Apple Inc. (AAPL) Solid Results, Gross Margins Remain A Concern

Apple Inc. (NASDAQ:AAPL) FY Q4 results were above the consensus expectation and in line with the company’s prior statement that read “near the high end of guidance”. For the first quarter and for full 2014, Bernstein Research analysts have lowered estimates due to the accounting change.

Apple Inc. (AAPL) Solid Results, Gross Margins Remain A Concern

Solid iPhone sales lifted results

Channel build for iPhone was 3.3 million units, better than the Bernstein Research analysts (A.M. (Toni) Sacconaghi, Jr., Jonathan Cofsky, and Eric C. Garfunkelat) estimate reflecting weak sales, but overall a stable quarter.

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Apple Inc. (NASDAQ:AAPL) racked in revenue of $37.5 billion in the last quarter, which was above the consensus estimate of $36.8 billion and analysts’ estimate of $36.7 billion. Revenue earned was also above the guidance range of $34-$37 billion.

Revenue was 5.6% above the mid-point of guidance, which according to analysts, “was once again consistent with the, company’s new, more realistic approach to guidance.”

Solid iphone sales werea key factor in Apple performing better than the estimates. iPad sales also contributed to revenue with better than expected ASPs. However, Mac revenue came in low, which in turn impacted overall revenue. iPhone units derived benefits from more than expected inventory build estimated by analysts, but iPhone 5S went into a supply glitch due to  shortages.

Gross margin for Apple came in at 37.0%, an increase of 10 basis points and above the analysts’ estimate of 36.9%, and at the high end of guidance of 36%-37%. Earnings per share came in at $8.26, which performed better than analyst expectations of $7.97, consensus of $7.92 and implied guidance of $6.90-$8.00.

Gross margins remain a concern for Apple

For FQ14, Apple Inc. (NASDAQ:AAPL) is expecting revenue to be in the range of $55-$58 billion, gross margin to come in at 36.5%-37.5% and implied Earnings per share of $12.88-$14.16. For the second time, in the past 11 quarters, Apple has guided above the consensus revenues although gross margin guidance is below consensus estimates of 37.9%. Analysts note that both gross margins and earnings per share are affected by software revenue, which has declined due to the company strategy of offering free software to customers.

According to analysts, “half of our reduction in EPS estimates for FY 14 is attributable to the change in deferred revenues, with most of the remainder due to lower gross margins.” Bernstein Research analysts have maintained their Outperform rating for Apple with a price target of $600.