Apple's first quarter shines, but the outlook crushes stock; Is the beating warranted?

Updated: Apple on Tuesday reported strong first quarter results handily topping estimates as it lured holiday shoppers with new Macs and iPods. However, Apple's outlook for the March quarter left a lot to be desired and may hint at a demand slowdown. Wall Street shot first and asked questions later.

The company reported first quarter earnings of $1.58 billion, or $1.76 a share, on revenue of $9.6 billion. According to Thomson Financial, Apple was expected to report earnings of $1.62 a share on sales of $9.46 billion. In the first quarter a year ago, Apple had a profit of $1 billion, or $1.14 a share, on revenue of $7.1 billion.

So far so good right? After all, Apple's December quarter was its best ever.

And then came the outlook. In its statement, Apple projected second quarter earnings of 94 cents a share on revenue of $6.8 billion. For the March quarter, Wall Street was expecting Apple to report earnings of $1.09 a share on sales of $6.98 billion.

The end result: Apple shares were shredded after hours, down to $139.95 from a close of $155.64.

Other than that outlook, which could point to weaker demand or overly optimistic analysts (the highest March quarter revenue estimate was $7.7 billion), Apple's results were strong. On a conference call, Apple CFO Peter Oppenheimer didn't explicitly say that the company expects weak demand from consumers. He said:

"I think the guidance we're projecting is up 29 percent (from year ago quarter). We give you guidance we have a reasonable confidence of achieving. I remain very confident in the business."

He also added:

"In terms of the economy we'll leave the economic forecasts forever. We're focusing on operating the business."

And when asked how Oppenheimer feels about demand, he said:

"I am very confident in our business, strategy and products."

My take: Apple has no credibility when it comes to issuing guidance. The company has repeatedly been way conservative with its outlook. Has Apple overpromised in the last 10 years? Nope. Apple underpromises--sometimes by a lot. That said, economic worries are real and perhaps Apple is lowering the bar a bit as insurance. Overall, it doesn't sound like Oppenheimer is predicting impending doom. He said Mac sales were strong throughout the quarter, but iPod sales tailed off a bit because of gift giving. In fact, I don't think Oppenheimer actually believes the outlook he's dishing out. The quarter was impressive and the outlook is still impressive--even though it's not meeting Wall Street targets.

By the numbers:

• Gross margin for the December quarter was up to 34.7 percent, up from 31.2 percent a year ago.
• International sales, which until a few days ago was a good thing, was 45 percent of revenue.
• Apple shipped 2,319,000 Macs, up 44 percent on units from a year ago.
• Apple sold 22,121,000 iPods in the quarter, up 5 percent from a year ago in units.
• In the quarter, Apple sold 2,315,000 iPhones.
• Apple had $18.4 billion in cash at the end of December.
• Deferred revenue as of Dec. 29 for the iPhone and Apple TV was $816 million.
• Desktop revenue in the first quarter was $1.5 billion with notbooks coming in at $2.04 billion.
• Other music related products and services (iTunes roughly speaking) was $808 million, up from $634 million a year ago.

Aside from worries that Apple is hitting the iPod saturation point--a big worry since a lot of folks have at least two or three iPods--there's very little to quibble about there.

Update: Oppenheimer and COO Tim Cook did the walkthrough with analysts, who were obviously interested in the reasons behind the outlook. Oppenheimer said March quarter margins will be 32 percent. Oppenheimer said Apple was guiding gross margin down for two factors: A sequential decline in software sales (Leopard, iLife) and the usual March quarter slowdown. "We remain confident in our product pipeline and look forward to 2008," said Oppenheimer, who mentioned the MacBook Air launch last week (see Macworld coverage).

Other takeaways:

• The number of iPhones bought with the intention of unlocking was "significant," but Oppenheimer was unsure about how to evaluate the numbers to come up with a good estimate.
• Sales of Macs are growing 2.5 times industry rate. Oppenheimer said "the Macintosh business is on fire."
• Leopard response has been terrific. Revenue was $170 million in the quarter, up a good chunk from the Tiger launch.
• Inventory for iPod was 4 to 6 weeks. Oppenheimer talked up iPod touch. In addition to "selling very successfully, the iPod touch drove up ASPs to $181, up sequentially and year over year. Oppenheimer noted that the iPod touch has carved out a high-end ASP in the iPod lineup.
• It's too early to tell whether the MacBook Air will take sales from other laptops in Apple's lineup.
• Apple retail stores were $1.7 billion. Average revenue per store was $8.6 million, up from $6.6 million a year ago. Store traffic was strong.
• On the iPod saturation issue, Cook said that Apple views the market as larger than just music players. He talked of the iPod touch being a multimedia platform. In a nutshell, Cook said the market isn't saturated.