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Apple misses earnings. Stock punished in after-hours trading

Mac and iPad sales set new records, but iPhone sales disappoint

Apple (AAPL) reported disappointing results for its fourth fiscal quarter on Tuesday. Although the company handily beat its own guidance, it fell far short of the expectations of analysts and investors, who punished the stock in after-hours trading

Apple shares, which had closed the day at a record $422.24 amid hopes for an upside surprise, fell at one point more than $33 (7.9%) in after-hours trading.

iPhones, in particular, came in considerably lower than expected. In a conference call with analysts, CEO Tim Cook and CFO Peter Oppenheimer attributed this to two factors: 1) The draw down in their retail partners’ iPhone 4 inventory that had been built-up in the previous quarters and 2) the effect of “pervasive rumors” of a new iPhone, particularly in the second half of the quarter, which slowed sales.

As for how the analysts’ expectations could have been so ahead of the company’s performance, Bullish Cross‘ Andy Zaky attributes it to the fact that Apple beat its guidance by 22% in the June quarter — far more than the usual 15%-18% beat. This quarter, the company beat its guidance by only 13%, leaving most analysts — and especially the more bullish independents — out on a limb.

The numbers:

Sales: $28.27 billion, up 39% year over year
Profits: $6.62 billion, up 53.7%
EPS: $7.05, up 52%
iPhone: 17.07 million units, up 21%.
iPhone sales declined in 2nd part of quarter as customers anticipated the iPhone 4S
iPhone sales more than doubled in Asia-Pacific
iPad: 11.12 million units, up 166%, a new quarterly record
Mac: 4.89 million units, up 26%, a new all-time quarterly record
Mac units up 61% in Asia-Pacific.
iPod: 6.62 million units, down 27%. iPod touch more than 1/2 of sales
Retail: Ended quarter with 365 Apple stores
Revenue per store: $10.7 million per store, down from $11.8 million
Gross margin: 40.3%
Cash and marketable securities: $81.6 billion
Cash generation: $5.4 billion in the quarter
Revenue guidance: $37 billion
EPS guidance: $9.30
Gross margin guidance: 40%

CEO Tim Cook pronounced himself “thrilled” and COO Peter Oppenheimer “extremely pleased,” with revenue that was, after all, a record for September. But Wall Street had been looking for an all-time record, and that they did not get. It was a rare setback from a company that usually beats expectations.

Press release here.

Notes from earnings call below the fold.

Talk about iPhone inventory levels that lost me. Cook confident he will set an all-time record iPhone sales this quarter. The decline in iPhone sales in the June quarter wasn’t as bad as they feared, but hit hard at the end of the September quarter.

Question about gross margins. Component prices and iPhone sales keep the GM high, but the strength of the dollar and price cuts lower the GM.

Question about China. “China progress has been amazing,” says Cook. Greater China represented 2% of revenue in ’09, 16% in this quarter. Accounted for $4.5 billion of revenue for the current quarter. Has never seen as many people rising into the middle class. Has quickly become the No. 2 country in terms of revenue for Apple. Also focused on Brazil (sales up 118% YoY). Russia and Middle East looking promising. “In China the sky’s the limit.”

Question about supply chain. Cook: We have an outstanding team and a track record that is the best in the industry. “Out approach has always been to do business with as few people as we can so we can be very deep with them.” We get great prices and quality.

Question about the tablet market. Cook reiterates a record quarter for both iPad and Mac. Have seen several competitors come forward. “I think its reasonable to say that none of them have achieved any traction so far.” In fact, Apple sales have gone up as new entries came in. “I feel extremely confident in our product pipeline.”

Question about deferring new carriers in Sept. quarter. Pushed new carriers off until after the launch of the iPhone 4S. With that behind them, now including new carriers in advance of the holiday season.

Question about the size of the tablet market. Cook: Market even better than we thought. Sold 40 million in a cumulative basis. Still believes it will be larger than the PC market. There will be many many more people who can access it. “I think its a huge opportunity over time.”

Follow-up on the iPhone. How many units were pushed off into the next quarter? Cook: We can not say how many we would have sold if there hadn’t been rumors about the new iPhone. The iPhone 4S “is off the charts.” 3 million sold in first weekend. “That’s the mother of all uplifts (?).”

How will the iPad sell in Dec. quarter? Oppenheimer: Expect new records for both iPad and iPhone in Dec. quarter. For Mac, only promised to outgrow the market.

Question: Is Siri a feature or a new way to interact with devices? Cook: “We see this as a profound innovation.” What percentage of use, I don’t know, but gut feeling is that it is substantial?

Question about Thailand: Cook’s “heart goes out” to the losses from the monsoons. Several factories that are currently not operable. Our primary exposure is on the Mac. Significant portion of hard drives are made in Thailand. Virtually certain there will be a worldwide shortage of hard drives, but already factored into their $37 billion guidance number.

Question about Android patent disputes. What’s your ultimate objective? Cook: Doesn’t want to comment. “But basically, we spend a lot of time and money and resources coming up with incredible innovations. We don’t like it when someone else takes those.”

What kind of remedies are you seeking? That’s what I don’t want to comment on.

Question about price reductions on iPhones. Cook: “We did it because we wanted to make the iPhone more accessible to a broader market.” Mentions post-pay market. It also has advantages in the pre-pay markets. We did it for both markets.

Follow up on component pricing and unibody casing. Cook: Currently investigating the casing issue, already priced into our guidance. NAND, DRAM and LCDs pricing looks very favorable. Generally a very positive market from supply point of view.

Question about iPad distribution rollout and new markets. Cook: We are in 90 countries with iPad. We have about 40,000 points of sale around the world. 50,000 on iPod, 120,000 for iPhone. With the iPhone numbers, it’s crystal clear there was a slowdown. That is not the case with iPad. Somewhere in the quarter we achieved a supply-demand balance with iPad and stayed there for the rest of the quarter. In terms of other countries, we have already started placing efforts in the countries I mentioned. There are some countries that have protectionist structures for products that aren’t built at least in part there. In China we did everything we know how to do, from stores to advertising. We won’t be doing all of that in the countries I named, but we’ll do portions of it.

Question about thoughts dividends or share buybacks, now that you are CEO? And what about PC cannibalization. Cook: I do believe we are seeing cannibalization. Some people are buying an iPad rather than a Mac. But more people are buying an iPad rather than an Windows PC. With cannibalization like this, I hope it continues. Regarding cash: Cash not burning a hole in our pocket. We’re not the kind of people to do silly things with it. We’ve acquired several companies, bough intellectual property, invested in production, built out stores. But I’m not religious about cash. It’s a topic for the board on an ongoing basis and we will continue to discuss it. Oppenhiemer points out that most of that cash is overseas.

Question: Is buying back shares a philosophical white flag that you can’t create value through innovation. Cook: We have a pipeline that is unbelievable. I view them to be totally distinct things. The cash is always a topic — we will always do what is in Apple’s (i.e. not investors) best interest.

Cook talks about the size of the 1.5 billion handset market. We are very focused on that.

Question about the extra week. Is it truly linear? 14th week ends New Years Day, a big day for Apple, but not the biggest.

Question about Japan. Disparity between revenue vs. units larger than other regions. A huge bump last year from iPhone 4 launch in Japan, so a tough compare. On the other had gained a lot on the Mac side in Japan.

Question about iPad in terms of price of the device. Cook ducks. Reiterates that he sees the tablet market as a huge opportunity and repeats claim that Apple has fantastic things in the pipeline (presumably the iPad 3).

That’s a wrap. A replay of the webcast will be available for two weeks at 888-203-1112; passcode 2922403. Seeking Alpha has posted a transcript here.