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Apple's lackluster Q3 results: What the analysts are saying

July 25, 2012: 8:34 AM ET

Stronger than expected iPad sales failed to offset disappointing iPhone numbers

FORTUNE -- "It's a testimony to just how remarkable Apple's last few years have been," wrote Daring Fireball's John Gruber, putting a positive spin on Apple's (AAPL) surprisingly weak third quarter results, "that 23 percent year-over-year growth looks so bad on a chart."

Still 23% growth was a disappointment to Wall Street, which had expected better of Apple, and its analysts had some explaining to do.

A sampling of what they were telling their clients the day after:

Needham's Charlie Wolf: A rare miss. "Although Apple beat its consistently conservative guidance of $8.68 for the third quarter, the beat was less than it's typically been in recent quarters... The chief culprit in the miss was the weak economies across Europe. And while iPhone sales increased 100% year-over-year in mainland China, this increase actually represented a slowdown in growth from previous quarters." Reducing estimates, maintaining Buy rating and a target price of $620.

Deutsche Bank's Chris Whitmore: Bitten by the product transition bug. "iPhone units were light; demand pause ahead of iPhone 5. iPhone unit shipments totaled 26M and were worse than expected (vs. Street at ~28M). Further, iPhone channel inventory is ~8M suggesting the Sep Q will require an inventory work down with muted sell through. In addition, ASPs were soft at $624 (vs. $647 in March Q) from negative mix (lower capacity SKUs / Macro) and FX headwinds." Adjusting estimates; maintain Buy and $650 PT.

Topeka's Brian White: The Return of the Black Swan. "Apple's rare miss last night reminds us of last October when the Company came up short and the stock was punished severely; however, the October sell off proved to be an excellent buying opportunity and we believe the current dip will as well. With the iPhone 5 launch on the horizon and other potential new products in the coming quarters, we believe Apple's stock is prepared for the next major leg up." Sticking with street-high price target of $1,111. 

RBC's Amit Daryanani: Calm Before the Storm. "Apple reported a softer Jun-qtr and guided Sep-qtr below expectations. Headwinds in June and September quarters are primarily related to softer iPhone sales ahead of a material fall refresh (iPhone 5). In addition, gross-margin guidance was soft heading into the September quarter at 38.5%, which is due to a mix shift toward iPads as consumers await the release of the iPhone 5 coupled with headwinds from f/x. We recommend that investors look past the softer Sep-qtr guide and focus on multiple catalysts ahead in CY12/13: 1) iPhone launch in September; 2) potential iTV and iPad mini launch late in the year; and 3) sustained momentum of iPad 3 as capacity constraints ease." Maintain price target of $700.

Morgan Stanley's Katy Huberty: Near-Term Pain Offset by Long-Term Gain. "AAPL shares increased 30% on average and outperformed the S&P 500 by 27% on average in the three months leading up to prior iPhone product announcements. We expect similar strong performance ahead of iPhone 5 which we believe will feature LTE connectivity and a new form factor (thinner, new casing). While weaker than expected Jun/Sept Q results are disappointing near-term, it potentially sets up for even stronger sequential results in the December quarter." Maintaining target price of $720.

ISI's Brian Marshall: 180 Days of Enlightenment vs. 180 Days of Darkness. "Recall AAPL posted phenomenal results in the Dec-11 and Mar-12 quarters beating its revenue and EPS guidance by ~25% and ~50%, respectively. We called it "the perfect quarters" at the time driven by the ramp of the new iPhone 4S. In our view, AAPL's business model could now be emerging to have two distinct patterns…we refer to them as the "180 Days of Enlightenment" and the "180 Days of Darkness". The "flip-switch" of these two periods being the timing of the launch of the new iPhone model (e.g., we still expect the iPhone 5 in early October)." Lowering price target to $710 from $750.

Piper Jaffray's Gene Munster: Expect Concern About Sept To Ease As Oct Launch Of iPhone 5 Draws Closer. "Investors were bracing for a weak June iPhone number and soft September guidance and got an even weaker iPhone number and more conservative guidance which will fuel concern heading into the Sep-12 quarter. While the concern is legitimate, we believe it is largely irrelevant because iPhone will rebound in the Dec-12 quarter as it has in the past. Importantly, Sep-12 will likely be reported after the iPhone 5 release which should more than outweigh the September iPhone number. Bottom line it's not as bad as it looks, and we believe the primary reason for the soft iPhone number is anticipation of iPhone 5 (Sep-11 deja vu)." Maintaining $910 price target. 

Barclay's Ben Reitzes: Back to Very Conservative, Apple Issues Cautious Guidance: Apple issued guidance for its F4Q12 including EPS of just $7.65 vs. consensus of $10.26 and our estimate of $10.05. Apple also expects F4Q12 revenue to be about $34 billion, below our estimate of $38.2 billion and consensus of $38.0 billion. Although we believe that investors were prepared for typically conservative guidance on the top line in Apple's range, Apple's EPS expectations seem to reflect lower-than-expected gross margins, which may raise some concerns. We believe the next big product cycle with the iPhone 5 will have a bigger impact in the December quarter." Maintaining $750 price target. 

Jeffries' Peter Misek: Guidance out of the way; now own the stock. CQ2 results were weak due to a pre-iPhone 5 inventory adjustment. As expected, CQ3 [guidance] was below consensus, as management is conservatively not including the iPhone 5 launch in our view. We think a decision as to a Sep or Oct launch date will be made in Aug." Reiterating Buy. 

BMO Capital Markets' Keith Bachman: Staying with the Theme of Product Launches Pulling the Stock. "Apple delivered disappointing results on nearly all metrics, despite very strong iPad sales. Although we cautioned on a summer slowdown in iPhone sales, actual iPhone shipments in the June Q were much lower than expected, which helped drag down total revenues and gross margins. Relative to recent June Q results to September Q guidance, we find Apple's revenue guidance bullish, and Apple's gross margin guidance conservative. Therefore, we can't help but wonder if a new product arrives during the September Q end." Lowering price target to $680 from $700.

Hudson Square's Daniel Ernst: Let us join the defender chorus. "Yesterday after the market close, Apple reported below expectation FY3Q12 (Jun) results. Strong 2Q channel fill in China, led to a larger than expected sequential decline in iPhone sales. Apple noted that end user demand in China had not slowed, but that in Europe it had. Guidance for 4Q, factors, we believe, lower iPhone carrier demand ahead of an expected October launch of iPhone 5. Let us join the chorus of Apple defenders this morning; after all where else in large cap tech does one achieve 21% earnings growth in a bad quarter?" Maintaining $700 target price.

Cowan's Matthew Hoffman: "Fall transition" key to stock. "AAPL guided to well-below consensus F4Q12 revenue/EPS of $34.0B/$7.65 and gross margins of 38.5% (-430 bps q/q). Gross margins will be impacted by a "fall transition", a full quarter of back to school promotions and a stronger USD. Mac sales should materially improve q/q with a full quarter of new Air and Pro products. iPhone channel inventory was down very slightly exiting C2Q12 (-300K q/q to 8.3MM). We remain constructive on AAPL shares and believe F3Q12 will mark the near-term bottom for EPS as an LTE-enabled iPhone "5" renews end-user enthusiasm for the franchise into YE12." Maintaining Outperform rating. 

Goldman Sachs' Bill Shope: A tough miss, but bears have a very short window. "While we had expected some weakness as a result of a pause in iPhone demand ahead of the iPhone 5 refresh, the impact was greater than we anticipated. In addition, Apple's gross margin performance and macro commentary served as key sources of disappointment... Despite the disappointment, we believe investor concerns may be very short-term in nature, and we suspect the stock will rebound quickly. We reiterate our CL-Buy, and Apple remains our top pick in the sector." Lowering price target to $790 from $850. 

William Blair's Anil Doradla: Near­Term iPhone Transition Hiccup: Pullback a Buying Opportunity. "Although the company's results and guidance were lower than our and Street expectations, we believe the company's fundamentals are intact and view the lackluster results as a short‐ term product cycle transition hiccup. From our point of view, Apple is still in the initial stages of its product cycles, with significant growth potential for its iPhone and iPad. Trading at an after‐hours price of $570, shares trade at 11 times our fiscal 2013 EPS estimate of $50.31, 9 times excluding cash. Given the inexpensive valuation combined with the strong product ramp with the launch of the new iPhone, we would use any pullback in the stock as a buying opportunity." Maintaining Outperform rating.

Wedbush's Scott Sutherland: Would Use Slowdown Based on iPhone Product Cycle as Buying Opportunity. "We would use any weakness due to slackening iPhone sales as consumers game the product cycle to add to or establish positions in shares of Apple ahead of a likely iPhone 5 launch this fall. Given that we see solid growth driven by a robust product pipeline and international expansion combined with attractive valuation, Apple remains on our Best Ideas list." Reiterating $800 price target. 

Merrill Lynch's Scott Craig: Rare miss on iPhone buyer pause ahead of refresh. "Despite the rare miss (only 2nd in 9 years) and uncertain macro, we remain relatively positive on Apple given valuation, product trends, and GM% upside though there could be near-term pressure on the stock. Lowering price target to $720 from $770. 

Oppenheimer's Ittai Kidron: Deja Vu. Buy the iPhone Lull. "This mid-year lull feels similar to last year when an iPhone launch delay led to Apple's first miss in over 5 years during 4Q-FY11. We believe investors will come to the same conclusion they did last year, namely the miss and near-term outlook reflect a time-shift of demand and that Apple's fundamentals remain strong long term (TAM expansion/international growth). That said, operational performance is now more volatile and tied to iPhone swings (two misses in one year). We'd buy the shares on any weakness, anticipating a strong Dec." Maintaining $680 price target. 

Baird's William Powers: iPhone Slowdown in Europe and China Weighs. "Several factors, including European weakness, lower results in China and iPhone 5 speculation, appear to have negatively impacted FQ3 iPhone shipments more than we had expected. Though less of a surprise, FQ4 guidance also missed our estimates, and consensus to a wider degree. On a positive note, iPad shipments beat, driven by international. Given what we continue to view as strong medium- and long-term growth opportunities, we would be buyers on anticipated weakness." Maintaining $740 price target.  

Credit Suisse's Kulbinder Garcha: Hesitancy takes effect. "While we acknowledge that iPhone weakness will lead some to questions around growth potential, we remain of the view that with a significant product refresh in 2H12, this will prove temporary. At current levels the stock trades on a P/E of 10x which is inexpensive given, net cash of $124 per share and $75 of long-term earnings power." Maintaining target price of $750.

JP Morgan's Mark Moskowitz: A Rare Miss: Most Is Explainable, but There Are Warning Signs. "The company surprised investors with a rare miss on its Jun- Q results. Plus, the outlook appeared to be more conservative than usual. The earnings miss was driven by 1) slowing iPhone sales ahead of the next launch, 2) higher mix of lower-margin iPad sales, and 3) weak macroeconomic conditions in EMEA, Australia, Brazil and Canada. Apple's China business also slowed, and while Apple commented that its China business was not hurt by macro pressures, we think this risk lingers." Lowering price target to $675 from $695.

Societe Generale's Andy Perkins: "Apple announced a slightly disappointing set of results last night for Q3 FY12... Main problems were weaker than expected iPhone sales and weak sales in France, Greece and Italy... This weakness appears to be caused by potential customers delaying purchases as they are waiting for the new product (iPhone 5?) available in the autumn. This slowdown in demand happened a quarter earlier than last year and was not anticipated. After last quarter's introduction, sales of the third generation iPad were very strong at 17m (cs 15.4m) although ASPs were down again." Maintaining $750 price target. 

Wells Fargo's Maynard Um: AAPL: Doesn't Quite Stick Landing, But Strong Event Coming Up. "Although guidance was expected to be 'conservative' into the iPhone transition quarter, gross margin guidance of 38.5% was below expectations. We see most of these issues as temporary and, based on management commentary, believe constraints should not be an issue into the iPhone 5 launch, which we still feel will be the biggest launch in consumer electronics' history." Valuation range: $640 to $660.  

CSLA's Ari Silver: Waiting is the hardest part. "Apple is clearly feeling the pinch of economic weakness alongside the staleness of the iPhone4S and anticipation of iPhone5. We do not believe there is anything structurally wrong with Apple despite the disappointing results and tepid guidance. The gross margin pressure stems from reduced iPhone mix, lower memory density models within iPhone, and FX. We think the bad news is now behind Apple as estimates likely reset more reasonably and iPhone5 offers material share-gain opportunities, reaccelerating earnings in 1HFY13." Lowering price target to $750 from $770.

Sterne Agee's Shaw Wu: Surprising EPS Miss Due to Lower Gross Margin. "While light revenue and an iPhone unit shortfall were somewhat expected, lower gross margin wasn't. The mix shift from iPhone helps explain the decline but we believe the higher cost of iPad retina displays also had an impact. We are buyers on weakness as the big picture remains that there are 3 key upcoming catalysts, namely the 6th gen. iPhone refresh, smaller form factor iPad, and China Mobile." Leaving price target at $780. 

Wedge Partners' Brian Blair: Here's the Valley ahead of the Hockey Stick. "We had raised the flag of concern over too high iPhone estimates last month, as we noted a slowdown in iPhone sales in the May time frame. Recently, street expectations for iPhone units had come down quite a bit (some this week) but even the recent range of 27 – 30 million units (some analysts as high as 32 million) ended up being too high against Apple's reported 26 million, creating too lofty revenue and EPS expectations and causing a rare miss for Apple. In our view, the miss creates an opportunity ahead of what will certainly be a massive December quarter."

Janney's Bill Choi: Expected Summer Slowdown; Buy Ahead Of iPhone 5. "Apple 3Q results came in well below consensus estimates, and management guided very conservatively for Q4. As we indicated in our earnings preview, Apple is seeing a summer slowdown ahead of some important product announcements. The miss in the quarter was largely attributed to disappointing iPhone and Mac sales, while iPad and iPod came in above expectations. We had anticipated weak 3Q results and conservative guidance, and would be buying on any weakness in the shares ahead of iPhone 5 launch in 1Q'13." Maintaining FV of $720. 

JMP's Alex Gauna: Lost in Siri Translation as Earnings Miss Again Under New Mgmt. "While many will argue this is a buying opportunity similar to last year's September quarter miss ahead of the iPhone 4S, we caution that this miss is coming far earlier than last year, is being accompanied by outsized margin compression and overseas slowing, and is occurring in the face of far stiffer competitive pressure.  Competition is intensifying and Apple is behind the smartphone competition in terms of getting next-gen features, such as 4G LTE, to market in 2013. We suspect this has as much to do with compelling Android alternatives as it does consumers awaiting the next iPhone, which we note was an effect that didn't really take hold until the September quarter last year. We fully expect an iPhone upgrade this fall and for it to be successful; however, we also believe Apple's vertical integration approach is costing it in terms of time-to-market and market share." Maintaining Neutral rating. Price target: N/A. 

That's most of them. I'll put any stragglers just ahead of Gauna, who always makes a good caboose.

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Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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