Apple: Why Did You Doubt Them?

| About: Apple Inc. (AAPL)

After the bell on Tuesday, Apple (NASDAQ:AAPL) released its much anticipated second quarter earnings report. Apple had fallen from a high of $644 to just $560 going into earnings. There had been some concern recently, especially over iPhone sales, with Verizon (NYSE:VZ) and AT&T (NYSE:T) reporting iPhone activation numbers that were down big over the prior quarter, when Apple sold 37 million iPhones. This had some worried that Apple would only sell 30 million iPhones, or perhaps less, which would lead to a miss on revenues and earnings.

I was not this pessimistic, and you can see that from my official Apple preview released on Monday. If you didn't catch my preview, here were my headline predictions:

  • Revenues of $39.17 billion, EPS of $12.03.
  • Mac unit sales of 4.75 million, iPhone unit sales of 33 million, iPad unit sales of 11.8 million, iPod unit sales of 8 million.
  • Q3 guidance of $34 billion in revenues and $9.50 in EPS.

So, what did Apple report? Well, I was dead on with a few of those predictions listed above. Let's look at the numbers.

Apple sold 35.1 million iPhones in the quarter. That number was up 88% over the prior year period, and down from the 37.04 million sold in the fiscal first quarter. The iPhone number was a bit ahead of my expectations, and since that is where they make a lot of their money, that's good news. Apple sold 4 million Macs in the quarter, up 7% over the year-ago period, but down from the 5.2 million sold in the first quarter. This number was well below my expectations, as it seems people may be waiting for newer versions to come out. I wouldn't be worried about this number, unless it stays depressed for multiple quarters. They still showed a year over year increase. Apple sold 7.7 million iPods, down 15% from the year ago period, and half of the 15.4 million sold in the first quarter. The iPod number was a little light for my expectations, but most street analysts expected much less than I did. We know iPod sales will continue to decline, and they don't contribute a large portion of revenues to Apple, so it is not a big worry. Apple sold 11.8 million iPads in the quarter, a 151% increase over the prior year period, and down from 15.43 million in the first quarter. I was dead on with the iPad number.

In terms of overall revenues, Apple reported $39.186 billion, slightly ahead of the $39.17 billion I had predicted, so I basically hit that number as well. Apple reported gross margins of 47.34%, well above the 44.68% from the first quarter, and above my prediction of 45%. A large part of this was the great sales of iPhones, and as I mentioned in my preview, when iPhone sales represent a higher portion of revenues, Apple's margins go up. Apple's operating margins came in at 39.26%, up from the 37.42% in the first quarter. That also exceeded my expectations of 38%. Net profit margins also came in at 29.66%, above my expectations for 29% as well. Again, the iPhone sales had a lot to do with that.

Apple also announced that its pile of cash, short term investments, and long term investments is now more than $110 billion. This is considerably large, and likely to continue growing until Apple starts paying its dividend later this year. They also will be purchasing shares, but it is not a true buyback, as their goal is only to cover the increases in outstanding shares from executive options. Most likely, they will not be reducing the outstanding share count.

Now, we know Apple gives conservative guidance, and they did again. My prediction for their Q3 guidance was $34 billion in revenues and $9.50 in EPS. They gave revenue guidance of $34 billion for Q3, but EPS guidance was "at least $8.68". Both numbers were below current street estimates of $37.4 billion and $9.93. However, we know Apple is usually conservative, so expect them to beat current street estimates.

As for the stock, it was up more than $40 in after hours, back above $600. That is to be expected. Apple clearly showed why it is the best, and proved those recent doubters entirely false. My view was to be long Apple into earnings if the name was between $550 and $585, and that turned out to be the correct one. I think shares could easily trade back to those $644 highs in future weeks as all those fears have been calmed. Apple isn't back, because it was never gone to begin with.

Today's report cements Apple as the best company out there today. I hit on the iPad, revenue, and revenue guidance numbers, so I'm happy about that. A couple of my other numbers were off a little, but I don't think you'll find any analysts that hit everything, let alone at least three numbers. I'll try to do even better next quarter.

In summary, Apple produced a good revenue number of $39.19 billion, and thanks to a high percentage of revenues coming from iPhone sales, margins were up tremendously to multi-year highs. Earnings per share came in strong at $12.30, more than $2 above street expectations. Apple reported great numbers in terms of iPhone and iPad sales, and iPod sales weren't down as much as many had expected. Mac sales were a bit light, but it may be part of the upgrade cycle. All in all, Apple reported a great quarter, and shares are rising in the after hours session to reflect that.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AAPL over the next 72 hours.

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