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Apple Is Still Cheating You

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Analysts still can't figure Apple (Nasdaq: AAPL  ) out.

The Mac maker blew away Street estimates when reporting fiscal first-quarter results last night. Revenue rose 32% to $15.68 billion. Diluted per-share net income soared 106% from last year.

Analysts were expecting just $10.4 billion in revenue and $1.77 in per-share earnings. Calling that a swing and a miss is too generous. It's more like getting caught in the shower when the first pitch is thrown.

Behind the strike
Media reports say analysts were thrown off by a change in how Apple accounts for iPhone sales. No longer amortized over a two-year subscription, the Mac maker now recognizes all handset revenue at the point of sale. Applying this new accounting style to last year's first quarter, net income growth would have come in at "only" 47%.

Last quarter, Apple's old accounting style led to a 184% increase in iPhone sales on significantly lower unit growth. In Q1, handset revenue soared 90% and unit sales doubled, due partly to deals with China Unicom (NYSE: CHU  ) in China and KT (NYSE: KT  ) in South Korea.

Wait, the story gets better! Gross margin improved to 40.9% from 37.9% in last year's first quarter. Operating cash flow rose 47% to $5.8 billion, continuing a flush trend:


Fiscal Q1 2010*

Fiscal Q4 2009*

Fiscal Q3 2009*

Fiscal Q2 2009*

Cash From Operations





Capital Expenditures










Sources: Apple press releases and Capital IQ.
* Numbers in millions.

According to Capital IQ, only 10 companies in the world have generated more cash on fewer capital expenditures than Apple last year. Three of them are American: Pfizer (NYSE: PFE  ) , JPMorgan Chase (NYSE: JPM  ) , and Bank of America (including its Merrill Lynch subsidiary).

But the fruit's still getting brown
Apple's prowess is in this area is almost comical. Its balance sheet is like a clown car, stuffed with $39.8 billion in cash and short- and long-term investments.

And what is the Mac maker doing with all this green? Not much, according to Chief Financial Officer Peter Oppenheimer's comments during last night's conference call:

Our investment priority for the cash continues to be preservation of capital, which has served us well in the current environment. We are continuing to focus on short-dated, high quality investments and remain comfortable with our investment portfolio. [Emphasis added.]

This isn't exactly a fair argument, sir. Sure, Apple avoided buying into the 2008 bloodbath, but the Mac maker also missed last year's massive rally.

But the truth is actually worse than that. Apple's returns on capital have declined since 2007:

Fiscal Year

Return on Capital







Source: Capital IQ, a division of Standard & Poor's. Assumes a uniform 37.5% tax rate.

Poor cash returns could be part of the reason why (from page 39 of the latest 10-Q quarterly report):

The weighted-average interest rate earned by the Company on its cash, cash equivalents and marketable securities decreased to 0.75% in the first quarter of 2010 from 2.37% in the first quarter of 2009.

Fortunately, this trend didn't continue in Q1. Apple's return on capital has recovered to 21.9% over the trailing 12 months. The Mac maker needs further gains in this area to justify higher returns, which makes management's professed stance on using cash all the more infuriating.

Why hire the guy if you won't use him?
"Preservation of capital" sounds nice. But if that's really all there is, then Jobs was stupid -- yes, that's right, stupid -- to hire former Goldman Sachs (NYSE: GS  ) banker Adrian Perica to run point on acquisitions.

Perica, hired last year, is the guy who brokered a deal for Quattro Wireless when Google (Nasdaq: GOOG  ) outbid Apple for AdMob, BusinessWeek reports. Now, after yet another surprisingly cash-rich quarter, he's got a $40 billion war chest to work with.

Why not let him off the leash, Apple? I'll be back tomorrow with an updated list of acquisition ideas. In the meantime, use the comments box below if you have your own ideas or want to sound off on Apple's results, forthcoming products, or valuation.

Apple is a Motley Fool Stock Advisor selection. Pfizer is a Motley Fool Inside Value pick. Google is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of Berkshire and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy isn't interested in attending its 20th high school reunion. Save the stamp.

Read/Post Comments (9) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 26, 2010, at 3:15 PM, Uruzone wrote:

    Apple has long said that they have better things to do with their cash - better ways to return gains to their investors - than by paying a dividend. I have no reason to outguess management right now on any of its decisions, this among them. Other than through Apple's stock, I sure haven't been able to get a 22% return on any of MY capital.

    Now, I note that you don't mention a dividend here, so if that's not your idea for how to throw away Apple's strong cash position, what exactly is?

  • Report this Comment On January 26, 2010, at 3:54 PM, TMFMileHigh wrote:

    Hello Uruzone,

    Thanks for writing.

    I've said before that a one-time return of capital would make sense:

    Here, I'm arguing more broadly for aggressive moves on acquisitions.

    And not just company acquisitions. Apple is reportedly building out one big data center but if is intended to be a big part of the iTunes business long-term, more facilities would make sense.

    I'll have other ideas in tomorrow's follow-up.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On January 26, 2010, at 4:02 PM, TMFMileHigh wrote:

    Hello Uruzone,

    Thanks for writing.

    I've said before that a one-time return of capital would make sense:

    Here, I'm arguing more broadly for aggressive moves on acquisitions.

    And not just company acquisitions. Apple is reportedly building out one big data center but if is intended to be a big part of the iTunes business long-term, more facilities would make sense.

    I'll have other ideas in tomorrow's follow-up.

    Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On January 26, 2010, at 4:15 PM, Turfscape wrote:

    TMFMileHigh wrote:

    "Here, I'm arguing more broadly for aggressive moves on acquisitions."

    But perhaps there isn't strong enough value in the acquisitions they are looking at right now. Buffett sat on his cash hoard ($30 billion? If I remember correctly) for years because he said he couldn't find value in the market. Then, of course, we looked in the bank vaults and all hell poured forth...suddenly Buffett found value (GE, HOG, Burlington Northern, etc.).

    I would image that AAPL is seeing a similar scenario. Do the acquisitions make sense, and are they a good value? If not, sit on that hoard.

  • Report this Comment On January 26, 2010, at 4:46 PM, lutece7 wrote:

    I have always thought it wise for Apple to have huge cash reserves. Isn't that what kept a hostile takeover form happening in the past? And they will be able to weather any storm.

    But, if inflation were to return to the rates we saw in 1980, 20% or so, then wouldn't it be dumb to have that much in cash?

    I am a long time Apple shareholder. I am always amazed at how many negative articles I read on Motley Fool about Apple.

  • Report this Comment On January 27, 2010, at 1:17 AM, beetlebug62 wrote:

    Read the conference call transcript. Oppenheimer said, "never say never" in reference to doing something besides "preservation of capital", that's a bit of a surprise. They never say anything when it's not necessary.

  • Report this Comment On January 27, 2010, at 11:25 AM, TMFMileHigh wrote:

    'Morning everyone,

    Just talked with my editor and we're going to move the acquisitions story to tomorrow because of the flood of tablet news on the wires today.

    In the meantime, please continue to use this space to give us your ideas. What acquisitions, if any, would you make were you in Perica's position?

    Thanks for your patience and Foolish best,

    Tim (TMFMileHigh and @milehighfool on Twitter)

  • Report this Comment On January 30, 2010, at 5:59 AM, abrahamomega1 wrote:

    the revolution of every company is not just a physical demonstration of financial battle alone,but the reflection of every business is basically meant to reduced the low level of poor infrastructural constrain in the world market.the essence of going through vagorous production does not really matter for now,all that matter,is the reproductive identity that would be out in a couple of time.when you beging to experience a change in the market firm,it does rely on the foundamental structure of the producing market features.i wants to really believed that apple industry are only trying to play a game of soccer and the end would tell better.i wants to also say that every thing they are doing for now is just a competition ideology which will tend to their economic crunch.they will only reason with me by the time a new programme comes out for a daily service record.and with that,there ability to fly high will be limited to their activity;which i surely know that they are just a bird that can fly,byt am an eagle that will fly higher than for my client,i wants to place an advise to them all that playing with a dog and at the same time a snake could be armful;don't be subjected to the physical things you are seeing for now,but that which shall be out within a few weeks from now is even greater than that which you are seeing.i am not move with the influence of any body,i still remain what i am and will never sell my glory to any body not even to my competitors.

  • Report this Comment On February 11, 2010, at 10:53 AM, lrecap wrote:

    And who, even at TMF could outdo Jobs? Unfortunately some of the outflow from TMF these days is to gain attention, not to be overly benefitial to the subscribers.

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