(By Rich Bieglmieir) Apple Inc.'s
) earnings disappointed, revenues were light versus expectations, and forward guidance wasn't as robust as Wall Street hoped. In the after-market and pre-market trading, shares of the tech bellwether are down around 5%.
iStock digested the company's conference call and financial reports so you don't have to read them. For the most part, the quarter was excellent. Year-over-year quarterly sales grew by 23% and net income by 20%.
Product wise, the iPad and Macs did better than expected, while the iPhone fell short due to "rumors and speculation." All three business segments grew. Meanwhile, demand for iPods was off 10%. Apple stores saw traffic increase by an average of 17,000 per store. The brand is healthy.
So what went wrong, and is it correctable?
CEO, Timothy D. Cook says European sales were essentially flat year-over-year. To give you an idea how badly things must be deteriorating on the continent, in the previous quarter and six months, sales in the region grew by 46% and 51% respectively.
The EU accounts for roughly 23% of Apple's sales and is likely to linger as a problem. A residual effect of the fall of the Euro is the strengthening of the US dollar. In the quarter reported, a buffed George Washington cost the titan $200 million in revenue, net of hedges.
This, too, will continue to weigh on AAPL's bottom line. CFO, Peter Oppenheimer tossed out this doozy in the conference call, "The U.S. dollar has strengthened against most currencies around the world including the euro, Brazilian reis, the Chinese RMB, British pound, Australian dollar, Canadian dollar, Mexican peso and Swiss franc. We expect this to have an adverse impact to revenue in these countries in excess of 400 million sequentially net of our hedges."
The dollar and stock based compensation expense will damage margins as management says it will fall from 42.8% to 38.5%.
iStock sees a couple of potential yellow flags within the financial statements. Inventories, selling, general and administrative costs (SGA), and account receivables are growing at a faster pace than revenues and net income.
As we already mentioned up top, sales growth came in close to 23%; meanwhile, from September 24, 2011 to June 30, 2012, inventories rose 44.5%. In the same timeframe, accounts receivables jumped 42%. For the three months ended June 30, 2012, SGA moved up 33% and 34% for the nine month period.
These aren't definitive signs that trouble is ahead, but iStock would prefer to see the numbers in line with revenue growth, not exceeding it.
What's right going forward?
The company says they are "maniacally" focused on having the best products on the market. Unlike our distaste for rising inventories and the like, we are happy to see research and development (R&D) costs outpacing revenue growth – especially with Apple's history of innovation.
In the June quarter, R&D spending increased 40% compared to the same timeframe in 2011 and grew 39% for the last nine months. Something big must be on the way, and we expect to see it for the holiday shopping season – just thought we would do our part in adding to the rumors and speculation.
The June quarter didn't include iPad sales in China. The issues holding it back have been resolved, and shareholders should benefit as sales for the device heat up in the world's most populated country.
iPad use in education is growing like weeds as Mr. Cook says, "The adoption rate of iPad in education is something I'd never seen from any technology product in history. Usually, education tends to be a fairly conservative institution in terms of buying, and we're not seeing that at all on the iPad."
Finally, the CEO says they see enough traction in Apple TV (4 million units sold and 170% growth year-over-year) that they will continue to invest in it as "we're not willing to keep around projects that we don't believe in."
iStock's Apple Inc. (AAPL) outlook:
The stock is likely to trade down near its 50-day average of $580 today. If the 50-day benchmark doesn't hold, the next wave of support comes to the rescue around $560. The final break-wall before free fall is at $530ish; although, minus a complete global meltdown, iStock doesn't expect to see AAPL trade anywhere near there off of Tuesday's eps results.
On a forward P/E basis relative to the company's guidance of 20% growth in sales and profits, a forward P/E of 11.06 – and going lower today – is a steal.
The quarter wasn't a complete bust, and there are some catalysts to drive the stock in the second half of the year. However, as we have seen with Europe, if the global and US economies stall, iPad and iPhone sales will suffer.
Investors looking to take advantage of any weakness might consider taking a half position if the stock remains within striking distance of the 50-day average. If the stock falls to $560ish, buy the other half, and invest in some protective puts if it breaks $550.