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Summary:

Apple’s long track record of underpromising and overdelivering when it comes to expectations of the financial community seems to have finall…

iPad 2 and money
photo: Getty Images / Mario Tama

Apple’s long track record of underpromising and overdelivering when it comes to expectations of the financial community seems to have finally reached an end, despite an otherwise strong quarter. Apple (NSDQ: AAPL) reported revenue of $28.27 billion and earnings per share of $7.05, both strong increases compared to the prior year, but both numbers fell short of analyst estimates.

Apple’s revenue of $28.27 represents a 38 percent increase compared to last year, and its net profit of $6.62 billion was up 54 percent compared to last year. The company even grew more profitable, increasing its gross margin from 36.9 percent to 40.3 percent.

But financial analysts were looking for more. On average, as polled by Yahoo (NSDQ: YHOO) Finance, analysts were expecting Apple to post revenue of $29.45 billion and earnings per share of $7.28.

Apple’s own guidance for the quarter coming off of its last earnings call was for $25 billion in revenue and earnings per share of $5.50. But the financial community has gotten so used to Apple’s notoriously conservative financial guidance over the years that few analysts take those numbers seriously: the most pessimistic estimate compiled by Yahoo Finance was for $26 billion in revenue and $6.10 in earnings per share.

Still, there’s no doubt that Apple is selling an awful lot of gear. iPhone sales were smaller compared to the previous quarter, but given the hype surrounding the launch of what turned out to be the iPhone 4S, it’s not surprising that some people would prefer to wait and see what Apple had in store. iPhone sales were up 21 percent compared to the prior year.

The discrepancy between the analyst estimates and Apple’s official numbers appears to have come about because of slower-than-anticipated demand for the iPhone 4 in the weeks leading up to the launch of the iPhone 4S. CEO Tim Cook didn’t directly comment on the earnings targets (they never do), but said there was a noticeable decline in “sell-through,” or the number of iPhones that are purchased as opposed to sitting in inventory, as rumors and speculation gathered about what many expected would become the iPhone 5.

He also attributed that decline in sell-through to the fact that Apple has launched a new iPhone during this quarter of the year each year since 2007 except for this one, meaning that people had come to expect that summer upgrade cycle. Couple that with people’s ability to put two and two together when Apple announced in June that iOS 5 would be available in the fall, and the company saw a greater number of people sitting on the sidelines than perhaps the financial community had expected.

iPad sales of 11 million units grew 20 percent compared to the previous quarter and 166 percent year-over-year. Cook said the tablet market has the potential to be a huge opportunity for Apple, declining to directly address the introduction of the Kindle Fire but noting that competitors to the iPad don’t have much to show for their efforts.

He also declined (unsurprisingly) to comment on Apple’s legal strategy in the numerous patent suits it has launched over the past few years. Some believe that Apple is not interested in cutting cross-licensing deals or settling with its opponents–the common outcome of most patent disputes–but Cook wouldn’t take the bait as to whether or not Apple has taken that hard a line.

Looking ahead to the holiday quarter, typically the biggest of Apple’s year by far, the company said it expected to record $37 billion in revenue and earnings per share of $9.30. That would be a 38 percent jump in revenue and a 153 percent increase in profit, huge numbers, although Oppenheimer reminded those on the call that the quarter this year will have an extra week than normal.

  1. This was NOT a “rare miss” by Apple.  It was a swing and a miss by analysts.  Clearly Apple grew in most if not all respects and its high stock price is indicative of its 38% revenue growth AND increased margins.

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    1. Apple has established a long pattern (8+ years) of shattering its own guidance by ridiculous levels in a quarter and then providing extremely conservative financial guidance for the upcoming quarter despite the fact that they know exactly how well they are doing. As a result, financial analysts, who need to estimate corporate earnings in order to advise their clients on how to invest, began raising their estimates beyond Apple’s guidance.

      Apple then continued to beat those increased expectations by ridiculous numbers, so financial analysts continued to raise their estimates. It’s part of what has kept Apple’s stock so high over the last two years, the fact that they have continued to beat those sky-high third-party estimates.

      The cycle finally caught up with them. No one complained when the financial community’s estimates were so low compared to the actual numbers. A miss is a miss.

      It would be nice if Apple provided more honest guidance, but I understand why they are conservative: there’s little downside. It’s a stupid game, but it’s the game public companies have to play. Clearly any other mobile company would kill for their numbers, and any investor who doesn’t look at little harder at Apple’s numbers and momentum and just sells based on the miss has a pretty short-term outlook.

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  2. This is the kind of miss that Apple’s competitors can only dream of experiencing at the moment.

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  3. “Apple’s long track record of underpromising and overdelivering when it
    comes to the earnings guidance it provides to the financial community
    seems to have finally reached an end, despite an otherwise strong
    quarter.”

    The opening line to the article is false and linkbait just like the headline. Apple did actually, and handily, beat it’s own guidance numbers, which most would define as “underpromising and overdelivering”.

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    1. You’re right, in part. It was the third-party numbers that it missed, and I’ll fix that. But it was a product of writing quickly, not linkbait (saying the wrong thing is actually not a good long-term strategy for getting links).

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  4. Why not fix the headline too?

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    1. Because the headline is correct: they missed expectations. I had written, however, that they had missed their own expectations, which was not correct. The concept of beating expectations or missing expectations is always based off the consensus of 30 or so financial analysts, not just for Apple, but for all public companies.

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