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July 21, 2009

Apple Quarterly Earnings Preview

My friend and RealMoney.com colleague, Jordan Kahn, wrote the following preview of Apple's June quarter earnings which are due to be reported after the close tonight. Please check out Jordan's blog "In The Money" for more of his always excellent commentary.

I'd preface Jordan's comments by noting that the estimates and stock price targets for Apple have been rising along with the stock for the past month. This has raised the expectations bar as far as the immediate reaction in the stock after earnings are reported. As Jordan notes, guidance commentary is key, especially in lieu of the weak economy and premium price points on Apple products. In the long run, I think Apple still has substantial upside as there is plenty of market share still to be gained in Macs and iPhones and I expect both product lines to be expanded/refreshed regularly along with an eventual move into something akin to the currently popular netbooks. Adjusted for $32 cash on the balance sheet (producing just 20 cents if EPS), the stock is reasonably priced at 19 times 2010 consensus estimates which are probably conservative. Enough of me, here is Jordan's very well informed and insightful preview:

Apple (AAPL) will report earnings after the close on Tuesday. Consensus estimates are for EPS of $1.18 on revenue of $8.25 billion (according to Reuters). Apple has a long, long history of topping consensus estimates, so that is not really the question here. Whisper numbers are already in the low $1.20s. The key to the stock in the days ahead is guidance -- namely, how conservative management is with September guidance.

Piper Jaffray looked at the last 12 quarters and calculated that Apple management has, on average, guided forward EPS estimates 12% below Street expectations. Right now, the Street has next quarter's EPS number at $1.29, and many analysts think guidance could come in the range of $1.00 to $1.10. So watch this number as a key driver (I know it's a silly game of underpromising and overdelivering, but I don't get to make the rules.)

The company launched its third generation iPhone 3GS in June, which was met with very strong demand. Apple also cut the price of the old 3G iPhone to $99, which likely spurred demand for folks who have been waiting for a better price entry into the smartphone market. The company also lowered prices on refreshed Mac laptops. So unit sales for these categories should be good, and we will have to see if the company had to sacrifice margins. Gross-margin guidance from last quarter was 33%.

Other keys to the call will include the following:

* can iPhone units sold top the 5 million whisper number?

* can Mac shipments hit the high end of 2.3 million to 2.5 million units?

* update on iPhone release in China (and other foreign markets);

* comments on any upcoming iPod line-up refresh;

* comments on rumors of an upcoming "tablet" launch;

* update on Steve Jobs' status (will he get on the conference call?); and

* again, guidance -- how conservative will management be ahead of the back-to-school period?

Although most of the hype surrounds the iPhone, don't forget that the biggest driver of earnings is still Mac sales. There has been chatter that the shipping delays on the online store for Macs augurs well for demand currently outstripping supply, but expect Apple to ramp-up its builds over the next quarter.

Posted by Steve Birenberg at July 21, 2009 11:15 AM in AAPL