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July 22, 2008

Apple Guidance Is The Problem

Listed below is my live commentary which was posted on RealMoney.com from last night on Apple from before and during the conference call. Without reviewing analyst commentary from the morning after I'd add a couple of things.

On September quarter guidance, the gross margin would be the lowest since December Q 2006. The operating margin would be the lowest since September Q 2006. We'll see but that seems awfully conservative to me even accounting for a historical sequential downturn in gross margins in the September quarter.

Lots of questions on the 2009 gross margin guidance of 30% all of which surrounded Apple's pricing strategy. Seems to me quite clear that some major new products and maybe new price points are coming in that time frame. We already know that in the September quarter a "future product transition" will hurt gross margins (I'll bet that one is a big price cut on the touch). I'll repeat what I said last night: EPS estimates for next year are too high even if the new gross margin guidance is a 100-200 basis points too low unless new products ramp revenues materially beyond current estimates. Management is hinting this is the case driven by a new go to market strategy. We'll see.

On the stock, I have t admit that I am less optimistic than I have been in some time. These transitional issues on profitability seem to limit upside surprise potential. Then again, as I type this the stock is under $149. But if 2009 EPS are at consensus of $6.28, these issue make the premium multiple a little tougher to swallow. A big beat in the September quarter and/or the excitement surrounding these hints on new products are required now to get the stock turned back up.

Last night's comments...

....4:52 PM: It's all about guidance. The assumptions to get to the revenue guidance seem conservative given the usual sequential uptick in Mac sales for the back to school season. Then again, I really have no idea what to book for iPhone revenue. Similarly at the EPS line how to project margins is complicated by the gross margin related to component costs and again the iPhone. Given the guidance it will have to be clear that it is very conservative to reverse the after hours slide. The quarter itself looks very good. I have only a couple of questions. First, inventories are up. That very well could be iPhone stocking but I'd like to know for sure. Second, the iPhone ASP is just $152. I figured it would be flattish vs. a year ago instead of $152 vs. $159. Third, while ASPs look fine they are not as high as I would have projected. I'll trade a little price for a lot of units given the market share story at Apple but this is something that will come up on the call.

5:34 PM: The stock dipped a few more bucks just after a statement on the conference that "Steve's health is a private matter." Given the setup of the question allowing for a "Steve is fine" answer this is problematical to the rumor mill.

Also of interest and more important to me is a comment that 2009 gross margin will be 30%. Even if this is low by a few hundred basis points as gross margin guidance has been recently unless revenues jump sharply above current estimates, EPS forecasts would seem too high. This comment may have also contributed to the second drop in the stock referenced above. The gross margin guidance was stated due to product development related investments -- "state of the art new products that are competitors will not be able to match." Hmmm.

Posted by Steve Birenberg at July 22, 2008 09:54 AM in AAPL