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April 21, 2009

Apple Earnings Preview: Should Be Good But It's Always About Guidance

Apple reports its 2Q09 results after the close on Wednesday. As usual with Apple the stock will react to guidance unless the quarterly numbers are a major surprise. The stock has rallied sharply this year, up about 40%. This dramatically raises the expectations bar for short-term traders. In addition, good results and a huge stock pop for Research in Motion has raised the bar for Apple.

There has been little movement in Apple estimates over the last 90 days. Consensus estimates call for EPS of $1.09 on revenues of $7.94 billion. Nevertheless, commentary about the quarter has grown increasingly positive amid indications that Mac and iPhone sales have held up better than expected given seasonality and the tough consumer economy.

I maintain a simple spreadsheet on Apple that has been very helpful to me in gauging quarterly reported numbers and guidance. I can easily see the quarter coming in as high as $7.93 billion in sales and $1.16 in EPS. This would be inline with estimates on revenues and above consensus on EPS. My model likely is more positive on gross margins where I am looking for 35% vs. guidance of 32.5% and most estimates between 34% and 35%. I would not be surprised to see upside on revenues emanating from iPhones or better than expected iPod ASPs due to the touch. It should be noted that projecting iPhone revenue is a tricky exercise. EPS at or above the $1.23 high estimate is not a major stretch.

To satisfy the street, I think Macs must come in at 2.1 million plus units, iPhones at 3.8 million units, and iPods at 8.5 million plus units. Much will be made about a 20% drop in iPod units but I have always advocated for the idea that iPhones are self-cannibalizing iPods in a positive manner for Apple shareholders.

The guidance commentary may give some insight into the timing of a new iPhone model. If it ships in the June quarter, it would seem there would be some upside to revenue although it is important to remember that iPhone revenue is recognized over 8 quarters. Current consensus for June is revenue of $8.26 billion and EPS of $1.11. These estimates are up very slightly from March quarter estimates. This sequential pattern is consistent with the last few years. As a result, guidance for June will need to be close to flat sequentially to satisfy the street. Apple always guides conservatively so numbers 5% or so below whatever is reported in 2Q09 may probably good enough. Anything at or above what is reported, which is likely to be above the current 3Q estimate, should be greeted favorably.

Apple shares trade off following the earnings report more often than not. With the expectations bar at a high level that seems like the most likely scenario this time. However, I think Mac and iPhone sales are trending ahead of estimates. Macs due to market share gains and iPhones due to share gains and very strong smartphone penetration. Confirmation of these trends could take Apple shares higher.

My investment style is longer term. I've owned a core position in Apple since early 2005 and just trade around it, mostly by trimming positions on relative strength. Unless the quarter has negative surprise, I stand by my recent thoughts that the shares have upside to at least $150 this year.

Disclosure: Apple is widely held in Northlake client accounts including Steve Birenberg's personal accounts.

Posted by Steve Birenberg at April 21, 2009 10:52 AM in AAPL