Apple - all about the operating system

I had the opportunity to watch the Apple results 'live' on financial TV.  It was an interesting experience as the after hours ticker bumped up and down (mostly down) and new interpretations kicked in. 

As is often the case, perception and reality are two different things...and that is certainly true of Apple results. 

What was getting the post-market action so excited was this:

You have to admit that this does not look so clever, combine it with this chart on sales progression and you have your story: margins and sales that are losing their momentum

Forget that revenue was US$37.5 billion, ahead of Wall Street's average forecast of US$36.8 billion, and EPS was US$8.26 (also ahead of analysts' average estimate of US$7.94) this is all about where the company is going.

And then the Apple conference call started.  I am grateful to the excellent report here on the www.ft.com site (subscription needed for full access) for this (with my emphasis added):

9:44pm

More discussion of the deferred revenues: Apple defers part of the sales price of each iOS device and Mac to reflect the software provided free with the devices. With the recent announcement that Apple will give away more software with its devices, the amount of money at issue with each Mac has gone up from $20 to $40, and for each iOS device has risen by around $5 to between $15-20.

9:46pm

In other words: the margin hit was all about the deferred revenue. Gene Munster of Piper Jaffray asks the necessary follow-up question: If you add that back in, is it fair to say that the mid-point of the gross margin range of the present quarter would rise to 38.5 per cent? Oppenheimer confirms that, which he says sounds roughly right.

9:48pm

Like magic, Apple’s stock is back up. It’s now changing hands at more than 1 per cent above the closing price in after-market trading. As software and services become a bigger part of the value in Apple products, it looks like Wall Street will have to get used to a new way of measuring the company’s revenues and profits.

Now Apple shares will remain volatile but all of this sounds very reminiscent of my original review of the company a month or so ago which you can find here.  With the share then at US$475, I thought US$550 was more likely than US$400 based on Apple being more about speed of operating system - so important to a certain cross-section of the population in a mobile world.

That's the key with Apple, it is a luxury goods company.  Software is a key transmission mechanism for this and hence this is their focus. 

So...at today's c. US$525 Tuesday opening share price, US$450 or US$600 first?  US$600 I think but with more volatility.  The market needs to get its head around this and stocks are generally overbought.  Nevertheless the Apple strategy is right...but just for them.  For most players in the tablet or smartphone markets it is about shifting units alone still.