Fourth-Quarter Results Beat

Apple Inc. (AAPL) fourth-quarter beat the Zacks Consensus Estimate of $1.43 in earnings per share and $9.19 billion in revenue. Earnings in the quarter were $1.82 per share, which also surpassed the company’s own guidance. This increased 44% from $1.26 per share reported in the year-ago period.

Strong earnings were due to higher sales in the quarter, which increased 25% to $9.87 billion, representing the second highest revenue growth in the company’s history. The tremendous revenue growth was due to higher iPhone sales and increased Mac shipments in the quarter. Apple continues to gain market share in the three major hardware sectors – computers (with very significant gains in portables), music players and smartphones. Apple’s revenue increased in every region, including the U.S. and Europe.

The company is currently benefiting from a positive mix shift to the higher-margin iPhones/iPod business from its traditional MP3 players, as a result of which non-GAAP gross margins grew to 42.5%, a 350 basis point increase year over year. The lower-than-expected increase in component costs also contributed. The company also benefited from the ramp-up of new products. We expect Apple to post higher margins as a result of higher sales and the continued mix shift in the next several quarters.

On a non-GAAP basis, operating margin for the quarter was 30.9%, an increase of 200 basis points year-over-year and better than the company’s expectation. This was due to higher-than-anticipated revenue and gross margin.

Apple’s balance sheet remains strong. Cash and investments were $34.0 billion at the end of quarter versus $31.1 billion in the previous quarter. Apple generated cash flow of $3.1 billion during the quarter versus $2.3 billion generated in the previous quarter.

Quarterly Highlights

The company released Snow Leopard, the latest upgrade to the Apple Mac operating system in the quarter. In addition, Apple announced new upgrades to its iTunes and the iPod digital media players at a media event in Sep. The company plans to release iPhones in China via China Unicom (CHU) and entered into a three-year agreement to sell the iPhone 3G and 3GS in the country. We continue to believe that Apple will outperform its peers, given its strong iPhone sales and new product launches.

–– Apple shipped a record 3.05 million Macintosh computers in the quarter, representing a 17% unit increase year-over-year due to the increased demand for Snow Leopard. By comparison, the overall market for PCs grew just 2% year-over-year during the September quarter, based on the latest forecast published by Interactive Data Corp. (IDC). According to IDC, Apple holds 9.4% of the U.S. PC market. Mac portable sales increased 35% year over year, a very significant gain.

iPods –– Apple sold 10.2 million iPods during the quarter, representing an 8% unit decline from the year-ago quarter. However, the iPod Touch did extremely well in the quarter, growing 100% year-over-year and the company anticipates larger growth with the new $199 entry-point price tag. According to NPD, Apple’s share of MP3 players in the U.S. was over 70% in the month of September, and iPod was the top-selling MP3 player. The company continues to gain share year-over-year in most international markets.

–– The iPhone continues to be a major success for Apple. Quarterly iPhone unit sales were 7.4 million during the quarter, representing 7% unit growth over the year-ago quarter. The value of iPhones sold during the quarter was $4.5 billion, up $1.6 billion from last quarter. iPhone sell through increased 38% year over year in the quarter.


For the first quarter of fiscal 2010, Apple expects revenue in the range of $11.3 billion to $11.6 billion. EPS is expected to be in the range of $1.70 to $1.78. While this is below the Zacks Consensus Estimate of $1.92, the company traditionally gives extremely conservative guidance.

Our Analysis

Apple posted impressive results in the quarter, fueled by strong Mac and iPhone sales. The company has undergone a total turnaround from a loss of 7 cents per share in 2001 to a profit of $6.29 per share in fiscal year 2009. Apple reported strong 2009 results with increased revenue and earnings growth despite the recession, while its rivals Nokia (NOK), Research In Motion (RIMM) and Palm Inc. (PALM) are still struggling to recover from the recession’s impact on consumer spending.

We believe the company will continue to post solid results due to continued resurgence of its Mac computer line, increased sale of iPods and continued growth in iPhone sales.  

Year to date, Apple share prices have more than doubled, outperforming the peer group and the S&P 500. Apple’s valuation premium is justified, given the company’s various positive attributes and leaves room for further upside from the current levels. We have a Neutral rating on Apple’s shares.
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