The 5 Key Takeaways From Apple's Earnings Call

The 5 Key Takeaways From Apple's Earnings Call

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks were little changed today -- but enough to make another record high, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average up 0.13% and down 0.01%, respectively. The two-day October Federal Reserve meeting, which begins tomorrow, is not the "must-follow" event it has been in the recent past - there is absolutely zero chance the central bank will decide to taper its bond purchases (a.k.a. "quantitative easing") this month. Yes, folks, that's more time for you to spend focusing on earnings and fundamentals.

Apple released its results for its fiscal fourth quarter (ended Sept. 30) after the market close today. The devices-cum-lifestyle company beat Wall Street expectations on the top and bottom line, with diluted earnings per share of $8.26 against $7.93 and quarterly revenue of $37.5 billion versus $36.8 billion. However, iPhone and iPad sales of 33.8 million and 14.1 million units, respectively, were just below/at the bottom end of the analysts' range. Apple's stock was down 1% at 7:44 p.m. ET in after-hours trading.

But beyond the numbers, here are five of the most interesting points raised during Apple's earnings call:

Margins: Apple guides flat for the current quarter
Apple CFO Peter Oppenheimer: "We're pleased to be guiding flat given all the new products we're announcing -- but higher deferred revenue offsets."

By "guiding flat," Oppenheimer is referring to the guidance Apple provided for the gross margin in the current quarter of 36.5% to 37.5%, which is flat compared with the 37% achieved in the September quarter.

On one hand, new products have lower gross margin because costs haven't been fully wrung out of the production process. (Later, CEO Tim Cook said, "We will endeavor to get down cost curves as we have in the past.") On the other hand, the revenue that is deferred from last quarter into this one flows through directly to the gross margin.

Capital allocation: Trust us; we've done this before
Last week, activist investor Carl Icahn made public a letter he sent to Cook enjoining him to implement a jumbo $150 billion stock buyback. Regarding capital allocation, Cook said Apple will handle matters as it has in the past -- the board and management team will review the issue. Furthermore, he is spending a lot of time on how Apple decides what to do with its cash and highlighted the $36 billion returned to shareholders in dividends and repurchases over the past five quarters.

In other words, Cook and his board will not be rushed or intimidated into instituting a buyback the size of its entire net cash position.

iPad: Mind share, not market share

In referring to the tablet market, Cook said: "We see it as a large opportunity to us," adding that last week's announcement concerning the new iPad line was the most significant iPad announcement ever. However, he emphasized that huge market share is not the end game; instead, Apple is seeking to create the best product and cement customer loyalty.

iPhone 5: We got the pricing right; you misunderstood the positioning
Last month, when Apple unveiled the iPhone 5c and 5s, analysts and investors reckoned that the company had botched the pricing on the lower-end 5c -- too high at $549 (without a contract). That perception contributed to a 5.4% stock price decline on the day.

When he was asked this afternoon about the pricing, Cook suggested that the 5c's positioning had been misunderstood, insisting that the notion of the 5c as an entry-level device was a "rumor" -- that position is filled by the iPhone 4s. All three devices (4s, 5c, and 5s) correspond to different markets, and Cook said he wants all three to grow.

New products vs. new product categories
New products are great, but investors are anxious to see Apple launch a new product category, just as Samsung did with the Galaxy Gear smartwatch last month. On this front, Cook was non-committal, preferring to speak in generalities:

In terms of new product categories, if you look what Apple has in hardware, software, and services -- I think no one else has a set of skills on this. We believe we can use our skills at building other great categories that are in areas where we do not participate today -- we are pretty confident about that.

He went on to clarify that he had only ever said we'd see new "products" in this year and next, and that he never referred to a calendar for "new product categories."

Apple will destroy its greatest product
While Tim Cook wouldn't commit, we know it's coming: Apple has a history of cranking out revolutionary products -- and then creatively destroying them with something better. Read about the future of Apple in the free report, "Apple Will Destroy Its Greatest Product." Can Apple really disrupt its own iPhones and iPads? Find out by clicking here.

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Fool contributor Alex Dumortier, CFA, has no position in any stocks mentioned; you can follow him on Twitter: @longrunreturns. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Originally published