Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



The Real Culprit Behind Apple's Earnings Drop

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

For the longest time, Apple's (NASDAQ: AAPL  ) guidance was laughably low. Investors wouldn't be wrong to have simply ignored its outlook in the past, because the company always decimated its own guidance by astronomical margins. Those days are gone.

Perhaps Tim Cook wants to be more honest with investors, as the difference between actual results and guidance has declined significantly under his tenure. CFO Peter Oppenheimer made a very subtle semantic distinction with Apple's prior method of providing guidance and the new approach. The "new" Apple guidance is the real culprit behind its monstrous plunge today.

Sticks and stones may break my bones, but guidance was terrible
Oppenheimer repeated this line several times on the conference call when responding to an analyst seeking to understand the distinction with the new approach.

In the past we provided a single-point estimate of guidance that was conservative, that we had reasonable confidence in achieving. This quarter and going forward we're going to provide a range of guidance that we believe that we're likely to report within. No guarantee as forecasting is difficult, but we believe that we will report within that range.

Again, this becomes a semantic debate since Oppenheimer no longer describes future guidance as "conservative" as it was in the past. Taken at face value, investors are afraid that Apple will no longer actually beat its guidance and instead report "within" the provided range. That's why it actually matters that Apple guided revenue below Street expectations for the current quarter, whereas previously investors could have simply shrugged it off as another lowball forecast.

How bad could it be?
Apple is guiding revenue in the March quarter to $41 billion to $43 billion, short of the $45.4 billion that analysts were targeting. The midpoint of guidance represents 7% growth from a year ago, while analysts were hoping for 16% growth.


Fiscal Q2 2013 Guidance


$41 billion to $43 billion

Gross margin

37.5% to 38.5%

Operating expenses

$3.8 billion to $3.9 billion

Other income and expense

$350 million

Tax rate


Source: Apple.

Apple declined to offer specific earnings per share guidance, so investors have to do a little legwork to calculate its bottom line outlook.


Hypothetical Income Statement Based on Guidance

Revenue (midpoint)

$42 billion

Gross profit (midpoint)

$16 billion

Operating income (midpoint)

$12.1 billion

Other income and expense (as given)

$350 million

Earnings before taxes

$11.8 billion

Provision for income taxes (at 26%)

$3.1 billion

Net income

$8.7 billion



Source: Author's calculations.

That translates into earnings per share guidance of approximately $9.18. That's a whopping 25% lower than the $11.6 billion in net income and $12.30 in EPS that Apple put up in the previous March quarter. Again, Apple's guidance fell short of the $11.67 EPS that the Street was modeling for.

One of the fears coming into the December quarter release was that Apple would put up negative earnings growth based on its guidance. The company was largely able to avoid that, and net income was actually a hair higher last quarter to reach a new all-time record, while EPS was down $0.06 due to share dilution.

It was the best of times
The biggest contributor to this predicted decline is gross margin. The midpoint of guidance calls for gross margin of 38%. However, the year-over-year gross margin comparison deserves some additional context. The previous March quarter saw Apple's highest gross margin ever, so any comparison is going to stack up unfavorably.

Source: Earnings releases. Calendar quarters shown.

Not only is a 47% gross margin for a company with substantial hardware sales absolutely insane in the first place, but also arguably unsustainable. That being said, as Apple works its way down the cost curves of all of its newly redesigned products, gross margin should bottom out soon and rise again.

Whether or not it can ever achieve such a high level of gross profitability again remains to be seen, and it will also be a direct function of how frequently Apple decides to refresh its product cycles (which appear to be accelerating) and whether or not it moves downmarket with a lower-cost iPhone, among many other variables.

In absolute terms, it's not as if a 38% gross margin is bad by any measure, and plenty of other hardware-related companies remain envious.

In sickness and in health
If investors take guidance literally, then the outlook is disappointing relative to expectations. Now, more than ever, Apple's guidance is actually worth paying attention to, for better or for worse. Right now, that's worse.

As traders dump their Apple shares en masse, will you have the resolve to hold your ground -- or possibly buy more? Emotions aside, Apple's growth story is far from over and it still has massive opportunities ahead. We've outlined them right here in The Motley Fool's premium Apple research service, and it may give you the courage to be greedy when others are fearful. If you're looking for some guidance on Apple's prospects, get started by clicking here.

Read/Post Comments (2) | Recommend This Article (6)

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 24, 2013, at 6:15 PM, SimchaStein wrote:

    Nice! A motley fool article with data. Looks grim for the stock. But, if Apple buys back shares, EPS goes up. With cost reductions EPS goes up. With new products - when?? EPS can go up.

    If FY13 closes with just $40 EPS, it's a bargain.

  • Report this Comment On January 25, 2013, at 9:28 AM, jdmeck wrote:

    Stupid Investors with unrealistic expectations.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2213886, ~/Articles/ArticleHandler.aspx, 9/28/2016 5:02:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 4:00 PM
AAPL $113.95 Up +0.86 +0.76%
Apple CAPS Rating: ****