AAPL reported June quarter 2010 results after the close on Tuesday.  Per share earnings were $3.51, way above the Wall Street consensus, suggesting the company is on track to post eps of about $14+ for the current calendar year.

The company’s press release and conference call, as usual, contained a laundry list of all-time highests and significant milestones passed.  For example, in the June quarter AAPL posted its highest three-month revenue ever (even better than last holiday season) at $15.7 billion.  That was up 61% year over year, by the way.  Mac sales were also a quarterly record at 3.47 million units, up 33% year over year.  As my brother in law, a long-time Apple devotee, put it the only thing the AAPL report seemed short on was superlatives to describe the operating performance.

the details

–AAPL sold 9.4 million iPods during the quarter, down from 10.2 million in the corresponding period of fiscal 2009 (ends September).  But higher-priced iTouch units were up 48%, raising the average selling price for all iPods by 12%.  This meant iPod revenues were up 4% despite the sharp decline in unit volume.

–AAPL sold 8.4 million iPhones, including 1.7 million+ iPhone4s.  This was 61% year over year growth, substantially above the estimated 38% expansion rate of the global smartphone market.  AAPL could have sold more phones, except that: a) it deliberately ran down inventories of older phone models in preparation for the launch of new ones, and b) it ran out of iPhone4s to sell.

At $5.33 billion, iPhone revenues were up 74% year on year, and implied an average selling price during the three months of $595.

–Mac sales, as noted above, were a record 3.47 million units.

–iPad sales were 3.47 million units in the June quarter, totaling a bit under $2.1 billion, with maybe $80 million in accessories to boot.  ASP was about $640.

–the Apple Stores booked $2,58 billion in sales during the period.  That was 73% higher than in the June period of last year.  Average revenue per store was $9 million vs. $5.9 million a year ago.  Half the Mac buyers in the stores were new to AAPL computers.

–iTunes generated over $1 billion in revenue.  The app store now has over 225,000 selections, including 11,000 for the iPad.  there have been over 5 billion downloads to date.

–AAPL’s margins were 3.1 percentage points higher than it had expected.  The biggest single reasons were surprisingly brisk sales of iPhone accessories  and higher iPhone sales than expected (this must mean that older models sold unusually well, since iPhone 4 has lower margins).  Yes, the iPad did depress overall margins by the expected 150 basis points.

AAPL is also lowering its full year tax rate slightly, implying higher than expected sales in low tax rate areas (read: non-US sales).

what caught my eye

–Apple Store sales.  No sign of recession here.

–AAPL is selling iPhone4s and iPads as fast as it can make them.  This means the company doesn’t have a firm idea of what true demand for either is–just that it’s a lot bigger than AAPL planned for.  Also, both devices carry lower than company average margins.  I think this is a tale of two different devices, namely:

iPhone4

iPhone4s are selling as fast as AAPL can make them. So all the company really knows about demand is that it’s greater than AAPL can fill.  Therefore, AAPL doesn’t know whether it is losing market share to Android-based phones or not.

Returns of the iPhone 4 so far have been lower than for previous versions of the iPhone.  Virtually none of the returns are being identified by the user as being due to antenna problems.  (These problems apparently arise from the fact that antennas of different lengths for different frequencies are embedded in a bezel around the edges of the phone.  Poorly placed fingers can connect two antenna segments, thereby lengthening the antenna and losing the signal.)  Despite this, AAPL is offering all iPhone4 buyers a free case that fixes the issue.  AAPL will defer what it thinks will be $175 million in revenue that would otherwise be recognized in the September quarter from iPhone4 sales where the owner hasn’t responded to the offer of a case.  Not a big deal, but might slow AAPL’s growth rate this quarter by a percent.

Why the lower margins for iPhone4?  After all, it’s the best iPhone yet?  I think it’s competition–actual or anticipated–from Android.  If so, it signals a maturing of the cellphone business, the source of the largest part of AAPL’s profits.

iPad

The iPad is also selling as fast as AAPL can make the units.  So, just as is the case for the iPhone4, the company knows only that demand is higher than AAPL is able to fill.  AAPL management thought is was being very aggressive in assuming it could find buyers for a million units a month.  But that turns out to have been too conservative.  In its first three months, iPad is already well over 10% of AAPL’s business by revenue.

So far–admittedly a short time–there’s no apparent cannibalization of other AAPL products by iPad.   Mac had a record sales quarter and iPod Touch was up 48% year over year.  AAPL seems to be almost hoping that iPad begins to cannibalize PC sales, however.

The arithmetic is pretty straightforward.  If, say, 10% of current PC users would prefer a tablet like an iPad, then AAPL would lose sales of 3 million-4 million yearly Mac units, which would be offset to some extent by an equivalent number of iPad purchases.  Consider, however, what happens in the 90% of the PC market that AAPL doesn’t have.  A 10% shift toward tablets gives an addition sales potential for iPads of about 30 million a year. So cannibalization could well translate into a loss of $3-5 billion in Mac revenue, but a gain of $20 billion in iPad sales.  Not a bad tradeoff.

Why the low margins?  Unlike the situation with the iPhone, there’s no formidable competitor to the iPad in sight.  But AAPL wants to penetrate the market a deeply as possible, in the hope the iPad can become the de facto industry standard before a competitor emerges.

investment conclusions

I’ll elaborate in a later post, but I think the stock still looks to be reasonable value.  Growth stocks rarely have more than five years or so in the limelight.  Wall Street analysts seem to me to be clearly worried about this–about the possibility of competition in AAPL’s main business lines and about what AAPL can possibly do to replicate the fabulous earnings growth of the past half-decade.  On the other hand, growth stocks typically peak at outrageously high price earnings multiple.  The deadly combination, then, is earnings shortfall + elevated multiple.  In AAPL’s case, the former seems unlikely for now.  At 17-18x calendar 2010 earnings, the latter doesn’t appear to me to be the case, either.