Apple Q1 earnings: Analyzing the analysts
On Tuesday, Bullish Cross' Andy Zaky, representing a group of unaffiliated analysts who track Apple (AAPL) in blogs, challenged the professionals who do it for banks and brokerage houses — and whom the bloggers believe are largely clueless (see Apple Q1 2009 earnings smackdown).
So now that Apple has reported its 2009 Q1 earnings, how did the two teams do?
The results are summarized in the chart below. The red numbers are the worst two estimates; the green numbers the best two.
What's immediately apparent is the sharp difference in sentiment. The bloggers tend to be bullish, the Street — at least on Apple — tends to bearishness. And on the number that matters most to investors — earnings per share — the bloggers were right on the money, missing the actual EPS by only a few pennies. The Street, by contrast, underestimated Apple's earnings by 40 cents a share — a stunning 22.5%.
But the best individual performance goes to a professional, RBC Capital's Mike Abramsky, who had three greens and no reds, correctly calling (or at least getting in the ball park of) unit sales numbers for iPhones, iPods and Macs — although he did miss revenues by $367 million and, bizarrely, has the lowest price target for Apple in the business: $70 a share.
On the other hand, the two worst performances were also turned in by professionals: Bernstein Research's Toni Sacconaghi, who scored no greens and missed Apple's revenue number by $874 million, and Morgan Stanley's Kathryn Huberty, who underestimated unit sales in every category and missed the iPod number by 6.27 million units. (If anybody has her estimates for revenue and EPS, we'd love to fill in those blanks.) (UPDATE: Huberty's Q1 estimates: EPS $1.34; revenue $9.569 billion. Thanks Turley!)
For everybody else, it was mixed bag. Zaky scored two greens and two reds, overestimating iPhone sales by 2.75 million units (a mistake he attributes to the fact that Apple drew down iPhone inventory heavily in the quarter).
Piper Jaffray's Gene Munster, the bulls' favorite analyst, came closest on Apple's revenue number but missed its EPS by 45 cents. We've asked him how that can happen and will update if we get an answer.
Special mention goes to Scott Craig of Merrill Lynch, who scored highest in Apple's tricky non-GAAP numbers, the adjusted earnings that factor out deferred revenue on iPhone sales (see Spotlight on Apple's hidden revenue stream). Making sense of Apple's subscription accounting is so tricky that most analysts don't bother to do it. As you can see in the chart below, Craig did it better than anyone:
Overall, we'd have to call this one a draw. The bloggers called the EPS correctly, but the best individual performances were turned in by pros. Zaky, for his part, thinks we should give this round to them.
For our live blog of the earnings call, click here. For a transcript, click here. Apple's press release, which includes its balance sheet, is here. And if you have an hour to spare, you can download a podcast of the earnings call — including COO Tim Cook's "we believe" speech — from the iTunes Store, where it will be available for two weeks. Just search the store for Apple Quarterly Earnings Call.
Just thinking off the top of my head, if inventory levels had remained in their normal 5 to 6 week range, you probably would have seen Macs at 2.8M and iPhones at 5.6M and iPods at 23M.
And, comparing that to the list of analyst and blogger predictions, I would say Turley Muller was closest, while noone was anywhere near the iPod figure.
I went to the conference call transcript just to check my memory of the conference call, and here are the quotes:
"We began and ended the quarter with between three and four weeks of Mac channel inventory."
"We ended the quarter within our target range of four to six weeks of iPod channel inventory or a look-forward basis."
"despite launching in 20 or so additional countries and some additional channels within countries that we had previously launched, we ended the quarter with sequentially lower channel inventories.
The level that we're at we're very comfortable with. And I think you have to obviously take the changes in channel inventories in both quarters into consideration in looking at sequentially the sell through."
"Sure. I'll be specific. The draw down was about a quarter of a million."
"If you look at the Mac and the slight decline sequentially and you think about the macroeconomic environment from fiscal Q4 to fiscal Q1, I think it's a fantastic result, so I'm thrilled with it. I'll remind you we grew 9% on a sell-in basis and we did take down the channel inventory some in addition to that. "
All of the above quotes are from Oppenheimer and Cook. As you can see, Mac channel inventory was 3 to 4 weeks, when the norm is 5 to 6 weeks. Even iPod inventory may be low, since it could be as low as 4 weeks. And, the inventory levels are based upon this upcoming quarter's sales expectations, which as you know are lower, then a Xmas quarter.
You can read the conference call yourself at the following URL: http://seekingalpha.com/article/115797-apple-inc-f1q09-qtr-end-12-27-08-earnings-call-transcript?page=-1
To be completely fair and accurate, one should make some adjustments to Apple's numbers. Those are shipped numbers, not sold numbers. It wouldn't matter if inventory levels in the retail channel stayed at the normal levels of 5 to 6 weeks, but when inventory levels vary, they screw up the predictions. In this case, inventory levels dropped signficantly for iPhones and Macs. The iPhone inventory level dropped 250k from the previous quarter. In fact, I know the bloggers were counting on inventory levels increasing to stock the 4000 WalMart points of sale that were added before quarter end. And, Apple added 23 new countries to the iPhone retail chain. Most were expecting an increase in inventories of 500k, and possibly 1M. The fact that Apple dropped inventories 250k, made a swing in predictions of anywhere from 750k to 1.25M. Imagine what that does to predictions!
The same happened in Mac inventory. I believe Oppenheimer said inventories dropped from the normal 5 to 6 weeks to just 3 weeks. In other words, cutting Mac inventories in half. Dropping inventories by 3 weeks could be as much as 600k Macs. Take 2.5M divide by 13 weeks and multiply by 3. Of course, you have to factor in retail sales vs internet sales.
Either way, a change in inventory levels from the norm has a huge impact on predictions since Apple rarely varies too much.
Thanks. The color coding is hand, but may I suggest a change for the next quarter's results?
Instead of just who was closest and who was furthest from the actuals, consider highlighting lowest furthest from actual and highest furthest from actual.
This would help distinguish the overly optimistic and overly pessimistic.
For the case where analysts have the units down well but underestimated Revenue, it is a matter of knowing the mix of sales in each category. We know that the iTouch was really popular this quarter for iPods, and laptops made up a bigger share of Macs than in the past. Hence Revenue estimates were likely underestimated due to a higher proportion of higher priced items in a category than estimated.
If you have the Revenue numbers correct, and can make a reasonable guess at Margin based on previous quarters for Apple, and we know how many Apple shares there are, EPS is easily estimated. Well, Apple has stated they expected margin to go down, and instead, it has not significantly changed – hence a reason for underestimating EPS even if close on Revenue.
It's incredible that these pros have not had company resources realigned away from their personal bank accounts.
Had buy ratings on AAPL when it was at $202, and waited until it fell 50% before they downgraded to hold/sell. Gee, thanks. Now that their reasons for downgrading have proven faulty, will they revalue?
Toni Socconaghi is simply terrible. Is everyone at Piper Jaffray that bad? I had no idea that firm was so shoddy.
Mike Abramsky's target of $70/share is hard to comprehend. The company was sitting on $31.50/share in cash, and that will grow more than $3 during this, the company's slowest, quarter. At the end of the quarter, Abramsky thinks the fair value of AAPL is 2x cash on hand?! The other $35 buying the enterprise, which NOBODY feels will earn less than $5 GAAP under the absolute worst possible economic forecast. An absolute worst-case 7x earnings for a company that is bucking the macroeconomic trends? That's laughable. Put in a more realistic $6 bad-case GAAP earnings, and the laughter increases. Consider the non-GAAP earnings, and you realize that people's hobby businesses sell for a greater multiple. Value on a cash-flow basis, and you'll wonder how Abramsky ever got this job.
Seriously, with this lousy of a work product, why do these individuals still have jobs?
Abramsky nailed the estimates for sales in all three categories, but called revenue $400M low. He rates the stock as "underperform" and puts a $70 price target. So he's clearly pretty far off in terms of estimating AAPL's margins. Given that he's been proven wrong on the margin estimates he's using, do you think he'll upgrade the stock? And can we ask the SEC to investigate what appear to blatant attempts at market manipulation?
We can see that bloggers aren't all bullish for no reason. They were the closest on GAAP-Based EPS figures. We can see that most analysts still don't get Apple. And we can see that one analyst in particular (a ray of hope), Scott Craig, is worthy of praise for understanding Non_GAAP (although Gene Munster was closer on EPS for Non-GAAP). Thank you so much for "Analyzing the Analysts". People need to be held accountable for making a company go down in the market so much, when the fundamentals of the company are still sound. Instead of selling out, people need to understand real truths of what is happening here. We are in the midst of Apple gaining market share more and more, as Windows declines in market share (meaning trouble not only for Microsoft, but for all their partners). Can you hear the train a' comin'? I can. Get on board, this train is a good ride for long-term investors.
Thanks… This is always interesting stuff when you summarize it this way.
Certainly this week shows huge differences between AAPL and MSFT 
Having 3 greens and missed the eps by 30cents? Abrasmky needs some math classes even though the margin was larger than expected.
What I don't understand is how all the PRO's managed to understand how many units would be sold and still miss earnings by so much!
I know if I was that wrong I would have some SERIOUS explaining to do to my boss. What gives?
ex ped: I assume they underestimated Apple's profit margins.
One thing that stands out is that Toni Sacconaghi and Kathryn Huberty have repeatedly published bearish reports about Apple, and have driven the stock down again and again. Not only are they incompetent, but may be actively betting against Apple. Does the SEC investigate them? Not in your life. At the very least, both of them should be fired for their utter incompetence and prejudice. When you are consistently wrong quarter after quarter, what value do you bring customers of your brokerage firm?
Memo to Toni and Kathryn: Starbucks called. They need baristas…