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2 Reasons Investors Were Disappointed With Apple Earnings

By Evan Niu, CFA - Apr 24, 2013 at 8:15PM

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There were good and bad aspects of Apple's earnings release last night. Judging by trading action today, investors are focusing on the bad. What were they disappointed with?

Last night's earnings release for Apple (AAPL 2.54%) was jam-packed with new information for investors to digest, both good and bad. Under the "good" column, we can file the generous new capital return program and solid results for the March quarter.

However, there are still a few items that investors are placing in the "bad" column, judging by the weakness that shares saw today. What were investors disappointed with?

Guidance
Apple's outlook for the June quarter came in below consensus. Revenue is expected in the range of $33.5 billion to $35.5 billion, while the Street is modeling for sales of $38.2 billion. On top of that, profitability is predicted to deteriorate further, with gross margin of 36% to 37%.

This will be the second quarter under Apple's new guidance methodology, and investors are now taking the company's outlook at face value following CFO Peter Oppenheimer's comments in January. Guidance for the June quarter was destined to be the single greatest challenge that investors were facing with the report. Even though Apple topped the high end of its own revenue forecast, one instance isn't enough of a sample size to formulate any patterns.

The main reason why gross margin should decline sequentially is that Apple will lose some operating leverage as revenue similarly falls sequentially. Apple's been investing very heavily in manufacturing gear and infrastructure recently, and that relatively higher proportion of fixed costs within the cost structure will put a dent in margins during a seasonally slow time.

A shift in product mix was also cited, which likely hints at continued strength with older iPhones and the iPad Mini, which carry lower prices.

"This fall"
In Tim Cook's prepared remarks, he teased that Apple's working on new offerings to introduce "this fall and throughout 2014." Many investors had been expecting new iPhone models as early as June or July, thanks to the constant Apple rumor mill. Cook's comments imply that investors and consumers may have to wait a little longer before new iPhones are released, which will give competitors even more time to chip away at Apple's market share.

Analysts picked up on the tidbit, and Cook simply declined to elaborate further.

Summertime, and the livin' isn't easy
These two notions are closely related, as later product launches would lend to muted June guidance. It'll be a slow summer for Apple, but the flip side of that is a busy winter.

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