Strongest June Quarter in Apple History Doesn't Satisfy the Street

Ben Franklin famously said only two things in life are true: death and taxes. That maxim may be true but in these finicky financial times, another element might fit too: guidance below expectations sinks stocks. It doesn’t matter if a company routinely underestimates future performance and then exceeds those expectations. Conservatism isn’t rewarded. It doesn’t matter if a company sets new performance records. The past isn’t rewarded. What matters, all that seems to matter (at least when it comes to short-term stock performance), is meeting or beating the analyst gold standard and projecting a better than expected future. As Apple (AAPL) proved yet again Monday, it’s a simple truth: Guide Lower than Analysts and the Stock Price Will Pay.

Apple’s 3rd Quarter results were released after the close of the market Monday. The company easily beat expectations with income of $1.07b ($1.19 a share), 11 cents ahead of Wall Street predictions (Thomson Survey). The company also easily beat expectations on gross revenue with sales of $7.46b, a 38% year over year improvement and an improvement above analyst expectations of $7.37b. 

Mac sales were up to a new record level. iPod sales, which had been growing at a reduced rate in recent quarters, jumped to double digit percentage growth. It was the best June quarter in Apple’s history. Still, it wasn’t enough.

Apple, citing an ambiguous product shift as partial causation, predicted a Q4 result of $1 per share on sales of $7.8b. Analysts were looking for $1.24 a share on sales of $8.3b. The stock was pummeled in after hours trading, dropping near 10%.

It’s an all too familiar story. A year ago, in the summer of 2007, Apple guided to decreased margins and profits as a consequence of a then ambiguous product launch too. Earnings, they forecast at that time, would come in well below the trend line. The actual numbers, however,  bested the prediction substantially (guidance was 65 cents a share, actual $1.01). In Q1 2008, it was more of the same minus the new products. Last April in Q2, same ol’ same ol’ too. Apple had forecast Q2 at 94 cents a share then came in at $1.09. 

Now, surprise surprise, wink wink,  it’s more of the same. Another ambiguous upcoming product launch characterized as a “future product transition” is threatening margins. Apple is being conservative in guidance. CFO Peter Oppenheimer offered the standard line, saying, "We give you guidance we have reasonable confidence in achieving." "I have guided revenue up 5 percent this quarter,” he added. “We are confident in our business."

Wall Street wasn’t satisfied. Doesn’t matter that it’s historically been a pattern and a non issue. Lower guidance, the street lowers the stock price. Simple truth.

Adding to it, issues of Steve Jobs' health, which previously surfaced in June, were refueling questions about Apple's future leadership.  It even came up as a direct question from the analysts. Apple declined comment saying his health is a personal matter. At this point, there's nothing factual to indicate cause for concern. [Ed 7/23: This paragraph has been corrected from an earlier version.]

Ultimately, the numbers should speak for themselves. They have every quarter of this past year. Apple Q3, by the numbers:

• Apple posted revenue of $7.46b and profit of $1.07b or  $1.19 per share for the quarter. That is up from $5.41b and profit of $818m or 92cents a share last year. It was the strongest June quarter in the company’s history.

• Gross margins were 34.8%, down slightly from 36.9%. The fourth quarter margin is predicted to be about 31.5% and 2009, approximately 30%.

• The Mac accounted for 61 percent of Apple’s total revenue. Apple shipped 2,496,000 Macs, a 41% unit increase and 43% revenue increase year over year.  Sequentially the company was up 9% over the prior quarter in total units sold.  Breaking out the categories: desktops accounted for 943k of the total. Laptops accounted for 1,553,000. Desktop unit growth was up 49% year over year while portables were up 37%.

•iPod sales were up 12% year over year in total units 7% in revenue. In total, 11m were sold in the quarter. iPod sales grew 10 percent in the U.S., and 15 percent outside the U.S. As a note, Apple explained that the iPod Touch gets a different accounting treatment than the iPhone because of its free software upgrades, which iPods and Macs don’t receive.

•iPhones sold 717k on the quarter, up from 270k last year in the same period. On the negative, iPhone revenue wasn’t recognized during the quarter for any iPhone sold after March 6 because the company announced the iPhone 2.0 software that day. That was expected. Overall, the iPhone 3G is off to a fast start. More than 25 million applications have been downloaded from the App Store.

•Apple-owned stores: the company’s own retail outlets sold 476,000 Macs. The average revenue per store was $6.8 million during the quarter, with well over 200 stores open during the quarter. A store in Beijing store opened last weekend, and Switzerland and Germany are coming soon.

Comments

[Andy Zaky:]

Steve Jobs has Never Attended an Apple Conference Call!

2008 Jul 22 05:09 AM

[Andy Zaky:]

Steve Jobs has Never Attended an Apple Conference Call!

2008 Jul 22 05:09 AM

[Julian Ivan...:]

There's an echo here.. as Andy said, Steve doesn't "do" conference calls.

2008 Jul 22 05:46 AM

[papita:]

no shareholder should be spooked into selling their shares today or anytime soon. this is a company firing on all cylinders with better things to still come. this after hours selloff is driven by people who own the stock clearly for the short term. how else could you explain such a selloff after the company posted their best quarter EVER. in these troubled economic times, this company continues to separate itself from the pack. as far as Steve Jobs' health, that is just another topic that the shorts can use to drive the price down. This is a smart management team that knows exactly what they are doing.

2008 Jul 22 06:06 AM

[Azazello:]

the whispers before the earning call were not only about CEO health issues; the hedge funds are again at it with manipulating the stock-price and makings loads in the process

2008 Jul 22 06:40 AM

[DSB:]

Raise your hand if you know what happens to companies during a recession? How many iPods were bought with rebate checks?

2008 Jul 22 10:09 AM

[the Graduate:]

Actually, I believe it was "nothing is CERTAIN but death and taxes"...

2008 Jul 22 10:27 AM

[tom1234:]

question--when was the last time JOBS did a conference call---oh steve jobs did not sweep the floors in the office either ---now 31% higher ---beat the street expections --these are solid reasons to sell so i can come in and buy on the dip--when it does not make sense and the stock drops ---buy

2008 Jul 22 11:46 AM

[Seth:]

Andy - you're absolutely right. And so are the echos. Yesterday, the Associated Press' widespread earnings coverage talked about Steve's absence. As you point out though - that's normal. Instead of spotting the mistake, I made one of my own and gave it more air time.

2008 Jul 22 07:10 PM