Sunday, July 29, 2012

Apple 3QF2012 Earnings

3QF2012 Results

            Apple’s shares gapped down about 5% on Wednesday, after its third quarter conference call on Tuesday afternoon. To broad stroke the results, earnings missed analysts estimates by $1.06 & came in at $9.32 per share. This was the second earnings miss in the past 39 quarters. Management suggested that weaker sales were a result of customers waiting for the long-awaited iPhone 5 release, which is expected to be on sale this fall.
The company sold 26 million iPhones in its third fiscal quarter, a 29% increase y/y, but down from 35 million during the second quarter. Weakness in gross margins can be explained by a mix of lower priced iPhones ahead of the iPhone 5, greater contribution of the iPad to sales v. iPhones, & foreign exchange. CFO Peter Oppenheimer: “Our weekly iPhone sales continue to be impacted by rumors and speculation regarding new products.”
Deskop sales decreased 19%, notebook sales increased 3%, iPod sales decreased 20%, iPhone sales increased 22%, & iPad sales increased 52%. The iPhone 5 is rumored to have LTE connectivity with new physical features (e.g. thinner, new casing). Management estimates fourth quarter revenue of roughly $34 billion, gross margins of 38.5%, & EPS of $7.65.
All in all, an EPS/sales miss was bound to happen for a company that consistently beat The Street’s expectations. Although Apple may have missed consensus growth estimates for this quarter, it is still has a fantastic story & room to run. A strong product line, among other catalysts, should drive the stock price in the coming months if not before the holiday season.  

-New iPad, cheaper iPad 2, iPad Mini
-iPhone 5 with LTE capability drives strong upgrade cycle
-Mix shift from iPad to iPhone drives margins higher
-Expanding distribution in emerging markets (China, Brazil, ect.)

            The major risk to Apple’s performance & stock price is the success of new tablets, especially from Microsoft & Google. In my opinion, the Surface (Microsoft) poses the most threat. Although it is unlikely that a software company can successfully produce a physical product (like a tablet) without complications, strong execution could pose a threat to Apple’s corporate market. Many of these companies that are focused on productivity still run on Office to utilize programs like Excel & Word (Apple’s “Pages & Numbers” haven’t posed much of a threat to this market). Whether from the companies themselves or their employees, the Surface could be popular among those that want to get some work done in transit or at home, with the Surface’s keyboard feature. In addition, Microsoft 8 will offer a variety of features that should strengthen its hold on the corporate market.
Dan Hurley’s Comments (Original Analyst)
-Bad headlines did not help the stock price. Customers waiting for iPhone 5
-“A material chunk of the blowout iPhone/iPad sales from the March quarter will pull forward from this quarter rather than sales to end users”
- “The beat in iPads is extremely positive given the fact that new iPad sales in mainland China, which makes up ~70% of Asian sales, were not included. Sales of the iPad 2 at its newly lowered price point were driven by success in the education unit. Both of these bode extremely well for iPad sales in September.”
-Lowered margin guidance for the next quarter could meant Apple is introducing a smaller iPad (mini) at a competitive price point (to compete with tablets like the Kindle Fire).

Relative Performance (compared to the S&P 500) 3 Months Ahead of an iPhone Announcement

Original iPhone           22%
iPhone 3G                   40%
iPhone 3GS                 32%
iPhone 4                      20%
iPhone 4S                    22%

Apple will buy AuthenTec Inc for $355 million, which could provide a security feature on an advanced version of the iPhone (fingerprint technology).

David Einhorn: “Not only do we believe the skeptics are misguided, we believe the shares remain cheap.”

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