UPDATE: Apple (AAPL) Reports Strong Q1, But New Accounting Confuses Investors

January 25, 2010 5:23 PM EST
(Updated for price, analyst comments and conference call) Apple Inc. (NASDAQ: AAPL) showed its most profitable quarter ever on Monday, with the strength of the holiday shopping season pushing net income up 50 percent over last year. While the results were clearly strong, investors were confused because on an accounting change which boosted the sales and earnings numbers significantly.

The tech-giant reported first-quarter adjusted-earnings of $3.67 per share, which while $1.60 better than the market consensus of $2.07 is not comparable since the company is using a different accounting standard. Apple earned $2.50 per share in the same quarter last year when the company was using its new accounting standard. The old accounting showed EPS of $1.78 in Q1 of last year. Net income rose to $3.38 billion for the quarter, well over the $2.26 billion in the prior year period.

As a comparison of the impact of the accounting change, last quarter the new accounting boosted Apple's net sales from $9.87 billion to $12.2 billion and EPS from $1.82 to $2.77. So it added $2.337 billion to sales and $0.95 to EPS.

The company's new accounting standard will take into account revenue and associated cost of sales of the iPhone and Apple TV that had been deferred at the time of sale. This move caused confusion form investors over the initial numbers and shares were halted in the afterhours market, but trading did resume shortly thereafter.

Revenue for the company was $15.68 billion in the first quarter, which again does not compare to the analyst estimate of $12.05 billion, but was up from $11.9 billion for the year-ago quarter when using the new accounting standard. In the fourth quarter of 2009, Apple's net sales were $12.21 billion.

"If you annualize our quarterly revenue, it's surprising that Apple is now a $50+ billion company," said Steve Jobs, Apple's CEO. "The new products we are planning to release this year are very strong, starting this week with a major new product that we're really excited about."

The company is set to unveil its long-awaited tablet device at a press conference later this week.

During the fiscal-first quarter for Apple the company sold 3.36 million Macs, a 33 percent increase over the year prior. It sold 100 percent more units of the iPhone over 2008 at 8.7 million. Also the company sold 21 million iPods, an 8 percent jump from the year-ago quarter.

Apple is forecasting earnings for the second quarter at $2.06 to $2.18 per share, on sales of $11 billion to $11.4 billion on the new accounting standard. The Wall Street estimates earnings of $1.77, on sales of $10.37 billion, which was likely based on the old accounting.

Shares of Apple are up 2.3 percent in mid-day action Tuesday to $207.73

Analyst Comments:
  • Deutsche Bank: "AAPL adjusted its accounting treatment for iPhone and Apple TV and reported revs of $15.7B & EPS of $3.67 (vs. DB at ~$14.9B/~$3.62). Revenue upside was driven by very strong Mac units (+33% Y/Y) and ASPs increased across all major products categories Q/Q. As expected, AAPL issued conservative guidance and we expect continued robust iPhone and Mac demand, int’l expansion and new product cycles (Tablet, Mac and iPhone refresh) to drive continued momentum. We adjust estimates to reflect the new accounting...iPhone shipments of 8.7M beat our model at 8.5M but was below consensus expectation (Street ~9-10M, DB preview: ~10M)" Maintain Buy and $250 price target.
  • Goldman Sachs: "Apple continued its string of top- and bottom-line beats in the December quarter, but we think Mac strength is offset by a slight shortfall in iPhone shipments, leaving the stock near current levels in the near term. Apple's December-quarter highlights the strength of the company’s three-pronged product strategy, with upside in Macs, and a better mix of iPods (more iPod Touch) driving a higher-than-expected revenue and earnings even though iPhones (8.7 mn units) were in line with our estimate and 300K short of consensus. At the same time, while Apple’s gross margin of 40.9% came in 50 bp above our estimate, the gap was smaller than what we have seen recently and, together with higher opex, somewhat limited the EPS upside ($3.67, 10% higher than our forecast vs. a 20% beat last quarter). Maintains Neutral rating, raises price target from $220 to $230.
Click here for more analyst comments on the quarter.

Conference Call Highlights:
  • (CFO) We posted Apple's highest quarterly revenue and earnings and set new records in sales of Macs and iPhones.
  • Quarterly Mac sales grew 33% year-over-year, and this compares extremely favorably to IDC's latest published estimate of 17% growth for the market overall in the December quarter.
  • We added 17 new carriers during the quarter, including Canada Bell and Telus, Orange in the UK, China Unicom, and KTF in South Korea. We now have iPhone distribution in 86 countries, and we are very pleased with the international growth we achieved as we've added both countries and carriers.
Click here to see more highlights from Apple's Q1 conference call.

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Deutsche Bank, Steve Jobs