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By Jeremy Glaser and Brian Colello, CPA | 10-28-2013 05:20 PM

Apple's Core Business Remains Solid

New hit products could provide some upside for Apple but aren’t needed to support the current valuation, says Morningstar’s Brian Colello.

Jeremy Glaser: For Morningstar, I’m Jeremy Glaser. I’m here today with Brian Colello. He is our senior equity analyst who covers Apple. We’re going to look at the tech firm’s latest quarter and what it could mean for investors.

Brian, thanks for joining me.

Brian Colello: Thanks for having me.

Glaser: Let’s start with just a brief overview of your first take on the quarter. You just got off the earnings call. What did you think about this quarter?

Colello: Well, it was a solid quarter. The fourth-quarter results, Apple reported $37.5 billion of revenue, a little ahead of consensus estimates. Earnings per share was of $8.26, again, beating Wall Street estimates and a little ahead of our expectations. But really the outlook, most of the focus is on the guidance for the December quarter, Apple’s fiscal first quarter, and it was solid guidance. The guidance was $55 billion to $58 billion of revenue. The Street was looking for $55.5 billion, so it's solid there. The one problem that led to a little bit of a sell-off after hours was the gross margin guidance. They guided for 37%. I think investors, because of the iPhone 5S launched as being a premium product, because they didn’t come out with a low-end iPhone 5C in emerging markets, I think investors were looking for a little bit stronger profitability.

What we found out on the call on the bright side is they guided to 37%. But there is basically a software adjustment for deferred revenue, basically because Apple is giving more of the software away for free and the iOS upgrades, they’re taking a gross margin hit. If you adjust for that, which has not really been material in prior quarters, the gross margin guidance probably works out to something like 38.5%. That would have been better than anticipated. So you saw the stock trade from down 2% after hours to pretty much flat. So, all in all, I think the guidance looked strong.

We think that guidance implies something in the low- to mid-50 million unit range for iPhone [sales], if you think about it, they sold 47 million in the December 2012 with the iPhone 5. So this implies some growth. Now, that’s going to come from carriers. Apple struck a deal with NTT DoCoMo. There is T-Mobile this year. The firm is selling in China a quarter early. You kind of understand the reasons, and that implies flattish sales for the rest of the world. But that's a strong number. When this stock was trading in the $400 range, I think investors were looking at much less than that. So overall I think it's a good guidance and a good outlook for December.

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