Additional Thoughts on Apple (AAPL)

I covered AAPL's earnings conference call for TheStreet.com the other day. Here is a copy of my comments from after the call:

Apple (AAPL) reported a solid quarter overall, but there is a lot of noise and confusion surrounding the numbers due to the adoption of a new FASB accounting standard that eliminates the old subscription accounting methods used by the company. The new accounting convention changes the revenue recognition rules and thus the company will no longer need to report any non-GAAP figures. Monday's figures are GAAP results. Also, the rule adoption was made retroactively back to 2007, so all prior periods have been adjusted. (I don't have the space to go into it here, but if there is interest that could be a future article).

The company reported earnings of $3.67 a share (not comparable to consensus) on revenue of $15.68 billion. This equates to 47% EPS growth and 32% revenue growth vs. the year-ago periods. Those are pretty stunning growth rates. Gross margins were 41% and I estimate return on invested capital was 37.4%. So it's pretty clear that the company was more profitable and growing even stronger than its previous reporting methods showed.

The reason why I think that the quarter wasn't as strong as I had hoped is that EPS still looks below the whisper numbers, iPhones were light, and guidance looks to be even more conservative than usual. For EPS, the company said last quarter non-GAAP EPS would have been $3.12; so that means EPS grew in the latest quarter 18% sequentially. Now, it's not an apples-to-apples comparison (no pun intended) but the sequential growth that was factored into the whisper numbers under the old accounting methods was north of 20%. Not a huge deal, but maybe that low iPhone figure kept a lid on further upside.

Macs were the highlight of the quarter, coming in at a record 3.36 million units sold, which equates to 33% yearly growth. Management said new features are being well-received and international sales were very strong. Portables grew 16%. Macs have always been the primary driver of EPS, so I think they really carried the ball this quarter.

As I mentioned, iPhone sales were somewhat of a weak spot this quarter, coming in at 8.7 million units. That's still 100% growth from last year, but most estimates on Wall Street were for more than 9 million units, with some looking for as many as 9.3 million. The company added 17 new carriers and now sells in 86 countries. Average selling prices were $620. Corporate clients doubled as more CIOs are warming up to the iPhone.

Second-quarter guidance is for EPS of $2.06 to $2.18 on revenue of $11 billion to $11.4 billion. If you calculate the sequential drop from this quarter, guidance looks to be very conservative, even factoring in normal seasonality. Gross margins are expected to approximate 39% and the tax rate should be steady of 29%. The company also expects to open 40 to 50 new retail stores in 2010 (10 were opened during the quarter).

As I have been alluding to, the stock will now officially appear cheaper relative to consensus estimates due to the accounting changes. I see earnings power north of $12.50 this year, which would put the stock's price-to-earnings ratio at 16 times, and this does not include any contribution from the upcoming "tablet" product. So I will stick by my $300 price target for the stock, and maintain it as a top holding at our firm.

long AAPL