Apple Inc's Blowout Quarter Is Just the Beginning

Apple trounced estimates on iPhone sales, revenue, and profits. Plus, the possibility for new product releases could set the stage for a huge year.

Apr 24, 2014 at 11:25AM

Consumer technology giant Apple (NASDAQ:AAPL) had a fantastic quarter, after many predicted it would fall flat. For several weeks, analysts had been ratcheting down their estimates for this quarter in light of the fact that Apple has basically been stuck in a "muddle-through" period. With no new product releases in quite some time, and the prospect of a new iPhone on the horizon, it stood to reason that consumers would hold off buying Apple devices until later this year.

However, Apple's quarter was an absolute home run. The company handily beat estimates on revenue and profit, and gave an optimistic third-quarter outlook. In addition, Apple announced a plan to lavish investors with cash via an expanded stock buyback and a dividend increase. The company even plans to split its stock, spurring further excitement. With a blowout quarter in the rearview mirror and a slew of new product releases on the horizon, Apple has set itself up for a huge year.

Strong performance across most products
Among its key product categories, only iPads lagged estimates. Apple sold 16.35 million units, falling below expectations of more than 19 million. However, this was more than offset by extremely strong iPhone sales. Apple sold 43.7 million iPhones, well ahead of the 38.45 million expected.

Apple's iPhone sales, which had lagged in recent quarters, easily beat estimates and were the primary contributor to such strong results. In all, Apple posted $45.6 billion in revenue and $11.62 in earnings per share. Average analyst expectations called for $43.53 billion and $10.18 per share in profits. On a year-over-year basis, Apple produced 4.5% revenue growth and 15% earnings growth. Essentially, analysts expected little to no growth versus the same quarter last year.

Importantly, Apple's gross margin expanded by nearly 2 full percentage points, which is a crucial indicator that costs are finally getting under control after the company's gross margin had contracted in recent quarters. Plus, Apple's strong EPS growth demonstrates the power of its significant share buyback program.

Boatloads of cash
Both growth and income investors got what they wanted out of Apple. The company plans to split its stock 7-1, increase its annualized dividend by 8% to $13.16, and expand its stock buyback authorization by $30 billion. Overall, Apple plans to increase its total capital returns to $130 billion, up from $100 billion previously.

Apple is getting serious about funneling more cash back to shareholders. This makes sense, since the company literally has more cash than it knows what to do with. Apple's massive cash pile has sat on the balance sheet, earning virtually nothing for investors. By investing in new products, increasing share buybacks, and raising dividends, Apple is demonstrating a commitment to rewarding shareholders.

Apple's cash hoard fell after the most recent quarter, from $159 billion to $151 billion. It wouldn't be a surprise to see this trend continue, as Apple was not getting credit for its mountain of cash. Despite having upwards of one-third of its entire market capitalization in cash, Apple's earnings multiple was well below both the market and most other large-cap technology stocks.

The bottom line
Apple had no bad news in its most recent earnings report, which reversed a long-running trend of quarterly disappointments. The company trounced estimates on iPhone revenue and profit, and only disappointed on iPads. Since the iPhone is Apple's most important device, such strong performance more than offset tepid iPad sales.

Additionally, Apple is rewarding shareholders handsomely. Management announced a stock split, a dividend increase, and expanded its stock buyback program. Moreover, Apple handed in a current-quarter outlook that was better than expected. This implies that the company is optimistic about what the future holds, which will likely entail a new iPhone, a possible television, and maybe even a wearable device. Add it all up, and Apple's blowout quarter may be just the beginning of great things to come.

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Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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