Apple stock

It's official: On a revenue basis, Apple (NASDAQ:AAPL) just capped its best-ever fiscal third quarter. But even at its "best," Apple still couldn't completely live up to Wall Street's lofty expectations.

To be sure, Apple's quarterly revenue rose "just" 5.9% year over year to $37.4 billion, good for a new fiscal third-quarter record and near the high end of Apple's own expectations for revenue between $36 billion and $38 billion. That translated to 11.6% growth in net profit to $7.7 billion and -- thanks largely to Apple's share repurchase efforts -- 20% growth in earnings per share to $1.28. Analysts, on average, were looking for lower earnings of $1.23 per share, but on higher sales of $37.99 billion. Apple stock initially fell around 1% in after-hours trading.

Meanwhile, Apple's gross margin increased to a healthy 39.4%, also above its guidance range for between 37% and 38%, and up from 36.9% in the same year-ago period. 

Here's what held back Apple's top line
So why did Apple "miss" on revenue? The primary culprit was a 19% drop in iPad unit sales to just under 13.3 million. As a result, iPad revenue dropped 23% year-over-year to roughly $5.9 billion.

At the same time, Apple CEO Tim Cook took the opportunity in the subsequent conference call to highlight their recent enterprise app development partnership with IBM (NYSE:IBM) as a potential catalyst for tablet growth. Specifically, Cook says, mobile penetration in the business market is still low at around 20%, compared with around 60% in the consumer segment. This creates "substantial upside for tablets in business," he notes, where IBM and Apple's respective offerings are largely complementary.

Next, Apple sold 35.2 million iPhones last quarter -- including 48% unit growth in Greater China -- for revenue of $19.75 billion, or respective year-over-year increases of roughly 13% and 9%. And as Apple also management reminded investors during the call, ComScore's latest smartphone subscriber base figures show that the iPhone continued to gain market share in the U.S., increasing from 41.3% to 41.9% in its most recent measurement period.

Nonetheless, Wall Street went into the report slightly more optimistic in modeling iPhone sales of roughly 35.9 million. But any way you slice it, I think investors should view these as solid results, given both an abundance of new product rumors and reduced channel inventory for both iPad and iPhone product segments.

Apple also saw strength, with 18% growth in Mac unit sales to a new June quarter record of 4.4 million, which translated to revenue of $5.5 billion. This is particularly impressive, considering the contracting market in which Macs currently operate, and was helped by 39% growth in Mac sales for Greater China. In addition, iTunes/Software/Services revenue grew a solid 12% to $4.9 billion -- and nearly doubled in Greater China -- while Cook also noted that iTunes billings rose 25% to an all-time quarterly high of $5.4 billion. As fellow Fool Evan Niu pointed out only yesterday, this should only further reinforce device sales as Apple's high-margin digital ecosystem remains as healthy as ever.

Finally, Apple ended the quarter with $164.5 billion in cash and marketable securities, including domestic cash of $26.8 billion, and $137.7 billion overseas. Cash flow from operations came in at $10.3 billion, and $8 billion was returned to shareholders through dividends and share repurchases. So far, Apple has moved on $74 billion of its massive $130 billion capital return program, with six quarters remaining to its completion.

Coming up next
On the guidance front, here's what Apple sees for the current quarter:

  • Revenue between $37 billion and $40 billion.
  • Gross margin between 37% and 38%.
  • Operating expenses between $4.75 billion and $4.85 billion.
  • Other income/(expense) of $250 million.
  • Tax rate of 26.1%.

What can we observe from those numbers? First, note that the revenue range has widened to $3 billion from $2 billion, thanks to what management described as "many moving parts" going into next quarter -- a likely reference to the widely expected refresh of Apple's product line-up later this year. By comparison, Wall Street was looking for average fiscal fourth quarter revenue of $40.44 billion.

On the gross margin front -- and keeping in mind Apple has exceeded its own expectations for three consecutive quarters now -- Apple CFO Luca Maestri reiterated that this quarter's superior numbers were a pleasant "surprise" to them, as many operational variables simply fell in Apple's favor. In the end, though, I agree with Maestri when he insists investors should be pleased with next quarter's expected gross margin range.

In the end, this quarter may not have lived up to analysts' enormous expectations. But they were solid by any other measure. As a result, I'm still convinced that patient, long-term investors have no reason to sell their Apple shares.