Apple'S Q2 2012 results weren't quite as strong as last quarter’s (the holiday period), but year-over-year it was another set of records for Apple.

Apple Q2 2012 Highlights

  • Revenue was $39.2 billion, profit was $11.6 billion and EPS was $12.30. Wall Street analysts had been expecting EPS of $10.06, so this is a substantial beat.
  • Apple shipped 35.1 million iPhones, only slightly below the 37 million shipped last quarter (the holiday quarter). Impressive! This represents 88% year over year growth in unit shipments. However, over 2 million of the phones shipped were to help build up channel inventory.
  • iPad shipments were 11.8 million units. This is down from 15.4 million last quarter, but is still 151% unit growth compared to last year’s March quarter.
  • Mac sales grew 7% year over year, while industry analyst data shows that the entire PC market only grew 2%. So while Apple’s Mac business isn’t the sexy growth engine of the company, this product division is still kicking some Redmond butt.
  • As expected, the iPod business is shrinking. Apple sold 7.7 million units compared to 9 million last year. They still control over 70% of the US MP3 player market, but obviously the strength of the iPhone is displacing the need for stand alone MP3 players.

Overall, these strong numbers have set the stock back up to $600, after cratering to about $560 over the last 11 trading days. Is it enough to help the company reach a new high? Perhaps not this week. But I think Apple will get there.

Wall Street’s only criticism is Q3 financial guidance. But that’s typical with Apple. The company notoriously plays down its earnings potential for the next quarter. Then, almost like clockwork, they beat their own forecast.

Apple currently says it will earn only about $8.68 in EPS next quarter. Wall Street had been modeling $9.93. It’s likely that analysts will pull in forecasts for Q3, but I don’t see this as a cause for alarm. Apple is in fine shape. It’s just that they had huge demand for the iPhone 4S last quarter and channel inventory (carrier shelves) were bare. Apple needed to stock them up. So they did. They shipped about 2.6 million extra iPhones to accommodate this inventory build.

Gross margin was also incredibly strong for Apple this quarter. In fact, they reported margin of 47.4%, a whopping 540 basis points above expectations. They say half of this strength was due to commodity pricing. When you’re as big as Apple I guess you’re bound to get better pricing on components. The rest of the margin beat comes down to unexplained one time items, and revenue mix. I find it amazing that Apple’s revenue mix helped margins considering that the more expensive “new iPad” is now selling. It has a more expensive screen, batter, radio, processor and a bunch of other upgrades so it surely has a higher BOM (bill of materials) cost. And they STILL delivered such stellar margins? Wow.

Tim Cook recently unveiled Apple’s big dividend plan. Will this put much of a dent in cash? It sure doesn’t look that way. Apple’s cash balance is now over $110 billion, up from $97.6 billion last quarter. They’ve certainly left themselves room to raise the $2.65 quarterly dividend.

During the Q&A session, Cook took a question on the highly visible topic of iPhone subsidies. He answered by saying that the subsidy is low in proportion to the net revenues carriers generate over the 24 month contract period. But he also said something else that I found surprising. Cook said,

“Our engineering teams work extremely hard to be efficient with data and differently than some others. And we believe as a result of this iPhone has far better date efficiently compared to other smartphone that are using sort of an app rich ecosystem. Finally, and this is most important, iPhone is the best smartphone on the planet to entice a customer who is currently using a traditional mobile phone to upgrade to a smartphone. This is by far the largest opportunity for Apple, for our carrier partners and its a great fantastic experience for customers. So its a win win win there”

So, Cook is saying that the iPhone is far more data efficient versus Android (not BlackBerry, notice the careful wording). But more important, customers who upgrade to their first smartphone still want the best phone ... hence Cook’s huge confidence in Apple’s upside.

On China: “There’s a lot of headroom here in our view”

In response to a question asking for more details on China, Cook said revenue was over $7.9 billion in the quarter. That’s up more than 3x over last year. If China was only 10% of Apple’s business, this wouldn’t be so darn impressive. But $7.9 billion is one fifth (20%) of total revenue. That fifth is up over 3x? Holy cow. Cook described the results as “mind boggling”. Pent up demand for iPhone 4S was a big part of the growth. But iPad 2 growth is strong and the new iPad isn’t even shipping in mainland China yet. Mac sales in China were also up 60% versus 6% for the overall market. So the halo effect is alive and well in China.

iPad Growth Opportunity Still Huge

Apple emphasized a few times that the supply of new iPads is constrained right now. They are selling them as fast as they can make them. They haven’t launched it in mainland China yet. The opportunity for iPad growth still seems insanely huge. The education (K-12) market is buying 2 times as many iPads as Macs. The lower pricing on iPad 2 has created a spur of demand in several countries. Cook points out that many industry analyts are forecasting the tablet market to be as big as the PC market by 2015.

Conclusion: The stock is a keeper

I’m hanging on for the ride on this one. I’ve been a very happy shareholder ever since the first iPhone came out. I like how Apple sticks to its view of the world and just executes with precision. There are a lot of mobile phone users who don’t have smartphones. Apple will capture its fair share of them. There are a lot of laptop / desktop users who don’t own tablets yet. Apple will capture a good chunk of those. And there are still tons of people who aren’t using Macs. Apple continues to gain traction there.

The stock may be trading at $600 again, but they have over $116 per share in cash. They’re piling on cash at an incredible rate. I don’t feel like we need to rehash the price to earnings multiple here, but it isn’t high. Given Apple’s growth, it seems to me this is a must own tech stock. But that’s just my opinion.