Apple Earnings Report: This Bad Habit Needs Breaking

Three out of five.

That's how many times Apple (Nasdaq: AAPL  ) has "missed" estimates one way or another out of the five past quarters. The iPhone maker just put up fiscal fourth quarter and full-year results that fell short of most expectations, including the bottom line. This is a bad habit in the making. Is there something deeper at work that investors should be afraid of?

Revenue was just shy of $36 billion, which resulted in net income of $8.2 billion, or $8.67 per share. Those were the headline figures, but let's dig in deeper to the iDigits.

Least, but not last
The figure that jumped out to me was iPad unit sales. They came in at 14 million, well below what analysts were looking for and a sequential drop of 3 million units. This was somewhat expected, as Tim Cook recently said Apple had sold its 100 millionth iPad after the quarter closed, meaning it had to have sold less than 15.9 million units last quarter. While technically a "miss" here, there are some important considerations to remember.

Source: Apple. Fiscal quarters shown.

First off, Apple recognizes sales upon sell-in to the channel, not sell-through to end customers. That means the 17 million in iPad unit sales that Apple posted last quarter looked high because Apple was filling the channel coming off of the launch of the third-generation iPad. Specifically, we're talking about a 1.2 million unit increase in channel inventory in the June quarter.

On top of that, the rumor mill struck again and some prospective iPad buyers held off in anticipation of the iPad mini announcement. Even for consumers set on buying an iPad, it's reasonable to expect a portion of those would prefer the smaller form factor and it was all but a certainty the iPad mini was on its way. Cook added, "Some of that was anticipated and some of it I wish wouldn't occur, but it did occur."

Sell-through was actually up 44% over last year, higher than the 26% increase reported in sell-in. Ultimately, 14 million iPads may seem a little light, but it's hard to complain about selling 31 million units over the past two quarters. That's almost a third of all iPads that Apple has ever sold -- in two quarters.

Let's talk iPhone
On the bright side, iPhone units were solid, especially given the supply constraints currently afflicting the iPhone 5, which was only on sale for 9 days during the quarter. The 26.9 million iPhones sold were a sequential gain of about 900,000 units, a healthy indication that older models continue to sell well. This fiscal year, Apple sold 125 million iPhones, up from 72.3 million last year.

Source: Apple. Fiscal quarters shown.

Of fourth-quarter units, we know that at least 5 million were iPhone 5 units, but these remain supply constrained even now. That's more of a concern for the current quarter, since we're now nearly a third of the way through and Apple still has unmet demand. Cook feels "great" about current iPhone 5 output levels, as they've increased significantly throughout October, but stopped short of saying when supply and demand may balance.

He also expects the iPhone 5 to launch in Mainland China this quarter. Of course, Cook didn't drop any clues on the China Mobile (NYSE: CHL  ) partnership that everyone is waiting on, but he's dropped enough clues this week.

The Middle Kingdom
Greater China saw revenue of $5.7 billion last quarter, flat sequentially but up 26% year over year. Macs were up 44%, iPads jumped 45%, and iPhones increased 38% in the region. For the full year, Greater China revenue was a whopping $23.8 billion.

Source: Apple conference calls.

That's up 78% from $13.3 billion a year ago, and represented an incredible 15% of Apple's revenue for the fiscal year. It's a good thing more Apple retail stores are coming in China, because it's only just begun.

Missed opportunity?
When asked about Microsoft (Nasdaq: MSFT  ) Windows 8 and Surface, Cook's been "reading" that it's a compromising and confusing device. He's probably read all of these reviews, because that seems to be a common theme. He stands by the notion that hybrid and convertible devices have too many inherent trade-offs.

In Cook's trademark deadpan humor, he said, "I suppose you could design a car that that flies and floats, but I don't think it would do all of those things very well." Echoing his toaster-fridge comment in April, it seems Cook just doesn't realize how big the combined toaster-fridge and hover car markets are, and how they're ripe for disruption. Forget the Apple TV set -- I'd buy an iHoverCar.

Still, he's not too worried about Windows 8. Besides, iPad mini and fourth-generation iPad pre-orders start today -- the same day Microsoft is launching Windows 8 and Surface RT.

'Tis the season for an Apple blowout
Even if Apple sees some weakness over this "miss," I see it as a buying opportunity. The company now has $121.3 billion in cash on the books -- over a fifth of its market cap. With the results, it now trades under 14 times earnings (under 11 times earnings excluding cash), and just grew net income by 61% this fiscal year.

The holiday quarter is going to be a monster. Apple's product lineup heading into the shopping season is absurdly strong. In fact, CFO Peter Oppenheimer believes that 80% of revenue will come from products launched within the past six weeks. That would include the iPhone 5, iPad mini, fourth-generation iPad, the new iPods, iMacs, Mac minis, and 13-inch MacBook Pro with Retina display.

Have no doubt: next quarter will shatter records in more ways than one.

The iPhone and iPad now comprise nearly three-quarters of revenue, making them by far the two most important product families to Apple's future success. That's exactly why I've put together comprehensive reports on both of these growth magnets, all included as a bonus in our Apple premium research service. In them, you'll learn everything you need to know about the iPhone 5 and how to profit on it, as well as just how massive the global iPad opportunity will be in the years ahead. Get started by clicking here.


Read/Post Comments (33) | Recommend This Article (50)

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 October 26, 2012, at 12:04 PM, jdmeck wrote:

    Maybe the analysts need to do a better job? Apple is a tremendous success and is worth far more than the price.

  • Report this Comment On October 26, 2012, at 12:05 PM, LatrinaCleanola wrote:

    The habit that must be broken is the analysts' habit of pulling inflated estimates out of their hats--or wherever they pull them from. Each time Apple has an awesome quarter with growth that most companies can only dream about but which doesn't match the the analysts' fantasies, then this is declared a miss. The only thing that is being missed is the boat, which is what the analysts are missing along with anyone who bases investment decisions on their nonsense.

  • Report this Comment On October 26, 2012, at 12:46 PM, mill3417 wrote:

    I agree with the above comments. People have to just start paying attention to those financial reports. According to actuality, Apple has never really lost. Only when people "TRY" to predict the market have they lost, and that's sometimes. Isn't that like economics and finance 101, you absolutely CANNOT predict the markets. It's just so disappointing that people follow in herds like this. Wall Street is completely in control of the pricing of valuable companies according to the amount of investors that so "unfoolishly" follow.

  • Report this Comment On October 26, 2012, at 12:46 PM, christelpeeters wrote:

    Sometimes I think the big investors launch such estimates only to buy more shares for themselves at a cheaper price...

  • Report this Comment On October 26, 2012, at 12:49 PM, Chancing wrote:

    For a 14ish P/E, this is as cheap as can get for a company like Apple.

  • Report this Comment On October 26, 2012, at 1:12 PM, MarketMaker58 wrote:

    Apple is a great company, but I am shorting it (started at around $621 after the "meh" iPad Mini announcement). Just think we're going to start seeing the effect of no longer have Jobs around.

    I think the stock will drop to $400/share.

  • Report this Comment On October 26, 2012, at 1:13 PM, tcolgcedu wrote:

    On July 24, 2012 while reporting results for Apple's Q3 fiscal quarter, they forecast (http://www.morningstar.com/earnings/41404458-apple-inc-q3-20... the following for the September Q4 quarter: revenue of 34 billion (actual was 36 billion) and earnings per share of $7.65 (actual was $8.67). Over a year ago Tim Cook mentioned in a conference call that Apple intended to be more accurate with their projections going forward. It is not Apple's "miss" here. Perhaps analysts need to reassess their models to improve their accuracy (although they may find it easier to blame Apple).

    Apple offered a clear explanation for their projections for the next quarter as well. Startup costs will be much higher due to the introduction of: new iPads (4th generation), iPad mini, new iMacs (which are NOT AVAILABLE until November (21.5 inch model) and December (27 inch model), new 13 inch MacBook Pro with Retina Display, new Mac mini, continued ramp-up of iPhone 5 international releases, etc.

    With the exception of the MacPro desktop computer (which saw a minor processor upgrade), Apple has re-engineered their entire product lineup in the past year to increase the performance of every product they sell. They are GROWING computer sales (year over year) at a time when the global sales of computers is in a period of decline. This is a remarkable accomplishment that merits praise.

    Thank you, Apple, for your efforts over the past year, for quality of your products, and for the stunning designs that become the envy of the competition (and copyists).

    Now get to work on that new MacPro...

  • Report this Comment On October 26, 2012, at 2:33 PM, Mega wrote:

    "First off, Apple recognizes sales upon sell-in to the channel, not sell-through to end customers. That means the 17 million in iPad unit sales that Apple posted last quarter looked high because Apple was filling the channel coming off of the launch of the third-generation iPad."

    For iPads, aren't most of the sales direct to consumer? I think sell-in vs sell-through would be a much bigger issue for iPhones where most sales are through a carrier.

  • Report this Comment On October 26, 2012, at 2:36 PM, TMFNewCow wrote:

    MegaShort, it's true that most sales are direct to consumer, but channel inventories still have a notable effect on the sell-in figures, especially as Apple expands third-party retail distribution.

    -- Evan

  • Report this Comment On October 26, 2012, at 3:49 PM, ynotc wrote:

    Has anyone ever seen a company that is this large, grow this fast with these margins, with so much cash and no debt and get snubbed?

    If this was any other company they would be getting a P/E of at least 20 over TTM.

    I am not an Apple aplogist these are just facts.

  • Report this Comment On October 26, 2012, at 5:46 PM, olivert1984 wrote:

    @ynotc

    First of all, P/E is not the end all be all of ratios. If you look you can see that their P/B is 5.1 which means they have a substantial amount of intangibles that are subject to big changes. Additionally their Price to sales is more than double the industry standard. Plus, everyone and their grandmother seems to own Apple stock which present its own set of challenges.

  • Report this Comment On October 26, 2012, at 6:01 PM, Borbality wrote:

    AAPL will never be able to prove it has a product that will last decades, because of the inherent fickleness of its market and the speed at which technology changes. The P/E is never going to get as high as many other tech companies. Them's the breaks!

    Also they just don't have enough products. If iOS suddenly isn't cool anymore, you got a big problem.

    I think AAPL is still a steal, but one day it won't be, and no one knows when that day comes.

  • Report this Comment On October 26, 2012, at 6:26 PM, wyrfox wrote:

    I have never understood the weight placed upon the estimates created by 24 year old MBAs. The fact that stock prices go up or down depending upon what these guys think or smoke is absurd. When will the real leaders of business tell these folks, "I will send you the latest annual report and quarterly report but other than than no comment." Every time some company feeds their fires, we stockholders are held captive to their illusions. The real choice is for the Boards of Directors and the Stockholders to evaluate returns, not analysts who are not playing the game.

  • Report this Comment On October 26, 2012, at 6:48 PM, haysdb wrote:

    This is a provocative article whose premise the author must surely know is BS. Whose problem is this? Apple's? Really?

  • Report this Comment On October 26, 2012, at 7:05 PM, TheRealRacc wrote:

    And I am not a non-Apple apologist. To say it as objectively as possible, if Microsoft can execute Windows 8 to its fullest potential, Tim Cook will have a great deal to worry about.

  • Report this Comment On October 26, 2012, at 7:57 PM, Resphigi wrote:

    When a company misses their own guidance, there's a problem worth paying attention to. When they miss the estimates of analysts who don't work for them, then "there's nothing to see here - move along folks."

  • Report this Comment On October 26, 2012, at 9:40 PM, Resphigi wrote:

    The notion that the products Apple is now introducing no longer show the influence of Steve Jobs is a crock. Everything being introduced now was in the development pipeline long before Steve Jobs died.

  • Report this Comment On October 26, 2012, at 11:11 PM, scoobster007 wrote:

    I agree with many others' comments. The analysts have the problem, not Apple. These small "f" fools need to stop trying to create their owns estimates as they clearly do not know how to properly forecast Apple results. Despite arguments that Apple is sandbagging, maybe they should go with Apple's estimates for the next few quarters as their estimates are proving to be useless as no one is taking them into account as evidenced by Apple opening up the day after earnings were announced at the same price as they closed on the day of the earnings announcement, despite the apparent earnings miss according to analysts.

  • Report this Comment On October 26, 2012, at 11:11 PM, JTFong wrote:

    You should change your article headline from "Bad Apple's habit of missing....." to "Bad High Expectations of Analysts Time and Time Again" JTFong

  • Report this Comment On October 26, 2012, at 11:30 PM, dkd3684 wrote:

    PE is not the only ratio worth watching; there's a PEG ratio of .6 that makes Apple the cheapest growth stock in the world. Even as growth slows, Apple currently has 20% of its total market cap in the form of cash and marketable securities. AAPL doesn't sell products at a loss like AMZN, and it didn't spend 1/3 of its cash on a money losing phone company like GOOG did. When analysts guess AAPL's earnings, why don't they just take AAPL's own earnings estimates and add 12%, and we'd be a lot closer to final numbers a majority of the time. It would be a lot more worthwhile to focus on companies that have a real problem competing "profitably" with AAPL, like AMZN and GOOG.

  • Report this Comment On October 27, 2012, at 12:36 AM, EquityBull wrote:

    Apple could defend the stock by way of a substantial buyback, increased dividend and a 20 or even 30 for 1 stock split.

    Had apple dropped from 17.50 to 15 nobody would blink. Well it just did that. 700 to 600 is the same thing. Unless apple splits nobody can see anything but a huge 100 point drop. Sad but true

    A larger dividend would give yield support.

    Apples cash loses 3.6 billion per year to inflation. In 3 years they lose 10 billion right to inflation. Sad. A buyback would fix this and be instantly accretive to earnings. Apple earns zero on their cash now thanks to low rates. Inflation is 3%. In their current investments it is just eroding away

  • Report this Comment On October 27, 2012, at 12:27 PM, hemhog wrote:

    Nobody here seems to get the point. Apple doesn't mind eating a bad quarter to create greater products. Long term, Apple wins. End of story.

  • Report this Comment On October 27, 2012, at 2:31 PM, ade61 wrote:

    Time to sell Apple Stock and invest in the Next Bubble

    My April, May assessment in regard to Apple's inflated and manipulated stock price is correct.

    Apple’s profitability has reached a plateau do to market saturation, competing products and to the enormous income currently generated by Apple which cannot be increased by double digit percentages annually anymore.

    In addition, the escalating competition for market share and the millions of products being manufactured by Apple, the price premium for Apple products is too high and will have to be lower to increase sales.

    The economies of scale along with substitution are in play. The principles of substitution states when a several similar or commensurate commodities, good or services are available, the one with the lowest price will attract the greatest demand and wide distribution. Apple‘s products are not immune to these principles.

    The belief that Apple can maintain its price premium and expand it sales by 20% a year for the next 5 years is a deception. This myth has allowed institutional investors which own 70 percent of Apple’s stock the ability to manipulate its price, hence the volatility and its inflated stock price.

    If this myth were true than Apple’s stock price would be legitimate and keep rising to a least a $1000 a share as so many fraudulent analysts have forecasted.

    Just as computers, big screen TVs and many other electronic devices have been commoditized, so will apple products if they wish to generate more sales. Apple products will be commonplace and just other commodity with significantly lower pricing which will affect Apples profitability and income.

    To get a clear picture of why Apple Stock is a inflated, see adelaw61.blogspot.com

  • Report this Comment On October 27, 2012, at 3:03 PM, dwatson102 wrote:

    Anyone who thinks Apple's growth will plateau anytime soon needs to look at the installed base of iPhones, the models of the installed base (mostly 3G's, 4's and 4S's) where they are in their contract upgrade cycle, and the 88% of iPhone owners who say their next phone will be an iPhone. The math is left to the student.

    Apple has a pipe line of customers for the next two years longer than the lines at their stores when new models hit.

    BTW the same number of android users saying they will get another android is at 55%. 27% say they will buy an iPhone 5 with 11% saying they will buy a 4S.

    And 51% of current blackberry users (yes there are still quite a few) say they will switch to an iPhone 5 with 28% claiming internt for the 4S.

    Cramer did an interesting article on Apple vs Amazon pointing out the incredible difference in PE multiples vs business results. We can all just shake our heads and wonder.

    People say markets are inherently rational. Not since I have been watching which is only about 55 years. But that is where the opportunity lies.

    Doug

  • Report this Comment On October 27, 2012, at 5:26 PM, pianopoet wrote:

    It just amazes me how obnoxious and manipulative analysts are. Cramer was indeed correct when he wondered why amazon was up 15 points on friday when apple was down.. This is really nuts and is a joke. There should be a full scale investigation to how many scams are going on within the investing community.

  • Report this Comment On October 27, 2012, at 10:52 PM, optimist911 wrote:

    >well below what analysts were looking for and a sequential drop of 3 million units. This was somewhat expected,

    If it's somewhat expected, then why didn't anyone expect it?

  • Report this Comment On October 28, 2012, at 6:14 PM, superbinvesting wrote:

    Tim Cook will be the death of this company. When Steve Job's legacy plan comes to a close, the innovation that was once the hallmark of Apple will crumble. This stock is a dog in the making.

    www.ingeniousinvesting.com

  • Report this Comment On October 29, 2012, at 12:27 AM, 123spot wrote:

    Is it just me, or does anyone else sense acrophobia?Spot

  • Report this Comment On October 29, 2012, at 11:10 AM, 48ozhalfgallons wrote:

    Apple is about to introduce the iFad.

  • Report this Comment On October 30, 2012, at 7:57 PM, mikecart1 wrote:

    Fact: Over 99% of those that hate on Apple own at least 1 Apple device, use 1 Apple designed computer software system (iTunes anyone?), or have used something Apple-related in the past.

    :D

  • Report this Comment On November 02, 2012, at 12:27 PM, klaa2 wrote:

    Re: "The company now has $121.3 billion in cash on the books -- over a fifth of its market cap."

    So where does this number come from. Value Line, Yahoo, et al all show about $27B "cash", $18B *net* current assets, $52B current assets and $119B book value.

    Surely the article does not contend that book value is equivalent to cash on the books. Totally different accounting concepts. Someone is off by a factor of 10 -- either the article or all the other data sources I look at.

    Any idea what's going on here?

    Bill

  • Report this Comment On November 05, 2012, at 9:57 AM, TMFNewCow wrote:

    Bill, Apple's cash consists of its cash and cash equivalents ($10.7 billion), short-term marketable securities ($18.4 billion), and long-term marketable securities ($92.1 billion).

    -- Evan

  • Report this Comment On November 08, 2012, at 12:41 PM, klaa2 wrote:

    Firstly "long term" is not cash - it's money that's locked up for the long term. Secondly to talk about current assets (cash) without subtracting current liabilities (immediate debts) is madness.

    If a company has $50M in current assets and $50M in current liabilities then all that cash is committed to some debtor to pay the bills this month. It doesn't count as an asset the company could use to create some new long term project or dividend or buyback or whatever.

    AAPL does have a relatively large amount of cash sitting around, but it's not remotely a fifth of the company's market cap.

    Bill

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