Analysis: Apple's best-ever quarter is no disappointment
Let’s get one thing correct right from the start: Apple’s results for the first quarter of fiscal year 2008 are no kind of “disappointment,” nor could anyone rationally call the company’s guidance for the second fiscal quarter anything but “positive.” Once again, Apple posted its best quarter ever in terms of iPod and Macintosh unit sales, in addition to posting record revenue and record profitability. Apple has never sold more products in a single quarter throughout its 31-year history.
While the March 2008 quarter should have seasonally lower sales that everyone expected (people buy lots of iPods to put under Christmas trees, not in Easter baskets, or Ostara baskets if that’s your thing), Apple’s projections for the quarter are still an impressive 29 percent higher than in the year-ago period. We suspect that this week, there are CEOs who would sacrifice children to get 29-percent year-over-year growth.
So how in the name of Phil Schiller did this narrative about “disappointing” results, or “warning” about future results get started? For that, turn no further than CNBC, the 24-hour business cable news channel owned and operated by NBC Universal with input and news from News Corporation (via its recent acquisition of Dow Jones, the parent company of the Wall Street Journal). CNBC is to stock traders what chocolate is to Augustus Gloop—they just can’t get enough of the channel’s obsession with everything to do with the stock market.
On Tuesday, that was not the best choice of obsessions, as worldwide markets tanked amid fears of a recession in the U.S. economy. CNBC was desperate to find “signs of strength” immediately after the end of an otherwise gloomy day.
At 4:00 p.m. EST, just after the markets closed, CNBC anchor Melissa Francis started the post-market coverage by noting “signs of strength,” and the surprise 0.75-percent rate cut by the U.S. Federal Reserve, and then said, “Now, attention switches to tech. Apple and Texas Instruments [are] scheduled to post earnings after the bell today. What they say could dictate the mood of the market tomorrow.”
CNBC’s first post-trading report from the floor of the New York Stock Exchange came from reporter Bob Pisani. In case Francis’s attempt to pin the market’s hopes on Apple were too subtle for you, here’s how Pisani ended his live report:
Still waiting for those Apple numbers. If we get a good number from Apple, and — [unintelligible, sounds like “off print,” but apparently means “if not,”] to the downside, the bears will have an argument that we’ve still got some ways to go. But Melissa, this may not be the bottom, but at least we’re in the process now, we can argue, of putting in some kind of bottom.
In other words, a good number from Apple will make it much easier for Wall Street to pretend that everything is going to be fine, but a bad number reinforces the view that the economy is in trouble. The hopes for the next trading day, according to CNBC’s first four minutes after the close of trading, were all on Apple.
Good is bad
Apple put its results on the newswire half an hour later, at 4:30 p.m. EST, just a few minutes before the permanent press release went live on Apple’s own Web site. When it happened, CNBC went live to its Silicon Valley bureau chief, Jim Goldman, who blogged last week that “this time, the company’s numbers will be followed more closely than ever before.”
Why? Worries about a recession, concerns over a lackluster holiday shopping season, insecurity about how the company’s products are selling. And there are questions about whether consumers will reach deep to pay for Apple’s pricey products even as they worry about whether they’ll have a job this quarter or next, leaving some head-scratching over Apple’s precipitous decline these last few weeks. Are you kidding me?
Apple reports earnings next Tuesday, and while the shorts and naysayers continue to beat the uncertainty drum, the company is probably sitting prettier than any other big name in big name tech nowadays. We can harp on recession worries, though Steve Jobs himself tells me that it’s a non-issue for his company…
Further, he scoffed at my suggestion that Apple is pricing itself out of competition with high-priced Macs, the iPhone and Apple’s iPods since all have seen noticeable price drops and the company, for the first time in its history, offers a broad array of products with a broad range of price tags. It’s a good and fair point.
Goldman’s blog entry is well worth reading in its entirety as he goes on to defend Apple’s value, but there it is once again—the narrative that the business press will not abandon, no matter how many times its proven incorrect and laughable, that Apple makes “pricey” or “high-priced” products that Joe and Jane Six-Pack can’t afford when the going gets tough, that Apple is some kind of boutique or luxury brand that doesn’t deliver solid performance for the price of its products.
The press has had to hide this narrative for several years because Apple is doing well, and they all love their iPods and iPhones, but they think they’re “luxuries” that ordinary people shouldn’t consider in hard times. (Apparently, during a recession, only the wealthy are entitled to convenient ways to listen to music or watch videos.) But it’s always there, waiting to burst through one day at the slightest sign of trouble. Tuesday was that day. CNBC probably thought it was being fair by saying, in essence, that if “pricey” Apple was still doing well, the economy must be in decent shape after all. On a broader scale, the cluelessness was just staggering.
On a financially precarious day, stock professionals were glued to CNBC’s coverage as if they were politicians watching election returns. When Goldman gave the first take on Apple’s results at 4:30 p.m. EST, he was creating the narrative, live and in real time:
All right, Melissa. We are digging through these numbers. They’re coming out on a headline basis, but right now, at first blush, it looks like a very good report from Apple Inc. The company, on the top line, reporting $9.6 billion, way ahead of the Street, and I should also tell you that that beats—or actually, meets the “whisper number” of $9.6 billion. The Street was at $9.465 billion.
The EPS number that we’re looking at here is $1.76; we’ll confirm that that number is solid. The Street was at $1.62.
But the reasons that [Apple] shares may be in the midst of a pretty significant 10-percent sell-off right there, that you see there on the screen, that the company is warning on its second quarter results, and that comes as a significant surprise. There was a lot of optimism that Apple would at least meet Wall Street expectations for its fiscal second quarter, but indeed, it appears to be warning. We’ll get the exact numbers on what Apple is expecting here in just a few moments.
But let me dig a little deeper here, because the Mac number was substantially better than anyone had anticipated: 2.391 million Macs on the quarter. The Street was at 2.2 million. I’m going to read through here really quickly so I can get to the guidance. The company is looking now at—hold on one second here, let me just get through here—the company is looking at $6.8 billion and earnings of 94 cents for its next quarter. The Street was at $6.96 billion; Piper Jaffray, for one, was at over $7 billion, and the EPS number was $1.08.
So if you look at where the company is guiding vs. what the expectations are, this is substantially lower than what Wall Street had anticipated, and certainly not the jolt of confidence that tech investors were indeed looking for. Let me get you an iPod number as well: the company [says] 22.1 million iPods, again, well below the 24.7 [million] the Street was anticipating. An iPhone number: 2.315 [million], and that’s actually ahead of where the Street was, but only slightly [at] 2.26 million iPhones sold on the quarter.
So we’re going to dig a little deeper into these numbers, and this is going to make for one heck of an interesting conference call, which begins at 5:00 p.m. EST. Let me remind you that I will be live-blogging that call, but there are a number of questions. I should remind you that Apple always tends to sandbag Wall Street when it comes to guidance, but “sandbagging” in terms of Apple usually means “slightly below or meeting Wall Street guidance,” as opposed to raising guidance or providing numbers that are significantly higher than what Wall Street anticipated. Numbers like this? They’re going to cause a tremor, big-time. Back to you.
At 4:40 p.m. EST, 20 minutes before Apple’s conference call would start, Goldman was back on CNBC talking about Apple’s results, continuing to create the narrative that something was “wrong” with Apple’s second quarter projections:
When you look at this, you know, the real question is “when is ‘best’ not good enough?” Apple is characterizing its past quarter as the best quarter in the company’s history, but that is so last quarter when you’re talking about guidance for the upcoming quarter that just does not meet expectations. Again, Apple beating the street by 14 cents per share, a buck seventy-six vs. the $1.62 that the Street anticipated, but look at the share price now! Down $18 a share from the close. You’re talking about almost $14 billion in market cap[italization] that Apple is essentially giving back in a heartbeat. The guidance [is] 94 cents [per share], the Street was at $1.08. Revenue [guidance is] $6.8 billion when the Street was closer to US7 billion, and many on the Street [were] over $7 billion.
The real surprise here? Apple missing its iPod number during the holiday shopping quarter. If they were going to miss, most people thought maybe it would be on the Mac side, or even iPhones, but to miss on the iPod number is a big surprise: 22 million instead of the 24.7 million that the Street anticipated, and—wow. When you see a stock that’s already been down 25 percent over just the past three weeks, giving back more than 10 percent now just because of these earnings, you gotta wonder whether this sends a message to the rest of tech. We’ll check the rest of the sector through today and certainly into tomorrow, but again, this is just not the news that weary tech investors were hoping for—some kind of optimism from certainly the biggest name in the sector.
At that point, anchor Melissa Francis asked, “But Jim, you mentioned before, I mean, Apple is notorious for sandbagging when it comes to their future guidance. Is there any chance that’s the case here? People are obviously taking this news not very well.” Goldman responded:
I think it’s a really good point. I think there is the risk that Apple is sandbagging once again. But given the current climate, with all the uncertainty around technology, you’d think that Apple would sort of err on the side of what’s more of a “reality” expectation, if you will, not sort of sandbagging as much as the company has in the past. Even if Apple is sandbagging, in the past, when the company’s done that, it has sort of met expectations or been slightly below expectations. This is 14 cents below what the Street anticipated, so clearly, if they’re sandbagging, it’s much more significant than we’ve seen from the company in the past.