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Wall Street Panics, Apple Pays: Measuring Q1 Earnings

measure appleWith markets in panic mode, the “R” word being used at the water coolers and the Fed pulling the ripcord on an emergency parachute, it was a bad day for any company to release earnings.  It was an especially bad day to share any comments that were cautionary, ambiguous, or anything but outrageously optimistic.  Apple shareholders paid the short term price.

Not five minutes into Apple’s earnings conference call After Hours traders, seizing on cautious, conservative lowered guidance, drove the stock down another ten percent.  The unfortunate thing is, the response is extreme, more a consequence of the economic climate than the actual news.

Apple has a history in recent years of being conservative with their guidance.  Sometimes they like to under promise and over deliver.   Listen to the conference call, or read the transcript and you’ll hear them repeatedly talking about making forecasts they can “confidently meet.”  CFO Peter Oppenheimer said it explicitly, “[Apple is] giving very strong guidance.  We are very confident we will achieve it.” That doesn’t mean they can’t, or won’t, exceed their conservative estimates.  Just the opposite, it means they will hit them and should exceed them.   In fact, if their recent history is any guide: that’s exactly what they’ll do.

Just this past summer, Apple similarly attempted to reset analyst and investor expectations.  When they issued third quarter guidance, they forecast dramatically decreased margins and profits as a consequence of the then ambiguous product launch. The earnings forecast they provided was just 65cents a share.  The actual numbers when the fourth quarter was reported: $1.01/share, well ahead of the low expectation or Wall Street’s consensus of 86c/share.  Apple blew away their numbers after saying they quarter might disappoint.

Today, Apple forecast Q2 profits of 94c/share, thirteen cents less than analysts’ expectations of $1.09/share.  They also projected revenue would be short at $6.8b versus analyst consensus of $6.99b.  Wall Street was looking for more but the differences in these forecasts are actually less than the shortfall projected in Q4 of 2007 (which proved a complete false alarm).

It’s difficult to believe this adjusted guidance is anything different, or there is more reason for concern then the projections made about Q4 2007.  Just look at the numbers released today for Q1:

•The company had the highest sales and earnings in their history

•Net profit for the quarter ended Dec  29 was up 57% to $1.58b ($1.76/share).  Net income for the same period last year was $1b ($1.14/share).  Analyst expectations were $1.61b (Reuters).

•Gross sales for Q1 were $9.61b, easily ahead of Wall Street expectations of $9.47b and a 35% increase over $7.1 from a year ago.

•Gross margins were up to 34.7% from 31.2% last year.

•In the Mac category, the company shipped 2,319,000 computers, a 44% growth in unit sales and a 47% growth in revenue.

•iPod growth was the only dark spot, and was more just a speck.  Growth was slightly lower than most expectations at just 5% in units (22.12million units in the quarter) but on the positive, the new product line brought a 17% rise in revenue versus the same period last year.

In addition to that momentum, Apple’s channel inventory (Channel Inventory is the number of weeks of product supply they keep in inventory) came up short in Q1.  That’s not a sign of a storm on the horizon.  It’s a sign of growth.  It means, instead of maintaining four to five weeks of products in inventory, demand this last quarter shrank inventory to a point where Apple had less product available for sale than they forecast. 

The Mac business is booming.  Demand for the new Macbook Air will likely further fuel that in some markets.  It’s hard to envision all the momentum pulling back far enough to justify the depth of Tuesday’s sell off; even with questions looming.

Is there a slowdown in store?  Will consumer spending retreat and hurt Apple’s sales? Will macro issues in the global economy dampen Apple’s successes? … Maybe, on all accounts.

Apple’s second quarter is sure to show some seasonal adjustments after the holiday sales rush of Q1.  The key question is: is the guidance really worth worrying about or, given the track record, are CFO Peter Oppenheimer’s financial forecasts a little bit like the boy who cried wolf when there was no wolf in sight? 

I’d take him at his word. “[Apple is] giving very strong guidance.  We are very confident we will achieve it.”  

That not just confident, it’s “very confident.”


Related Articles
Apple Q1 Earnings Call Transcript (via Seeking Alpha)
Apple Q4 2007 Earnings
Apple Q3 2007 Earnings
Apple Macworld Announcements
The New Macbook Air: A first look


More detailed press coverage of Apple’s finances can be found at:
Yahoo Finance
Google Finance

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