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.