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Apple Just Changed Everything

Over the past seven months, Apple (NASDAQ: AAPL  ) has been engulfed in an endless spiral of negativity. Whereas once the Mac maker could do no wrong, overwhelming investor fear about deceleration and market saturation got the best of Apple, quickly turning it into a shunned stock.

With fiscal second quarter earnings and the long-awaited cash announcement, Apple just changed everything.

Back to basics
Revenue totaled $43.6 billion, topping both consensus estimates as well as the high end of Apple's own guidance of $43 billion. Net income was $9.5 billion, or $10.09 per share. The company sold an impressive 37.4 million iPhones and 19.5 million iPads during the quarter. All of the above were better than muted expectations. Operating cash flow was $12.5 billion, and Apple finished the quarter with $145 billion in cash.

Sources: SEC filings and conference calls. Calendar quarters shown.

Gross margin came in at the low end of guidance at 37.5%. That level of profitability is down significantly from the all-time high of 47.4% seen a year ago, but quite frankly a 47.4% gross margin is a freak of consumer electronics nature. That's about the toughest comparison Apple's ever had.

Back to Mac outperformance
Mac units came in at just under 4 million, which was a modest 2% decline from a year ago. That's actually strong relative to the 14% decline that the broader PC market saw during the quarter. This relative strength was driven by strong desktop sales as Apple overcame iMac constraints, which was partially offset by declining laptop sales.

After last quarter's Mac weakness broke Apple's streak of outperforming the PC market, this quarter resumed that trend.

Nearly three years later, the iPhone 4 is still hot
Average selling prices for both the iPhone and iPad declined. iPhone ASP was negatively affected by product mix, as demand for the iPhone 4 is proving to be remarkably resilient.

Sources: SEC filings and conference calls. Calendar quarters shown.

iPad ASP was always destined to fall with the introduction of the iPad Mini.

Apple abroad
As a testament to Apple's international expansion, it just set a new record with how much of its revenue comes from abroad. International revenue accounted for two-thirds of all revenue during the quarter. The "Greater China" segment continues to march into new territory, with a record $8.8 billion in revenue including retail operations.

Sources: SEC filings and conference calls. Calendar quarters shown.

CEO Tim Cook predicted that Greater China would soon eclipse the U.S. as Apple's largest market, and that's looking ever likelier; Greater China sales are quickly closing the gap with domestic revenue.

Sources: SEC filings and conference calls. Calendar quarters shown.

The Middle Kingdom is well on its way to becoming Apple's biggest market.

What a tease
On the conference call, Cook directly acknowledged recent investor concerns: everything from decelerating growth rates to margin contractions to dropping share prices. Cook noted that Apple's share price is largely out of its control. Instead the company focuses on what is directly within its control: creating innovative products.

Intentionally or not, Cook also provided numerous teasers for investors. He said Apple has "a lot more surprises in the works," and that he's looking forward to "potential exciting new product categories." The CEO also said Apple has a lot of new offerings to introduce "this fall" and that the company will "continue to augment" its ecosystem with "new services." When asked directly about his view on the current payments market, Cook said he thinks it's in its "infancy."

Those comments all hint at widespread rumors of an iWatch, iTV, iRadio, and mobile payments solution. Cook also implies that new iPhones might not be due out until later this year, contrary to current expectations of a June or July launch. This is what Steve Jobs always referred to when he characterized Apple as a "ship that leaks from the top."

Levering up
Perhaps the biggest announcement is that Apple has more than doubled its capital return program, at long last addressing shareholder criticism about capital allocation.


Old Program

New Program


$35 billion

$40 billion

Share repurchases

$10 billion

$60 billion


$45 billion

$100 billion

Source: Apple.

As a fan of superlatives, Apple pointed out that this is the "largest single share repurchase authorization in history." That's an incredible $50 billion increase in buyback clearance. That increase alone is over an eighth of Apple's entire market cap right now. Apple also boosted its regularly quarterly dividend by a modest 15% to $3.05 per share.

In order to pursue this program without touching overseas cash, Apple is making a bold move and taking on debt. The company didn't specify details, but CFO Peter Oppenheimer noted that one of the primary benefits would be to reduce Apple's overall cost of capital, a point I outlined previously after estimating Apple's cost of equity around 10% using the capital asset pricing model. Management and the board felt that "investing in Apple was the best" option.

To that end, Apple has earned an AA+ credit rating from Standard & Poor's n, the same rating as the U.S. government. The paper that Apple issues will be safe, indeed.

Mixed feelings
Guidance for the June quarter was below consensus, with revenue expected in the range of $33.5 billion to $35.5 billion. Gross margin should be 36% to 37%, a sequential decline primarily related to the loss of leverage associated with the sequential drop in revenue. At face value, there's something to be desired up top, and investors still don't have a good sample size to fully understand Apple's new guidance methodology, even after it just topped its outlook for the March quarter. Is there still a lowball factor? Check back in three months.

There was an awful lot to take in from the release. After initially gaining upwards of 6%, shares gave up all of those gains and then some. Judging by the initial reaction, investors are still trying to digest all the new data and are likely underappreciating the new capital structure initiatives.

Some investors may have been looking for more in a regular payout, but remember that to the extent that buybacks reduce shares outstanding the repurchase activity becomes accretive to earnings per share. Apple can buy an awful lot of shares for an extra $50 billion.

Buybacks get a bad rap because they're frequently badly timed, but with Apple trading at 9.7 times earnings following the new figures, it's hard to argue that shares are overvalued and that the timing is bad. Other investors have called for a "shockingly large" buyback program, which certainly fits the bill.

It wasn't a blowout release, but it definitely topped low expectations. Even if investors were left wanting more, Apple has just changed the conversation. This ain't your grandpa's Apple.

In many ways, investors are now looking at a new Apple. The capital return program represents a dramatic shift in Apple's capital structure. At the same time, Cook acknowledged the potential of new frontiers that the company is facing and will likely tap in the near future. To help investors get a better picture of Apple's opportunities, The Motley Fool's premium research service on Apple includes numerous bonus reports that analyze different angles of Apple's business. Get started by clicking here.

Read/Post Comments (15) | Recommend This Article (93)

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 April 24, 2013, at 10:02 AM, lmaxtaylor wrote:

    The charts in the article all end with Q1'13. But the quarter that just reported is Apple's second quarter, since the holiday quarter is the first quarter of the company's fiscal year. This makes your charts confusing.

  • Report this Comment On April 24, 2013, at 10:05 AM, lmaxtaylor wrote:

    I see that you've labeled them calendar quarters, though. I didn't see that on first reading.

  • Report this Comment On April 24, 2013, at 11:23 AM, PrivInvest wrote:

    I must say I am pleased with Tim Cook's actions: say that apple will give now precise range guidance and then top it. Also, to warn not to give in about rumors regarding the chain of supply, let the rumors keep flowing and then blow out any market estimates. Move the new Iphone expected release, so that none may program their purchasing time. Right now the market is wondering, these things take time, and wondering is better than underestimating. I am wondering too and soon, I hope, he may wear his title rightfully and Apple be back to it's glories.

  • Report this Comment On April 24, 2013, at 12:19 PM, mtspace wrote:

    At a P/E of 9, Apple is priced as a company with no growth opportunities. Little of the data presented above is consistent with that story: strong growth in China, only slow erosion of iPhone margins, and old products that seem to keep going and going, like the iMac. The one downtrend illustrated above is the selling price of iPads. Instead of illustrating a problem, I believe this downtrend in average selling price is due to the success of a new product, the iPad mini, which Tim Cook suggested brought millions of new customers to the Apple fold.

    It seems to me that if Apple can manage one huge product introduction each year or two, while maintaining high customer loyalty and keeping strong volume and healthy margins on existing products, it should continue to be a healthy business for some time.

  • Report this Comment On April 24, 2013, at 4:24 PM, daveandrae wrote:


    At 400 bucks a share, the forward p/e isn't "9", it is much closer to 11, and that's being optimistic. The "downtrend" is obviously earnings. As long as the year over year comparisons continue to come in at a negative rate, the stock price will follow suit.

  • Report this Comment On April 24, 2013, at 8:39 PM, nehemia1937 wrote:

    As an AAPL shareholder how will I benefit from the share buy back program?

    And how will capital be returned to shareholders?

  • Report this Comment On April 24, 2013, at 8:57 PM, RoeBearToe wrote:

    One of the things that no one is discussing (regarding the reduced earnings over PY) is, yes, growth is slowing, but costs (in all likelihood R&D costs) are increasing. This is not necessarily a bad thing-- more like investment in future tech. The investment gives Apple a bad time if they sit on money, and a bad time if they spend it, even on things that they should be spending it on. Can't win.

  • Report this Comment On April 25, 2013, at 9:14 AM, tkeracer619 wrote:

    If you are still buying apple stock you're a fool.

  • Report this Comment On April 26, 2013, at 11:16 AM, Aaplfan2 wrote:

    I'm in apple for the long term. And love the buy back pr

  • Report this Comment On April 26, 2013, at 3:49 PM, dunce1239 wrote:

    Apple is limited in how it can return money to shareholders by our tax laws. Most of the cash is overseas where it was earned, if they bring it back for dividends the govt. will take a huge cut off the top and then tax the people who received the dividend again. They have a fiduciary responsibility to preserve stock holders money. Giving it to the govt. would be very "foolish". Hello Solyndra, Fisker, and the rest of the bankrupt crony capitalists.

  • Report this Comment On April 26, 2013, at 11:10 PM, jlclayton wrote:

    I totally understand that Apple is limited in how it can return money to shareholders if they don't want to be taxed bringing it back from overseas. However, if they can't use the money, why should I consider it as an asset to shareholders and figure it in when estimating the company's worth?

    If I have $100 in my savings account and a painting worth $1,000,000 in my vault, but I'll never be willing to do anything with it, what am I really worth realistically? Especially if the value of the painting will go down each year with inflation and I'm going into debt because I refuse to part with it.

    I realize my example does not match Apple's situation exactly, but as much as I'd like to be long on the company, I don't understand how to realistically value their cash stockpile.

  • Report this Comment On April 27, 2013, at 12:36 AM, davidmeyer1953 wrote:

    I am not buying anymore right now, but I am also not selling what I currently have. Maybe not growing but very solid company.

  • Report this Comment On April 27, 2013, at 10:33 AM, shermantr wrote:

    I have never seen an analysis that a buy back program positively affects the price of the stock. I would much rather see them use some or all of the funds for cash dividends, r and d, and strategic purchases.

  • Report this Comment On April 27, 2013, at 2:17 PM, crca99 wrote:


    You need the intermediate variable. Buy backs increase EPS, i.e., same net income divided by decreased share count = increased eps.

    If P/E multiple remains the same, increased EPS lead to increased stock price.

  • Report this Comment On April 30, 2013, at 7:20 AM, Pr0metheus wrote:

    "Cook noted that Apple's share price is largely out of its control"

    Which is why he approved a buyback program the size of McDonald's. Makes sense.

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