Don't Count Apple Out Just Yet

| About: Apple Inc. (AAPL)

When Apple (AAPL) recently reported that its results missed consensus expectations, all of Apple's detractors let out a collective cheer that was so loud, it broke the sound barrier up here in Boston. While we did not publish a Q4 2012 estimate for Apple, we were more than content with the $7.65 EPS estimate provided by Apple's management. We were satisfied with this estimate because Apple's management guidance called for a 7.8% increase in its EPS during the quarter and the company generated 23%. Apple reported quarterly revenue of $36B and quarterly profit of $8.2B, or $8.67 EPS. Apple saw strong corporate-wide growth due to strong sales growth from its key product lines. Revenue enjoyed a strong 27% increase versus Q4 2011 and EPS grew by 23%.

Source: Apple

The iPhone continues to be Apple's best-selling product. Revenue from the iPhone increased 56% to $17.1B on a year-over-year basis. Units sold increased by 58% to 26.9M, 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 as well as on a linked-quarter basis. According to mobile carrier executives, the iPhone has lower churn than other smartphones sold by the carriers.

Source: Apple's Q4 Earnings Reports from 2007-2012

We were surprised that Sprint Nextel (S) only reported 1.5M iPhones sold despite its unlimited data for smartphones and given its recent promotion efforts to attract iPhone users to switch to its network. AT&T (T) sold 4.7M new iPhones during the last quarter and Verizon (NYSE:VZ) sold 3.1M new iPhones, including 650K iPhone 5 LTE enabled devices. Apple's iPhone sales through the big three US carriers (AT&T, Verizon and Sprint) in the recent quarter eclipsed the number of Blackberry smartphones sold worldwide, as well as the number of Nokia smartphone devices sold worldwide. But what Nokia Nation should be embarrassed about is that Apple's iPhone sales at AT&T as well as its iPhone sales at Verizon significantly exceeded Nokia's Lumia sales worldwide. This amazing feat was achieved in a quarter in which sales were expected to be soft because people were waiting for the iPhone 5 and also Apple didn't have enough iPhone 5 devices to go around to sell to everyone.

Source: MRQ Reports from Apple, Nokia, RIMM, AT&T, Verizon and Sprint

The iPad also saw strong growth during the quarter. On a year-over-year basis, iPads sold increased by 26% and revenues from the iPad increased by 9%. 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 for the second quarter and Apple. This time, Apple did it with class as its Portable Macintosh computer product line is now generating nearly Apple ($5.3B) of the entire consolidated RIMM enterprise ($2.87B). At this rate, Apple will generate more revenue from its iTunes Store and related music products than RIMM did worldwide.

Sources: Apple and RIMM earnings releases

Other products with significant revenue growth included the following:Source: Apple

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 1% but product revenue increased by 5.5% versus the comparable quarter last year. With regards to its legacy Mac product line, we can see that although the Mac isn't as strong a performer as the iPhone or iPad, at least it isn't declining like Dell (DELL) and Hewlett-Packard (NYSE:HPQ). Dell saw 9.6%% year-over-year revenue declines in its hardware and related products in its most recent quarter and Hewlett-Packard had 6.36% year-over-year revenue declines in its hardware and related products in its most recent quarter. 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 19% and product revenues declined by 26% Year-over-Year. We'll see if the new iPod products will help this product line get its groove back.

Sources: Apple, Hewlett-Packard and Dell MRQ earnings releases

On a geographic basis, all the regions saw strong revenue. Even though Europe is still ailing from the sovereign debt crisis, it almost generated 8.5% year-over-year revenue growth. Although Asian Pacific revenue growth deteriorated significantly, Apple still generated 15% growth in the Asian Pacific (ex-Japan) region versus the comparable period.

Source: Apple

Cash Flows from Operations were $9.1B and capital investments were $3.45B, resulting in free cash flows of $5.65B for the quarter. Apple opened 18 new stores and ended the quarter with 390 retail locations. About 36% of its retail store base (140 stores) is outside the US. Apple stores generated $11.2M in revenue per store in the quarter, up from $10.7M in last year's comparable quarter. Apple stores saw 94M visitors, an increase of 21% year-over-year and average about 19,000 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 its conservative guidance. If Apple wanted to meet its EPS expectations for the quarter, it could have easily done so by using $11.5B 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 $121B in cash and marketable securities ($83B attributed to overseas entities) representing over 21% of Apple's market cap. Apple paid a $2.65/share dividend payment on August 16th, which was its first dividend in 17 years. Apple will officially begin its $10B repurchase program in FY 2013.

Source: Morningstar Direct

In conclusion, while we are never happy to see companies in our portfolio miss earnings estimates and to give downbeat forecasts, we believe that some proper perspective is warranted. We would like to remind the investor community that Apple's management issued Q4 guidance of $7.65/share. It was the analyst community who boosted their consensus estimates of Apple's results to $8.84 per share, because they remembered that Apple blew by their Q1 and Q2 estimates as well as the Q3 management guidance of $8.68/share. The iPad and iPhone once again accounted for the lion's share of Apple's revenue and revenue growth. 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 uncertainty, we are looking to add to our long position in the company.

Source: FactSet Marquee

Disclosure: I am long AAPL, S. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article was written by an analyst at Saibus Research. Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this article. We have no business relationship with any company whose stock is mentioned in this article. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.

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