Apple, Inc.: Profit Sails By Conservative Guidance (Again)

On Monday afternoon, Apple (AAPL -1.22%) posted yet another quarter of strong revenue and earnings growth. As expected, the iPhone led the way, with unit sales up 40% year over year to 61.2 million and iPhone revenue up 55% year over year to $40.3 billion.

Stellar iPhone sales powered Apple's profit growth last quarter. Photo: Apple

For the third quarter in a row, Apple's initial guidance proved to be far too conservative. As a result, many Wall Street analysts have underestimated Apple's rising earnings power -- and they are at risk of doing so again in the current quarter.

Strong Q2 results
For its recently ended second fiscal quarter, Apple's revenue reached $58.0 billion, up 27% year over year. This growth rate was especially impressive in light of growing headwind from the strong dollar.

Meanwhile, EPS rose 40% year over year to $2.33, easily outpacing the average analyst estimate of $2.16. Gross margin widened by 150 basis points compared to the prior-year quarter, hitting 40.8%, Apple's best gross margin figure since 2012.

Both Apple's revenue and its gross margin outperformed the guidance the company provided in January. But this shouldn't have been too surprising for Apple analysts and investors -- we've seen this movie before.

Apple likes to guide low
Apple changed its guidance policy a little more than 2 years ago to provide more "realistic" guidance than the ultra-conservative projections it had previously provided. Nevertheless, in recent quarters, Apple's initial guidance has almost always been too conservative.

Let's take a look at the projected and actual numbers for revenue and gross margin for the last four quarters.

Apple's Projected vs. Actual Revenue and Gross Margin, Last 4 Quarters

Bold=above the high end of the guidance range
Source: Apple earnings press releases 

As the above table shows, this was the second straight quarter for which Apple easily exceeded the high end of both its revenue guidance and its gross margin guidance. Moreover, it has beaten the high end of its guidance for at least one of the two metrics for every quarter over the past year.

What it means
True to form, Apple's management attributed the earnings beat to better-than-expected sales of iPhones, especially the pricier new models (iPhone 6 and iPhone 6 Plus) and models with higher storage capacity.

However, given the blowout results Apple reported in the December quarter, the growing popularity of the iPhone in China, and the timing of the Chinese New Year, I doubt this was as much of a surprise to Apple executives as they made it seem. The company simply seems to be returning to its habit of issuing very conservative guidance followed by an earnings beat.

In the end, long-term investors shouldn't worry too much about Apple's guidance policy. All that really matters is where its earnings end up. That said, in order to interpret Apple's guidance, it's important to recognize the recent pattern of conservatism.

For example, for the current quarter, Apple is projecting that revenue will fall sequentially to $46 billion-$48 billion, with a gross margin of 38.5%-39.5%. This has already led at least one analyst to say that sales of the new iPhone 6 and iPhone 6 Plus are finally slowing.

That's one possible interpretation. But it doesn't seem like the most plausible one -- usage of the new iPhones is still rising at a healthy clip. It's more likely that the projected slowdown is just a case of Apple offering guidance that is too conservative yet again. We'll have to wait for Apple's next earnings report to know for sure, though.