Apple’s Q2 Results: “Surprised & Delighted”

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To use CFO Peter Oppenheimer’s own words, any stockholder of Apple should be “surprised and delighted” at its Q2 results. Without going into numbers… Apple made a ton of money, and did even better than they expected themselves.

After listening to the Q2 Results Call again, I thought I might point out a few things that I found interesting:

Fluctuations in Gross Margins: Apple achieved a spectacular gross margin of approximately 35% during Q2, meaning that before general business expenses, the revenues minus the cost of products was 35%. However, I found it interesting that Apple forecasted that this margin would decline during Q3. It’s reasoning behind the decline was an increase in educational sales, which by decreasing the price decreases the margin, but also a change in the commodity market and changes in product mixes. What’s that mean? In general, Apple won’t be able to get the killer deal it’s currently getting on flash memory.

It also means that Apple isn’t going to make great margins on the iPhone. By factoring in the huge number of iPod sales that Apple expects, the gross margins are going to be dragged down my a fairly low margin on iPhone sales. Combined with the forecasted increase in memory costs, this could point to one reason why the iPhone is priced so high.

Subscription Accounting: Apple announced during the Q2 results call that it would be using subscription revenue model to account for both the iPhone and Apple TV. In short, instead of recognizing $500 of revenue when you buy your shiny new iPhone, Apple’s going to recognize that revenue (and cost) over the next 24 months.

This might not seem like a big deal to most people, but the reasons Apple has decided to use the subscription model hint at some very good things to come.

The biggest reason behind the subscription-based revenue model is that Apple is expecting to push new software and applications at no charge to owners of the iPhone and Apple TV. But we’re not talking just weekly software updates here, otherwise Apple wouldn’t be justified in using a subscription model. By recognizing revenue over time, Apple is saying that significant and substantial upgrades will be delivered over time to owners (let the speculation begin…), but Apple is also saying, indirectly, that the iPhone’s and Apple TV’s most powerful component is its software.

Apple Ready and Waiting: For what? Who knows – but Apple will be able to pay for it. Taking a page from Google’s playbook, Apple has begun to amass a large amount of cash ($13 Billion by the end of Q2) which it says it will hold onto to maintain “flexibility.” As one analyst pointed out during the call, however, Apple is letting its shareholders down by not putting that cash to more productive, and money-making, uses. With no obvious plans to buy back stock, it might be possible that Apple is saving up for some very large purchases in the none-to-distant future… in the price range of a small company or two. In any case, Apple has to have a good reason to be cheating investors of the potential return from that cash – reasons that we can only speculate.

So from everyone here at TAB, I would just like to give Apple a pat on the back for a job well done this quarter and wish them all the best during Q3 – it’s going to be another exciting one!

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I’m delighted as well :-) As a newbie stock trader, Apple stock is the one I’ll probably hang on to the longest. I’m interested to see what the subscriber thing is all about. I’m sure it’ll be brilliant, like most of their ideas.

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