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Apple's hit-and-miss report: What analysts are saying (u)

October 26, 2012: 4:03 PM ET

Most see a silver lining, despite disappointing Q4's earnings and troubling Q1 guidance

FORTUNE -- The earnings report Apple (AAPL) issued Thursday evening was complicated one, and analysts on Friday -- like voters in the U.S. Presidential election -- were trying to thread the needle between hope and disappointment.

Excerpts from their notes to clients:

UPDATE: Another wave arrived Friday afternoon. New ones on top.

Sterne Agee's Shaw Wu: Rare EPS Miss But Would Have Handily Beat if not for Higher FX Hedging Costs. "AAPL reported a mixed Sept qtr where it beat revenue & missed EPS but would have beat by $0.16 if not for higher than expected FX hedging costs. Several things played out as we previewed but there were surprises vs. consensus: 1) iPhone shipments of 26.9mm came in better vs 25-26mm; 2) lower than expected gross margin & guidance due to higher COGS of new products; & 3) iPads came in at 14mm units which was worse due to a pause & inv drawdown ahead of iPad mini & 4G iPad." Maintains $840 price target. 

Argus' Jim Kelleher: Analyst's Notes. BUY-rated Apple Inc. delivered quarterly results below consensus expectations for a second consecutive quarter, for the first time in 10 years and for just the third time since 2002. Apple fans and even investors did not seem to mind.  Maintains $775 price target. 

BCG's Colin Gillis: A good time to collect premium on Apple as stock may have stalled. "We list the following reason why the stock may be range bound for several months:

1)  Strength in the holiday quarter is widely expected, and the risks are balanced between possible upside and possible downside results for the December quarter in our opinion.
2)  Channel inventory increased again with 9.1 million iPhones in channel inventory (+800K sequential increase) and 3.4 million iPads in channel inventory (+200K sequential increase), muting the positive benefit of increasing channel inventory in the current quarter.
3)  Apple may have a product refresh vacuum until summer as the company has updated all of its significant products, which could cause a slowdown in unit sales this spring across multiple product lines.
4)  The average-selling-price (ASP) we estimate for the iPad has decreased to $500 for the December quarter, and we expect the declining ASP trend to continue as Apple introduces lower-priced products. We estimate 19 million iPads sold in the December quarter, but the decline in ASP crimps the impact of the unit volume.
5)  The strong iPhone sales in the September quarter may mute any upside to our estimate of 49 million iPhones sold in the December quarter.

Maintains $600 price target.

Gabelli's Hendi Susanto: Our forward looking assumptions for Apple are as follows:

- The law of large numbers and the grow of the absolute dollars
- According to management, the mini iPad carries significantly lower gross margin than the corporate gross margin. We are projecting sliding lower gross margin toward 37-39%. We believe gross margin variables include product life cycle, manufacturing ramp-up stage, economies of scale, hardware components, and the overall product mix.
- Apple still has growth opportunity in China and many other underpenetrated emerging markets
- The expansion of distribution channels, including more service carriers for iPhone and iPad and retail channels in international locations, has not reach market saturation yet.

Morningstar's Brian Colello: Apple's New Products Should Drive Strong Near-Term Revenue Growth, but at Lower Margins. "These results are miles ahead of the dismal results reported by many other firms in the PC supply chain. Even if the PC end market were healthy, these sequential improvements were also substantially above Apple's typical seasonal patterns. We view Mac strength as a positive sign for Apple's narrow economic moat, as iPhone and iPad users may be trading up to Mac PCs, thereby incorporating more Apple products into the company's ecosystem." Fair value: $770. 

Goldman Sachs' Bill Shope: iPhone concerns overblown, but some other areas falter. "We believe Apple's iPhone shipments and its commentary around supply improvements effectively eliminated a key short-term bear argument for the stock. We expect Apple to quickly regain some of its recent losses as a result. Nevertheless, the relatively lackluster EPS performance and the gross margin guidance add some incremental concerns. Our analysis suggests that the margin issue will ease soon, but it will take strong December quarter revenue and EPS to make up for the past two earnings shortfalls. We've added some incremental caution to our estimates until this occurs and to account for the weak macro environment." Lowers price target to $760 from $810. 

Morgan Stanley's Katy Huberty: Product Cycle Shines; Time to Buy. "We believe now is the time to accumulate AAPL shares. C3Q12 earnings suggests new products will drive more demand, supply concerns are overblown, and while gross margin guidance is a disappointment, it's not structural and the earnings reset positions AAPL for meaningful earnings beats going forward." Lowers price target to $714 from $720. 

Topeka's Brian White: Post the Correction, Apple is a Must Own This Holiday Season. "Last night, Apple reported in-line 4QFY12 results and a strong 1QFY13 sales outlook; however, the Company expects gross margin to come under pressure due to massive product launches over the past six weeks. Over the next year, we expect this headwind to turn into a tailwind as efficiencies are realized around these new form factor products. More importantly, Apple continues to innovate with new products such as the iPhone 5 and the iPad mini that we believe will prove to be blockbuster hits this holiday season, while the iPod and Mac lineup have never been stronger. With a 14% correction in the stock price over the past month and now trading at just 9x (ex-cash) our CY13 EPS estimate, we would be aggressive buyers of Apple ahead of the holiday season." Maintains $1,111 price target. 

Piper Jaffray's Gene Munster: iPhone Tops Ests. Demonstrating Strength Of Franchise Despite Lack Of Supply. "We believe there are three key takeaways from Apple's Sept report. First, iPhone units of 26.9 million were ahead of buy-side expectations of 25.3 million driven by better non-iPhone 5 sales. We attribute the upside to the strength of the iPhone franchise. Second, December revenue guidance was slightly better than expected, but earnings worse than expected. The steeper earnings guidedown results from 80% of December product sales being upgraded in the past 6 weeks, making it the biggest product transition quarter ever. We expect margins to rebound in March. Third, iPad units were disappointing as expected at 14 million compared to our 15 million. CEO Tim Cook noted that, like the iPhone 5, customers anticipated an iPad refresh, which impacted September quarter demand. We continue to believe that iPad can exceed the Street's 30% y/y growth expectation for CY13." Lowers price target to $900 from $910.

Barclay's Ben Reitzes: Constraints & the Impact on Gross Margins the Focus. "While there may be some initial worry about the F1Q EPS guidance, we believe Apple's December guidance is conservative – likely to accommodate product shortages for the iPhone 5 and iPad mini. We also believe the company's F1Q13 revenue estimate may be conservative in an effort to prevent expectations from getting too aggressive considering production constraints (requires "fixes" that lower margins"). We believe key topics to be addressed on Apple's conference call include sales trends of the new iPhone 5, expectations around supply constraints or stock outs, the puts and takes on gross margin, the strategy for the iPad mini, channel inventory levels for all products, and what Apple is doing to fix maps. We believe the recent pullback in shares represents an attractive buying opportunity – and expect shares to benefit as shortages are alleviated." Lowers price target to $800 from $810.

Canaccord Genuity's Michael Walkley: In-Line Results; Margin Guidance Disappoints but Provide Opportunity. "Consistent with our monthly checks indicating solid iPhone 4 and 4S sales ahead of the iPhone 5 launch and very strong initial iPhone 5 sales, Apple reported Q4/F12 results in line with our estimates. However, Apple provided guidance well below our estimates and consensus. We believe the soft December quarter guidance was primarily due to lower gross margins given Apple anticipates new and re-priced products will comprise 80% of December quarter sales and new products tend to have lower gross margins during the early stages of production. We maintain our belief Apple is well positioned for strong F2013/14 growth driven by new product launches across its portfolio." Maintains $800 price target. 

ISI's Brian Marshall: Rotten Apple? More like a Delicious Caramel Apple. "As usual, nothing is perfect and this earnings report from AAPL is no different. However, we believe the positives (e.g., better-than-feared iPhone units, upcoming iPad mini, etc.) far outweigh some select negative trends (e.g., 2nd consecutive quarter where iPhone activations in the U.S. grew faster than international, iPad unit growth grew ~3x faster than iPad revenue growth, GM declines for ~3 quarters, etc.). The investment community tends to get "wrapped around the axle" on tertiary details and fails to forget the 'big picture'...We call the first two quarters following a new iPhone launch the '180 Days of Enlightenment'  where we believe Dec-12 and Mar-13 will yield solid upside in both financial results and AAPL stock price (e.g., shares up ~70% in the last 'period of enlightenment' from Oct-11 to Apr-12)." Maintains $710 price target. 

Needham's Charlie Wolf: Apple reports an in-line fourth quarter. "With the virtually simultaneous launch of an all-new product lineup in the past six weeks, Apple is embarking on a quarter unlike any in the past. We're reducing our fiscal 2013 estimate from $50.00 to $45.75 chiefly because of a deterioration in gross margins accompanying these simultaneous launches... iPhone 5 continues to be hopelessly backlogged while we believe the iPad mini is likely to be once it launches in November. We suspect that Apple's December quarter revenue guidance is more a reflection of the company's ability to supply products rather than demand. We would not be surprised if Apple exits December with material backlogs in both iPhone 5 and the iPad." Maintains $750 price target. 

Deutsche Bank's Chris Whitmore: Mixed bag creates a buying opportunity. "iPad units were light at 14M (vs. DB at 18M) although this was largely factored into expectation following the iPad event earlier this week. In addition, AAPL guided Dec Q gross margins to 36% (vs. ~40% in prior and year ago Q) citing multiple pressures: 1) early stages of broad product refresh, 2) iPhone 5 / iPad mini and other form factors have higher BOM than predecessor products, 3) price reduction on iPhone 4 and 4S and 5) iPad mini has margins 'significantly below the corporate average'. There is also elevated execution risk with the broad product refresh heading into the traditionally busy Dec Q; but we believe this is contemplated in Apple's $52B revenue guidance. " Lowers price target to $800 from $850.

Merrill Lynch's Scott Craig: Some elements of déjà vu, heading into product cycles. "Similar to F4Q last year, heading into the best product line-up in their history, Apple's EPS disappointed on softer revenue (mostly iPad) and margin – EPS was $8.67 ($0.18 negative due to hedging accounting) vs. our/Street $9.50/$8.75. Solid pent-up demand, combined with additional carriers in F1Q13, should drive record iPhone sales and keep pent-up demand high heading into F2Q13. In addition, with other new products (iPad mini, etc.), we are buyers ($840 Price Objective) of the stock on recent weakness heading into likely the most successful product launches in company history." Lowers price target to $840 from $850.

J.P Morgan's Mark Moskowitz: Stage Is Set for Restored Beat-and-Raise Potential. "We think that shares of OW-rated Apple find increased investor sponsorship in the near to mid-term. Recall, our view has been that Sep-Q results and the Dec-Q guide do not matter. It is all about what Apple reports for Dec-Q in late January 2013. At that time, we expect Apple's operating metrics to exhibit increasing upside potential as its broad new products thrust hits full stride. Yesterday, Apple delivered Sep-Q results that were better than investors feared. iPhone shipments topped expectations, while iPad was surprisingly light, although Apple signaled a lighter number at its iPad mini event on Tuesday. The big topic for investors is likely gross margin. In our view, the Dec-Q guide for gross margin to decline 400 bps likely restores the beat-and-raise potential in the model in 1H C2013. As Apple scales its new products (iPhone 5, 4th- gen iPad, iPad mini, and Macs) down the cost curve, we think that consolidated gross margin can start to move back to 40% or better after Dec-Q." Maintains $770 price target. 

RBC Capital's Amit Daryanani: Nothing Mini About This Print. "Apple reported an in-line Sept-qtr and guided Dec-qtr conservatively but better than investor fears. Dec-qtr guide bakes in a healthy level of conservatism that should yield in material revenue and EPS upside. AAPL is guiding December to $52B/$11.75 (gross-margins of 36%). Management attributed the estimated 400bps of gross-margin decline to the following: multiple ramps, new products carrying lower gross-margins and manufacturing/yield inefficiencies. We believe many of these issues are transitory and will abate over the next 1-2 quarters. We recommend investors continue to accumulate shares at these levels and focus on: 1) strong holiday sales, 2) iPhone 5 China ramps, 3) long-term margin profile and 4) potential iTV." Maintains $750 price target.

Oppenheimer's Ittai Kiddron: Reset, But Also Refreshed And Ready. "Apple delivered in-line results, but a disappointing outlook that's likely to leave investors with some questions. This could create a near-term overhang in the shares, but we believe we're at an operational bottom here and would buy on any weakness. To us, the sales and margin guidance reflects an unusual combination of events— a short quarter, an unusually high new product mix, supply-chain uncertainty and a tough macro. The bright side of this is it will force estimates and expectations lower and de-risk the outlook from here. We believe long-term fundamentals are still strong with ample room to reach more of the mid-tier market, expand internationally and grow TAM through new devices/services." Maintains $800 price target.

Wells Fargo's Maynard Um: Through The Eye Of "Frankenstorm." "While disappointing relative to our expectations, we may be through the eye of the storm with the good news, in our opinion, being 1) a reset bar from reduced ests, 2) potential for better than seasonal gross margin in a future qtr as the new product cycles mature simultaneously, and 3) its strongest holiday product portfolio." Lowers target range to $710-730 from $740-760.

Pacific Crest's Andy Hargreaves: We Continue to See Upside in AAPL Despite Weak Near-Term Gross Margins. "Apple's surprisingly low FQ1 gross margin guidance appears to reflect the volume and breadth of recent new product introductions. This should allow margins to rapidly improve as volume ramps and Apple's rides its typical cost curve. Apple management's commentary supported our view that iPhone and iPad Mini supply issues are largely behind the company and production volumes are rapidly improving. We believe this will allow the company to meet or exceed our FQ1 unit estimates." Lowers price target to $670 from $760. 

Hudson Square's Daniel Ernst: A very good year. "While Apple often outperforms margin guidance, we note the note the shear breadth of FY1Q new product introductions (which typically have lower margins at the start of the production cycle) will likely produce the 400bps Q/Q impact that Apple is expecting. In commenting on the outlook CEO Cook appeared to suggest that the company was willing to give up margin, to ensure a high quality product that the company believes will gain share with end users over the long haul – we agree. However, we now expect less robust earnings growth of just 12% in FY13." Maintains $900 price point. 

Evercore's Rob Cihra: Great New Products Mean Not So Great New Margins. "Apple's Dec-qtr revs/EPS guide of $52B/$11.75 looks conservative as usual, but its guide for GM to fall 400bps Q/Q to 36%, even assuming low-balling (e.g., Apple's beat GM guide by an avg 3%pts over the past 8qtrs), still bakes in an atypical decline. Mgmt attributes most of this to much broader than usual refreshes across nearly every product, all simultaneously this qtr (iPhone, iPad, iPod, and Macs), with each starting lower than its predecessor, particularly iPhone 5 needing to climb early mfg. hurdles and new iPad mini. This said, apart from its $329 iPad mini, Apple has not really lowered the price point of any new product so we don't see pressure from some new aggressive pricing strategy, rather believing GM's should recover as yields ramp." Lowers price target to $775 from $800. 

Cowen's Matthew Hoffman: AAPL Reports Mixed F4Q12; Outlook Strong, But Is It Strong Enough? "We see three possible catalysts for the stock and estimates over the next two quarters: 1) iPad mini turns out to be more a TAM expander than cannibalizer, 2) iPhone 5 is launched in TD-SCDMA, opening China Mobile, 3) overall iPhone 5 demand ramps more sharply than we model. We continue to see shares appreciating ~15% relative to the market over the next 12 months."

BMO Capital's Keith Backman: Better Than Feared. "We think there are two issues from the call – 1) poor gross margin guide for the December Q, and 2) weak iPad sales in the September Q. For the September Q, we estimate iPhone gross margins were approximately 50% and iPad gross margins were approximately 32%. For the December Q, assuming 47 million iPhones and 20 million iPads, even if we assume that iPhone gross margins decline to 45% and iPad gross margins decline to 25%, then our total gross margins would be 37.6%, not the 36% guided to by management. We have assumed 37% gross margins in our model for the December Q, but we think we might be conservative." Maintains $730 price target. 

Nomura's Stuart Jeffrey: New Products Hit Margin, but Should Recover By June Quarter. "A mass launch of complex new form factors is driving production costs higher in Q1, squeezing gross margins in the absence of price increases. Apple typically faces this with every major form factor change, but has never launched so many new form factors at the same time. Given the company's track record, we suspect that gross margins will slightly surprise in Q1 and normalize by the June quarter." Lowers price target to $660 from $710.

Atlantic Equities' James Cordwell: Guidance points to continued strong demand. "Apple's Q4 missed our forecast but was largely in line with consensus as stronger iPhones offset iPad weakness. However, Q1 guidance provides reassurance regarding continued strong demand and, although this is forecast to come at the cost of margins, evidence suggests this is predominantly a temporary rather than a structural change." Lowers price target to $725 from $760.

FBN's Shelby Seyrafi: Some GM Headwinds, But Stock Remains Attractive. "AAPL's shares are quite attractive currently. Shares (off roughly $100 over the past month) are trading at a P/E of roughly 10x ex-cash of $128/share, the company has two strong new product cycles currently (iPhone 5, iPad/iPad Mini), and the company continues to gain share (as it outgrows the PC and smartphone markets). Bottom line: the CQ3 "throwaway" quarter is now behind, investors should be buying now as and the stronger quarters now begin." Lowers price target to $900 from $1,000. 

Wedbush's Scott Sutherland: In-line FQ4 and Conservative Guidance, ahead of Broad Product Launch. "While FQ4 results were better than feared, FQ1 guidance was weak, though likely conservative. Given Apple's attractive valuation at 9x FY13E adjusted EPS, and the broadest new product launch in the company's history, we continue to see a very strong FY13 and Apple remains a BEST IDEA." Maintains $885 price target. 

Janney's Bill Choi: Conservative Guide, But Solid Holiday Lineup. "Apple delivered decent Q4 results, given it was a transition quarter for iPhone and iPad. Lower gross margins will be the key focus for investors; we view near-term pressures as transitional but also partly secular, as Apple offers lower-priced iPhone 4/4S, iPad 2, iPad mini to expand into mass market. As such, we maintain our revenue estimates and reduce EPS on lower gross margins. We continue to believe Apple will leverage its ecosystem, and expect new products to generate significant earnings growth." Maintains $745 price target. 

Jefferies' Peter Misek: FQ4 (Sep) Results Solid but GM Guidance Light. "Positives: 1) In-line CQ3 with lower iPads offset by better iPhones; 2) CQ4 revenue guidance as expected; 3) Components supply constraints are gone. Negative: weak CQ4 GM and EPS guidance due to the cost of so many new ramping products. We expect product GMs to improve throughout Q4 and for Apple to materially exceed its conservative guidance." Maintains $900 price target. 

Credit Suisse's Kulbinder Garcha: A portfolio ramp starts, leverage to follow. "The refreshed iPad portfolio cements Apple's competitive positioning, and we increasingly see the company sustaining a 60% share in the segment given 3 factors: (1) a superior compute experience/ecosystem across smartphones, tablets and PC's; (2) a tablet product portfolio that addresses all price tiers; (3) structurally higher GMs than peers." Maintains $750 price target.  

William Blair's Anil Doradla: Good Setup Into the Holiday Season. "From our point of view, the results and guidance were consistent with relatively muted expectations and supply-constraint concerns entering the quarter. While iPad sales were lighter and iPhone shipments modestly exceeded our estimates during the quarter, there are reasons to feel optimistic regarding Apple's prospects in the December quarter. These two product categories, combined, contributed 68.5% of sales in the September quarter, and are not only expected to grow significantly in the December quarter (we project 68% sequential revenue growth), but also have the potential to offer upside to Street expectations. Consequently, given the recent pullback in the stock price, inexpensive valuation, and the strong product ramp-up ahead of the holiday season, we are buyers at current levels."

CLSA's Avi Silver: iPad mini launches with mini margin. "Apple is embarking on a massive product cycle across its product portfolio that we expect will accelerate its momentum in smartphones and tablets. We acknowledge the gross margin disappointment and the fact that this could lead to a YoY EPS decline in the Mar-Q (though not the Dec-Q, in our view). However, we expect most (though not all) of this pressure to abate as it mostly relates to launching new form factor products which have historically proven to only have a temporary effect on gross margin (Figure 2). Lowers price target from $805 to $770.  

 JMP's Alex Gauna: iPhone 5s Soar and Gross Margins Flag. "iPad shipments missed expectations, even after factoring in the recently updated view of 15.9M units implied from the iPad mini event this week. iPad sales of $7.51B (-18% q/q, +9.3% y/y) are suddenly not looking like the PC killer they once were, but with the addition of the iPad mini and help from holiday seasonality, are still likely to deliver an impressive December quarter result." Maintains N/A target price. 

Whew. That's most of them. I hope.

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About This Author
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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