue than RIMM. At this rate Apple will generate more revenue from its iTunes Store and related music products than RIMM did worldwide. We couldn't even find a BlackBerry Playbook for sale with the Big Four Mobile Carriers back when we first started our research analysis and evaluation of the iPad versus the Playbook in April and we still can't find a major carrier that offers the Playbook. Let's say that the BlackBerry boosters are correct in that the Playbook is a better mousetrap of a laptop. Unfortunately, the world isn't beating a path to Waterloo. RIMM will need to find a way to market it if it wants to compete with Apple.

Sources: Apple and RIMM earnings releases

Other products with significant revenue growth included the following::Source: Apple's Q3 Earnings Supplement

Performance of the iPod and Mac product lines has been a bit more downbeat. Unit sales of the Mac Desktops and Portables collectively grew by 2% and product revenue declined by 3% versus the comparable quarter last year. Then again, we noticed that Dell (DELL) saw 4% revenue declines versus the prior year period. The iPod is also a bit dated when you consider its capabilities versus the iPad and iPhone and it shows as unit sales declined by 10% and product revenues declined by 20 Year-over-Year.

On a geographic basis, all the regions saw strong revenue. Even though Europe is wracked by the sovereign debt crisis, it still registered 16% year-over-year growth. Although Chinese revenue growth decelerated significantly, Apple still generated 48% growth in China versus the comparable period.Source: Apple's Q3 Earnings Supplement

Cash Flows from Operations were $10.2B and capital investments were $3B, resulting in free cash flows of $7.2B for the quarter. Apple opened nine new stores and ended the quarter with 372 retail locations. About one-third of its retail store base (123 stores) is outside the US. Apple stores generated $11.1B in revenue per store in the quarter, up from $10.8B in last year's comparable quarter. Apple stores saw 83M visitors, an increase of 12% year-over-year and average about 17,000 visitors per store per week.

We take comfort in the conservative guidance typically issued by Apple management, the low consensus long-term growth of the analyst community in relation to Apple's recent growth results and its track record of shattering consensus estimates from the analyst community. If Apple wanted to meet its EPS expectations for the quarter, it could have easily done so by using $54B in cash and marketable securities to have repurchased stock at the beginning of the quarter and we are glad that it didn't do this. Apple also has $117B in cash and marketable securities ($81B attributed to overseas entities) representing nearly 22% of Apple's Market cap. Apple officially declared its $2.65/share in quarterly dividends which will be paid on August 16, 2012. Apple will officially begin its $10B repurchase program in FY 2013.

In conclusion while we are never happy to see our portfolio companies miss earnings estimates by a wide margin, we believe that some proper perspective is warranted. We would like to remind the investor community that Apple's management did Q3 guidance of $8.68 per share. It was the analyst community who boosted their consensus estimates of Apple's results to $10.37 per share, because they remembered that Apple blew by their Q1 and Q2 estimates. The iPad and iPhone once again accounted for the lion's share of Apple's revenue and revenue growth. While Apple's Q4 guidance of $7.65 EPS is tame in comparison to the $10.37 that analysts were previously forecasting, it is still 8% above what it earned last year in the comparable period. Even with facing headwinds from a strong dollar, a weaker macroeconomic environment and increased sales of lower-margin products, the company still manages to deliver satisfactory performance. We are certainly pleased with the overall results of the company during the quarter and during the year and because of the recent price decline coupled with macroeconomic uncertain, we are looking to add to our long position in the company.

Source: FactSet Marquee

Disclosure: I am long AAPL, S.

Additional disclosure: Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this report. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.