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Analyst Estimates About Apple Confront Reality

In the run-up to the release of Apple’s finances for the March quarter — its second fiscal quarter — the general patter from the critics was that Apple was in big trouble. iPhone sales must be flagging. Reports from the supply chain said so, and, further, Apple must heed the wake-up call and right the ship or continue to suffer the consequences. There were even a few demands to dump Tim Cook as Apple CEO.

Despite the concerns, analyst predictions about Apple’s financial performance actually ended up within the company’s own guidance of revenue in the $41 billion to $43 billion range, with gross margins from 37.5% to 38.5%. If Apple met these modest goals, why complain?

Well, it turns out that this is pretty much what actually occurred. In the March quarter, Apple reported a record quarterly revenue of $43.6 billion and net profits of $9.5 billion, or $10.09 per diluted share. That compares to last year’s results of $39.2 billion in revenue, with a net profit of $11.6 billion, or $12.30 per diluted share. Revenue sat above the high end of Apple’s guidance, while gross margins of 37.5 percent were at the low end. This compares to margins of 47.4 percent in the comparable 2012 quarter.

The sole bad news in these results is that Apple’s profits decreased for the first time in 10 years, but the company is still clearly getting the lion’s share in the tech industry.

Despite reports of poor sales of the iPhone, Apple sold 37.4 million, compared to 35.1 million last year. iPads fared even better, with sales of 19.5 million, compared to 11.8 million in the 2012 quarter. Mac sales were reported at just under four million, a two percent decline compared to last year. But Apple substantially outperformed the PC market as a whole, and forget about the claimed 7.5 decline announced by IDC in one of its typically wrong surveys. The main reason for the slight downturn was due to reduced sales of note-books, according to Apple, which haven’t seen a major change since last fall, and the minor refresh for the MacBook Pro with Retina display hardly counts. In the conference call with financial analysts, Cook also characterized the PC market as “incredibly weak,” and said it was “certainly true” that the iPad somewhat cannibalized Mac sales. He also suggested people are lengthening their upgrade cycles, but still felt the PC space had a lot of potential left.

In a surprising response, Cook actually said that they should have delayed the introduction of the 2012 iMac.”In retrospect, yes, I sort of wish we had done it after the turn of the year,” because customers had to wait a month or two to take delivery. That seriously hurt Mac sales in the December quarter, which only inflated false Wall Street impressions that Apple was in deep trouble. Nobody probably cares, but I’ve suggested the same thing in recent commentaries.

For the current quarter, Apple predicts revenue of between $33.5 billion and $35.5 billion, with gross margins between 36 percent and 37 percent. Apple bases the lower margins on such factors as a changed product mix. Yes, these figures are below Wall Street estimates, but remember the street has been frequently wrong about Apple.

In a development expected by some, Apple’s board also announced an increase in the stock buyback program to $100 billion by the end of 2015. Inasmuch as Apple now has nearly $145 billion cash on hand, and will likely have a lot more by then, this appears to be a reasonable way to deal with all that extra money. In addition, Apple’s board declared a dividend of $3.05 per common share, payable on May 16, which represents a 15% increase.

This decision, and reporting decent sales for the March quarter, may serve to somewhat calm Wall Street’s endless jitters about Apple’s future potential. Bear in mind that these results were achieved without a single major product introduction.

Cook dropped hints, but told nothing new about upcoming gear, speaking only of “exciting new product categories” in predicting great things for the rest of the year, including “amazing new hardware, software and services.” However, Cook indicated that the major product intros will begin to arrive this fall, and continue through 2014. This presages a barren spring and summer, but nothing is certain when it comes to Apple.

Although 300 million people use iCloud, nothing was said about the ongoing problems with the service. The next version of iOS? The next Mac OS revision? I didn’t expect to hear anything about it, and the questions weren’t even asked.

Now when it comes to rumors about a cheap iPhone, Cook dropped one hint that such possibilities should be taken seriously: “We’ve made the iPhone 4 even more affordable, which has made it more attractive to first-time buyers.” That’s a model that first appeared in 2010, an eternity in the smartphone business. This may be a strong reason for Apple to justify introducing a new, spiffier model that would cater to the same market segment, but that’s just speculation. Cook also seriously downplayed the possibility of an iPhone with a larger screen anytime soon, or at least until what they perceive as “trade-offs” in display quality can be resolved.