Former market darling Apple Inc. (NASDAQ:AAPL) announced earnings last week that came in slightly ahead of the analyst consensus. While this is certainly a positive bit of news, it isn’t what had investors truly excited. What really made the difference was the announcement of the company’s plans to begin returning some of its monster cash pile to investors, a move that according to some is long overdue. Is this enough to restore confidence in Apple’s stock?
While not the most salient point of the report for many investors, it may be useful to take a quick look at Apple’s earnings before moving on to their cash position. EPS for the quarter came in at $10.09 versus a consensus of $10.00. This is encouraging, but is important to note that this is down from $12.30 in the same period a year ago for a fairly hefty 18% decline, the first in over a decade.
Revenue on the other hand rose 11% to $43.60 billion, beating the $42.33 billion consensus estimate for the quarter. Sales figures came in better than expected, with iPad sales up from 11.8 million units in the same period a year ago to 19.5 million for this quarter. On the other hand, the gross margin declined somewhat to 37.5%, under previous guidance and well below the 47.4% it achieved in Q2 2012.
Apple Inc. (NASDAQ:AAPL) guided a little lower going into the third quarter of fiscal 2013, now expecting revenues of between $33.5 billion and $35.5 billion versus $35 billion in Q3 2012. Gross margin is expected to decline further to between 36% and 37%. Analysts are looking for EPS of $9.08 in Q3, down from $9.32 in the previous year.
The Embarrassment of Riches
For a long time, the company prided itself on its enormous balance sheet, totaling some $145 billion in cash. To put this ridiculous figure into perspective, the amount of cash the company has lying around is more than the nominal GDP of a country like Vietnam or roughly three times the GDP of a country like Bulgaria. Apple Inc. (NASDAQ:AAPL) has increasingly come under fire from shareholders for not returning some of this cash, and now has finally announced a number of measures to do just that.
First of all, the company announced a dividend hike of 15% to a quarterly dividend of $3.05 per share. The company will now pay some $11 billion annually in dividends, and plans to review its payout every quarter. Secondly, Apple Inc. (NASDAQ:AAPL) has announced plans to drastically increase its share repurchase program from $10 billion to $60 billion, the largest share buyback authorization in history. Finally, in order to facilitate the return on capital program, the company plans to start taking on some debt.
The news was met with approval from some investors, but the real question is whether these decisions are enough to restore shareholders’ confidence in the company. The issue of what to do with its cash reserves, while certainly an important one, is not the main problem. The problem is whether Apple Inc. (NASDAQ:AAPL) will be able to remain competitive in an increasingly crowded environment where it is facing stiff competition from cheaper, and sometimes better alternatives.