25 July, 2007

Apple Rides Strong Computer Sales to Blowout Quarter

One of the most anticipated earnings numbers of the season are in. Apple's (AAPL) quarter, which blew past street expectations showed that the company has got the motors running. The company reported $0.92/share vs. the $0.72/share the street was expecting.

First the raw numbers: 1,764,000 Mac computers, 33% growth year-over-year, which is 150,000 more than any other quarter in the company's history
9,815,000 iPods, showing that this business is still very good and growing at 21% year-over-year
270,000 iPhones sold in the first 30 hours of launch (June 29th from 6pm and June 30th), not half bad however with Wall Street expectations going from 200K to 700K this could be an area of contention.

Apple earned $818 million on $5.41 billion in revenues with gross margins increasing from 30% to almost 37% with management releasing a statement applauding the company results. However Apple shareholders know that this stock has been fueled in recent months by the announcement and build-up to the launch of the iPhone, and if this rocket is to continue to justify it's high valuation, the iPhone will have to be part of that limelight alongside the Mac and iPod businesses. One thing the iPhone hype did very well was get people talking about and looking at Apple's computers. With foot traffic in Apple stores at all time highs, how many patrons asking about iPhones and iPods thought to themselves "Wow, that's a pretty cool computer". I think it was plenty. As well as computers are selling for Apple this is admittedly only one leg of their 3 business strategy so part of management's opening statement may be troublesome for short-term investors.

Steve Jobs
"iPhone is off to a great start -- we hope to sell our one- millionth iPhone by the end of its first full quarter of sales -- and our new product pipeline is very strong."

No one can argue that it's off to a great start but with expectations being what they are, will this be trouble in the short term. This is either a case of analysts having no idea about supply and demand, or that the iPhone really is not as successful as initially hoped? Some street numbers called for as many as 700K iPhones to be sold over the first weekend, and there were rumors flying around that within a week 1 Million had been activated. Where these rumors were coming from, and their validity is certainly up in the air, but it seems like analysts really just had no clue. When the expectation window for 2 days of sales spans the range of 200K to 700K units, you know no one's reading the same book, let alone the same page. Either way selling almost 300,000, in a day and a half, of a device that fits in your pocket and costs as much as a Playstation 3 is certainly impressive.

With a stock that's fueled on expectations, lofty as they are, any signs of chinks in the armor will not be treated well. Apple's stock was halted upon the numbers release and when trading resumed after hours the shares found themselves down almost $4 to $133. Shares climbed back strongly and have been on the rise breaking new all-time highs essentially every minute as the conference call reveals more details about future iPhone software plans, and all other things Apple. Apple's shares are up almost $13 from their close of trading today.

Apple plays the guidance game very conservatively. The street thinks that $0.82/share is a decent estimate for next quarter and Apple executives low-balled everyone once again with $0.65/share and $5.7 billion in revenue. Apple continues to believe their high margins on things like flash memory are unsustainable, and they may be right. Those deals they cut for very large-scale continuous orders of memory are certainly paying dividends now, but it'll be difficult for the company to secure all the memory it needs with their growing sales and product base of iPods and iPhones. Analysts expect low-balled guidance from Apple and certainly will shrug this off.

What will end up being a big deal is the payment deal with AT&T for iPhones. Not only is Apple booking revenue over a 2 year period (Each iPhone sale will contribute 1/8th of its sale price in revenue each quarter over the 2 years), but AT&T is also reported to be paying Apple a hefty exclusive fee for each unit and a portion of the monthly service plan. According to executives, none of this revenue is seen yet or being counted. This is the type of news that could have Short Sellers running for the hills buying back their stock in the next couple of sessions.

In a recent article I wrote about putting the Muleta away and letting the Bull ride on Apple stock, well it certainly seems that management have put the company on a road to profitability never before seen in its history. This is something that has to be rewarded, and in After Hours trading the company sees its stock hit the landmark $150 per share number.

Bulls have seized control.

Disclosure: Author is long AAPL

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