Stuff that went right over most analysts' -- and nearly every reporter's -- head
Click to enlarge. Source: Bill Boynton (@wjboynton)
FORTUNE -- As predicted, the headlines reporting Apple's (AAPL) quarterly earnings last week -- and the market's immediate and violent negative reaction -- failed to take into account that Q1 2013 had one less week Q1 2012. Even Tim Cook did lousy job explaining it.
It fell to the Braeburn Group's Robert Paul Leitao, an independent investor who writes a blog called Posts at Eventide, to put the situation into plain English:
"Apple's fiscal quarters are usually 13 weeks in length and always end on a Saturday. Every 5 or 6 years, depending on the number of leap days in the multi-year period, Apple adds a 14th week to its first fiscal quarter to align fiscal quarters closer to calendar quarters. On a weekly basis, Apple's revenue was $4.2 billion in the recent December quarter versus $3.3 billion in the prior-year period. On an equal week basis, revenue in the quarter rose 26.7%"
What Leitao is too polite to mention is that the companies that make up the S&P 500 grew their revenue a comparatively anemic 3.8% in the same period, according to Capital IQ, and that without Apple's contribution that growth would have been even lower.
Yet the trailing PE ratio of the average S&P stock is 17.5, and in the past week the market -- driven in large part by computer algorithms that respond to "sentiment" (i.e. headlines), not fundamentals -- has pushed Apple's trailing PE down to 8.6.
The extra week is only one of a several subtleties in Apple's Q1 2013 that seem to have gone over most reporters' heads. A sample from Leitao's Thursday post:
- Gross margin. "The high costs of the iPhone and iPad product transitions, including the introduction in the quarter of the iPad mini, drove gross margin below the prior year's unsustainable rate. Gross margin will improve in subsequent quarters as the iPhone 5 handset series enters its second year of production and the iPad mini, which remained in constrained supply through the end of the December quarter, becomes available in greater numbers."
- Net income as a percentage of revenue. "The graph below illustrates that despite the drop in year-over-year gross margin and lowered rates of revenue growth, net income as a percentage of revenue remained strong."
Click to enlarge.
- Cash position. "Apple ended the quarter with cash and marketable securities of over $132 billion versus about $121 billion at the end of the September quarter. This is despite $2.493 billion in dividend distributions to shareholders during the period and share repurchases totaling $1.950 billion."
- Deferred revenue. "Apple defers a portion of revenue from each Mac and iOS device sold due to the rights of device owners to receive no-cost operating system upgrades over the estimated economic life of the unit... At the end of the December quarter, Apple's deferred revenue balance totaled $7.274 billion. Most of this deferred revenue balance will be recognized as net sales over the next eight fiscal quarters. The deferred revenue in the quarter contributed to the company's cash flow from operations but did not appear in the quarter's net sales line."
- Deferred tax liabilities. "Apple declares each quarter a US tax expense on much of the company's foreign earnings although the cash generated by those earnings remains outside the United States and is not subject to tax payments until the foreign earnings are brought into the United States. According to the company's Form 10-K for the fiscal year ended in September, Apple's deferred tax liabilities from earnings of foreign subsidiaries totaled $14.712 billion. Much of Apple's cash and marketable securities are held outside the United States. Should a sizable portion of these dollars be repatriated, it would not trigger additional tax expense."
"Most observers look to the income statement to determine the company's growth," Leitao writes in summary. "However, Apple's balance sheet that accompanied the December quarter revenue and earnings numbers tells a much different story. It's not so much that Apple's rates of growth have declined, it's an issue of discovering where the current rates of growth are reported."
His post is titled The Mysterious Case of Apple's Missing Growth. As reader Jim Neal put it, "This piece is so full of stuff that nobody's talked about in the past week it's not funny."
Thanks to Neal and to Apple Insider's Daniel Eran Dilger for spotting it.