With the Nasdaq pacing the other market indicators throughout the trading day, it was clear that Technology was on the mind of most Traders. With eBay (EBAY) reporting numbers to an enthusiastic response, next in line was the mighty folks from Cupertino, waving their iPhones and Macs, sans Legal Copy (If you haven't seen the latest I'm a Mac ads you are missing out on high comedy).
For Apple (AAPL), this quarter was met with tempered expectations. Charts and Graphs flew across the Internet, projecting the sky was falling for the Mac. Well not exactly falling, but some rather large chinks in the armor were showing. Microsoft (MSFT) ads that actually garnered praise! Mac sales at a year over year drop for the first time since 2003! Apple not in the fast growing netbook Market! Pres, Androids, Berrys aplenty! Where's Steve? I think you get the gist, a lot of shouting and hand waving by analysts and the media, some thoughtful, most not so much.
Even, Apple's number 1 business fan, CNBC's Jim Goldman, in a recent piece was comparing Macs to PCs on price and intangibles, made a point to mention that Macs come with Photoshop!? Perhaps a confused slip of the tongue but nonetheless tried and true stockholders are wondering if anyone outside the Apple circle truly understands the business. And in all likelihood, that's the reason the shares are so under appreciated and victims of manipulation and rumor.
But there's a little something called cold hard facts, and Apple's been providing them aplenty, quarter after quarter. And with that, providing what seems like quarter after quarter of what I like to call 2/3rds guidance. When will the pros just forget about those last two sentences in every Apple press release.
But now to the hard hitting stuff, the news that matters, the numbers.
- Revenue: $8.16Billion vs $7.7Billion expected
- Earnings: $1.33/share vs $1.09/share expected
- Mac Units: 2.2Million vs 2.1-2.2 expected
- iPod: 11Million vs 10Million expected
- iPhone: 3.8Million vs 3.3Million expected
iPhones continue to be big, and not only for Apple. Analysts were scrambling to revise their iPhone estimates upwards as AT&T (T) reported very strong wireless results as part of their quarterly report. With 1.6Million iPhone activations (only 300K less comparatively to the holiday quarter) AT&T was quick to point out that iPhone subscriber churn is extremely low (customers love their iPhones) and iPhone ARPU was 1.6 times the average (customers love spending on data plans).
Basically the iPhone's little sister, the iPhone Touch continued to increase in popularity as the AppStore has proven to be an incredible driver of not only adoption, but also loyalty. With Apple about to cross 1Billion applications downloaded this marketplace becomes the fastest growing software distribution channel in history. With combined iPhone and iPod Touch sales totalling 37Million units and counting, the install base for developers is only continuing to grow. And as Apple readies the reported and rumored "iPod Touch HD", their curveball into the netbook/tablet market, be sure it'll be accompanied by an AppStore of its own.
How did Investors react to the news? At first nonchalantly, Apple sold off late in the day as worries seemed to creep into the stock. After-hours however a 3% gain on solid results but sluggish guidance. The guidance number was partially explained on the call, which I'm sure has yet been properly disseminated. Apple is recording no Revenue from iPhones sold after their March event of iPhone software 3.0. This is all due to some technically complex accounting rules that allow their subscription based model to yadda yadda yadda (Insert Legal Copy). In a nutshell, by doing this they can legally give iPhone users the upgrade for free. iPod Touch users however, are stuck with another Hamilton (Doesn't have the same ring to it as a Benjamin does it?).
Since the software is set to come out in June, that's essentially an entire quarter of 0 recognized iPhone revenue. Kinda sounds like it fits nicely in the gap between Apple Revenue guidance and Analyst Revenue expectations doesn't it? Provided that the analysts have finally deciphered the enigma code that is Apple's subscription accounting method wherein all iPhone revenues, profits etc are split amongst 8 quarters while the rest is deferred into an ever increasing cash pile which at the moment stands at $29Billion.
To be fair, Apple has begun giving Non-GAAP accounting to try to set Wall St. straight. And by those metrics, the earnings are just staggering.
- The Current Quarter: $1.84/share
- Last Quarter: $2.58/share
- Quarter before that: $2.74/share
So the last 3 quarters of "real" earnings paint a picture of $7.16/share in earnings for a stock priced at $125. That's a P/E of 17 in 3 Non-GAAP quarters! Considering the $33/share in cash that Apple holds, that 3-quarter P/E ratio falls to 13. Looking ahead to the next quarter on a Non-GAAP basis and Apple is likely to earn close to $9/share (vs a comparitive estimate of the GAAP earnings of about $5.55/share).
This company is still undervalued, and while their entry into the netbook/tablet space will be closely watched, so will be the return of CEO Steve Jobs. Rumors and stock market games aside, Apple is an incredible money printing design house and because of its accounting rules it still seems "expensive" to some. An injustice that will hopefully be corrected as next-quarter analysts will have a full year of Non-GAAP numbers to look over and use in their predictions. Then maybe it'll be Apples to Apples.
Disclosure: Author owns AAPL, T, holds Call Options in MSFT
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