Apple's FQ2 Results: A Different View

There are a variety of ways to view Apple's 2nd fiscal quarter results. A classic approach is to primarily review the obvious stats:

For the three-month period ended March 27, 2010 Apple reported an almost 49% increase in revenue to $13.5 billion and an 86% increase in earning per share to $3.33. For the six-month period ended March 27, 2010 Apple has reported a year-over-year increase in revenue of almost 40% to $29.18 billion and a 63% increase in earnings per share to $7.00. 

A different approach to viewing the numbers for the March quarter includes looking at the numbers on a multi-year growth plane. In FY '09 Apple realized about $43 billion in revenue. As I suggested in early February, Apple will reach $60 billion in revenue this fiscal year. There's a possibility, if not a probability, Apple will reach $100 billion in annual revenue within two years. The Apple iPad, which has not been a factor in prior quarters, could add 20% to the June quarter's revenue with rising revenue contributions over the next several quarters. 

Apple is currently trading at a p/e multiple of 23x trailing 12-month earnings. At Apple's current rates of revenue and earnings growth, turbo-charged for the remainder of the calendar year from iPad sales, the company's forward p/e multiple drops well into the low teens. This discount to 12-month forward earnings creates a compelling argument for accumulation of Apple shares.

In the March quarter European revenue sources represented 30% of March quarter revenue. Operating segments exclusive of the Americas and Apple retail equalled almost 51% of the quarter's revenue take and represented 46% of Macintosh unit sales. In the March quarter Apple grew its global revenue category inclusive of iTunes store sales by 27% year-over-year and sequentially 12% compared to the holiday quarter. 

The emergence of the Apple iPad and its significant contributions to revenue and earnings will mask the growth in revenue and contribution to earnings of the iTunes store franchise. However, this revenue category will add favorably to gross margins in the quarters ahead. For Apple it's not an issue of hardware sales alone. It's a matter of constituent and ancillary revenue sources not only increasing revenue, but increasing the yield on hardware device sales on a recurring basis. iTunes and related revenue should continue to grow at or above the March quarter's pace for the foreseeable future. 

As I posted last week,  the story that's emerging is one of a multi-stream revenue system comprised of complementary hardware product lines. Significant revenue sources are emerging that will transcend the underlying hardware product lines and provide for both revenue and earnings growth as hardware devices adapt and change to meet the needs and desires of users. If there's one constant in the products the company will release over the next few years is the continuing monetization of hardware sales through the sales of content and services. 

Management's forward guidance (top range of the estimates) suggest revenue growth in the June quarter of just under 38% and earnings per share growth of about 19%. In other words the company represents in the June quarter earnings per share will rise at one-half the rate of revenue growth. The math used in the calculations must be atypical.  There's no way, based on recent quarterly results, that earnings per share growth will fall to 50% of the rate of growth of revenue. No matter slightly lower margins on iPad sales, Mac sales continue to perform well and the iPhone will continue to contribute both hefty margins and and strong gains for the top and bottom lines. Even with an expectation of iPad revenue contributing 20% of the June quarter's totals, gross margins should remain high with constituent and ancillary revenue streams contributing to the performance. 

To value the company's shares moving forward, one must view the revenue and earnings growth as they compound over the next two years. It's not an issue of Apple's growth. It's an issue of how quickly growth with be rationally factored into the share price. Last week I published what I consider moderate price range expectations for the shares. I expect the share price to cross $300 no later than late July and $400 per share no later than next April. 

Robert Paul Leitao

AAPL 12-Month Target Price (Updated 04/24/10)

After reviewing AAPL's March quarter performance I've updated my 12-month price target to include a price range between $405 per share and $440 per share. I have an interim anticipated trading range of between $300 per share and $325 per share by the end of July 2010. 

For the first six months of fiscal year 2010 Apple has realized revenue growth of about 39% over the prior-year period and earnings per share growth of about 63% during the same period. I expect robust rates of revenue and earnings per share growth to continue through the June quarter. 

Mitigating higher rates of revenue and earnings growth in the June quarter is the delay of the international debut of the iPad until late-May 2010.

Robert Paul Leitao

AAPL's 12-Month Trailing EPS and Revised P/E Multiple

Following the release of Apple's FQ2 performance earlier this week I have the company's trailing 12-month eps at $11.78 per share and the p/e multiple at Friday's closing price of $270.83 at 23 times trailing 12-month earnings. 

No matter this week's dramatic share price appreciation, Friday's closing price in my view does not reflect anticipation of strong revenue and earnings growth for the balance of FY 2010 that ends in September.

This low p/e multiple relative to current rates of revenue and earnings growth (32% growth in revenue in the March quarter and eps growth of 86%) suggest the shares should more than hold this week's gains with additional appreciation potential over the next six months as clarity concerning iPad sales is provided and accelerating growth in iTunes-related revenue for Apple becomes more obvious. 

Robert Paul Leitao

Apple's 2nd Fiscal Quarter Results: Looking Beyond The Obvious

I will do a more thorough review of Apple's 2nd fiscal quarter results this weekend. In the meantime there are a few issues that really "jump off the pages" when looking at the  quarter's revenue and unit sales results. 

Much of the media coverage on Apple focuses on hardware products and unit sales. The story that's emerging is one of a multi-stream revenue system comprised of complementary hardware product lines. Significant revenue sources are emerging that will transcend the underlying hardware product lines and provide for both revenue and earnings growth as hardware devices adapt and change to meet the needs and desires of users. 

For example, in the March quarter Apple grew its revenue category inclusive of iTunes store sales by 27% year-over-year and sequentially 12% compared to the holiday quarter. This revenue category represented roughly 10% of the quarter's revenue results.

Apple doesn't delineate sales of iPod models. But it's no wonder why iPod revenue grew 12% year-over-year despite a 1% drop in unit sales. The importance of the iPod touch not only to iPod unit sales and revenue but also to the iPhone OS eco-system should not be overlooked. As a percentage of revenue for the iPod line, the touch has become one of Apple's most misunderstood products. Similar to the way the Apple iPad is more than an oversized iPhone or iPod touch, the touch is much more than an iPhone without phone functionality. It extends the iPhone OS eco-system to consumer demographics the iPhone hasn't reached and may see increasing sales as a complement to the Apple iPad.

One of the challenges faced by AAPL analysts (pros and bloggers) is we tend to look at Apple and its prospects for growth from US-centric vantage points. Non-retail store revenue from Europe represented 30% of March quarter revenue. Operating segments exclusive of the Americas and Apple retail equalled almost 51% of the quarter's revenue take and represented 43% of Macintosh unit sales. Misunderstanding Apple's growth potential outside the US and the appeal of Apple's emerging revenue system leads to underperforming estimates of revenue and earnings.

Apple's fastest growing regions are growing with what might be best described as a post-Macintosh consumer attitude. While the Macintosh is Apple's oldest and most established product line, it's as apt to benefit from consumer adoption of the iPhone and iPad at least as much as the Mac leads consumers to other Apple products. 

As I said, the story that's emerging is one of a multi-stream revenue system comprised of complementary hardware product lines.

Robert Paul Leitao

Thank You!

Thank you to all of the active members of the Apple Finance Board for your support, feedback and camaraderie. Entering a public comparison of AAPL earnings estimates against many of the best minds on Wall Street was something I figured was akin to singlehandedly taking on the 101st Airborne Division armed only with a pitchfork. A suburban husband and father equipped with an iMac, pad of paper and Internet access to read the news, download financial statements for analysis and moderate an AAPL-discussion board are my claims to resources. Yes. I have a background in finance and accounting and a passion for the intuitive and revolutionary products produced by a company that takes its name from a fruit. Still, this was a challenge by nature I'd ordinarily avoid. I didn't expect my estimates to finish at or around the top. At best I expected a respectable showing. I'd like to thank each of you for being that added resource through your camaraderie and support that prompted me to publicly post estimates and do the hard work involved to produce them.  

Congratulations to Turley Muller on his top placement, to Daniel Tello for his excellent showing and his ongoing examples of hard work and diligence, and Patrick Smellie , Andy Zaky and Alexis Cabot for their fine showings and making the outcome a virtual shut out for the bloggers and unaffiliated analysts. A special thank you to Philip Elmer-DeWitt for not only including my numbers in his comparisons but also for choosing to use my given name. It was a bit startling to see my name in digital print outside of ATPM, the few comments I make on Apple 2.0 columns, and years ago the financial reports and columns I wrote for The Mac Observer. Perhaps for too long I've hidden behind that thin veil of pseudo anonymity that I crafted with the DawnTreader moniker. 

The results of the analyst comparisons can be found in this Apple 2.0 column.

Sincerely, 

Robert Paul Leitao (aka DawnTreader)

AAPL FQ2 Results: Bloggers Beat The Street

Apple reported extraordinary results for the company's 2nd fiscal quarter ended in March. I'll be commenting on and analyzing those results over the next few days. In the meantime I'd like to make mention tonight of results of a different kind. 

Philip Elmer-DeWitt, author of Fortune Brainstorm Tech's Apple 2.0 invited bloggers and unaffiliated analysts, including myself, to post estimates of Apple's 2nd fiscal quarter results alongside estimates of Wall Street analysts. While all of us (bloggers, unaffiliated analysts and Wall Street analysts) did not anticipate the magnitude of Apple's success in the 2nd fiscal quarter, the "rag-tag group" as he descriptively put it beat the estimates of Wall Street's best. 

The results can be found in this Apple 2.0 column. I'll be back in a few days with an in-depth look at Apple's performance in the quarter. 

Posts At Eventide Twitter Page

I've created a new Posts At Eventide Twitter page exclusively for AAPL-related discussions. I don't plan on advertising the page outside of this blog and a post in the Apple Finance Board. It's for AAPL-related communiqués only to and from the small group of bloggers, analysts and journalists I've come to know and respect.

I'll be logged on to Twitter throughout the day tomorrow as the market turns its attention to all things Apple. 

AAPL 2nd Fiscal Quarter Estimate - The Numbers

My estimate of Apple's 2nd fiscal quarter performance is based in part on continuing strength of Mac sales, in particular the popular iMac. I expect the iMac to be an industry standout  in the March quarter for a desktop PC, regardless of make or operating system. Though the Mac portable line is expected to be refreshed this week, sales of the current models will have more than held their own in the March quarter. I estimate the March quarter will deliver about a 36% gain in Mac unit sales in year-over-year comparisons.

The iPod line of digital music players, led by the iPhone OS-based iPod touch, will see only a slight year-over-year decline in unit sales. The iPod line will have benefitted from strong post-holiday sales in first few weeks of January.

I estimate iPhone units sales fell just shy of doubling the prior year's sales performance with strong overseas sales providing the greatest lift in unit sales growth performance. 

In all, I expect total revenue of just over $12.8 billion, operating income of about $3.645 billion, net income of about $2.586 billion and earnings per share of $2.80 based on 924 million diluted shares in the tally.

Mac units		3,010,000
Mac Revenue		3,984,086,853
iPhone Units		7,450,000
iPhone revenue		4,756,335,126
iPod Units		10,800,000
iPhone revenue		1,746,437,768
Other		2,325,000,000
Total Revenue		12,811,859,748
COGS		-7,687,115,849
Gross margin - 40%		5,124,743,899
Operating Expenses:
Research and Development		-377,949,863
SG&A		-1,101,819,938
Total Operating Expenses		-1,479,769,801
Operating Income		3,644,974,098
Other Income		50,000,000
Income before Tax Provision		3,694,974,098
Provision For income Taxes - 30%		-1,108,492,229
Net Income		2,586,481,869
Diluted Shares		924,000,000
eps		2.80

AAPL 2nd Fiscal Quarter Estimates (Preliminary Overview)

I'm working on my estimates for Apple's 2nd fiscal quarter for publication mid-week. In all I expect the three-month period that ended in March to be the strongest 2nd fiscal quarter in the company's history and perhaps the 2nd best quarter overall, bested only by the 1st fiscal quarter's results that included high seasonal sales of Apple iPods. In preliminary analysis the March quarter performance appears to be similar to Apple's 4th fiscal quarter of 2009 (the quarter ended in September 2009). This alone makes the results remarkable. Apple's 2nd fiscal has traditionally been the weakest quarter of the year, sandwiched between the holiday quarter and the spring educational buying season. 

I expect the Apple iMac to emerge as a clear sales winner in the quarter and to make a strong sales showing for any line of desktop PCs, regardless of make and operating system. The iPhone will have held its own in an increasingly competitive smartphone market and the iPod line will show a bit of relative strength led by the popular iPod touch. Although the iPod line has diminished in its percentage contribution to overall revenue and earnings, the Apple iPod touch, as a device component of the iPhone OS eco-system, will buoy the line's results for the quarter.

The Apple iPad will not be a factor in the 2nd fiscal quarter estimates due to its April 3rd debut. My 2nd fiscal quarter estimates will be published on this blog mid-week.

AAPL April Expectation: $258 Per Share

Apple (Ticker Symbol: AAPL) closed on Tuesday at $239.54 per share while setting a new all-time high of $240.24 in intra-day activity. No matter the number of Apple iPads sold in the first few days following the product's release last Saturday, the direction AAPL will follow over the next few weeks has more to do with the anticipated March quarter results to be released on April 20th than it has to do with sales of the company's latest hardware device. While a successful launch of the iPad will no doubt benefit the share price, an impressive March quarter will positively impact the share price even more.

At today's closing price Apple is trading at about 23.33 times trailing 12-month earnings per share of $10.27. I expect earnings per share of $2.75 or more for the March quarter. Using $2.75 per share for this example, Apple's trailing 12-month earnings would rise to $11.20 per share. Maintaining a price to earnings multiple of about 23, based on Match quarter results the share price should reach $258 or more per share by the end of April 2010. This suggests a further 7.5% rise in the share price from today's close by the end of this month. 

On Thursday Apple is expected to announce iPhone 4.0 software for its iPhone OS-equipped devices. While news of the OS update might move the share price higher, this news might have a more subtle effect of helping the shares maintain recent gains ahead of the March quarter earnings release. 

Apple 2.0: Philip Elmer-DeWitt Hits A Content Grand Slam

On this hectic Easter Sunday evening, in the brief moments between dinner preparation and time with family and friends, I came across Philip Elmer-DeWitt's latest column posted earlier tonight. I recommend this column for readers of Posts At Eventide.

As a writer and student of economics, this Apple 2.0 column addresses many of the themes concerning Apple's approach to the marketplace and the company's success developing new products that I focus on in my posts in this blog.

The PC industry is quickly losing its economic clout and personal computers as we have known and used them are losing significance in our society. Handheld devices such as the iPhone and other smartphones and now the Apple iPad are transforming the way we communicate and the way we access and consume digital content. 

I'll be back later this week with a look at the iPad's success and with estimates of how much this new product will impact Apple's financial results. In the meantime I recommend Philip Elmer-DeWitt's latest column for Sunday night reading. 

As the 2010 Major League Baseball season opens (and many of us have come to enjoy MLB's iPhone OS apps), I consider this Apple 2.0 column a comparative grand slam in these early days of reporting on the iPad's significance to our society, its economic impact on the PC and digital device industries and its all but certain overwhelming global success.