Apple (AAPL) Beats EPS Estimates on Strong Margins, Gives No Hints at iWatch

Apple announced third quarter earnings estimates on Tuesday, beating on EPS but falling short on revenue expectations. The tech giant announced $1.28 per share in earnings, up 20% year over year and above the $1.23 per share analyst estimate. Revenue came in at $37.43 billion, missing the $37.99 billion analyst expectation.

Apple’s strong bottom line was driven by strength in gross margins, which came in at a surprising 39.4%. “Cost improvements came in stronger than we were anticipating…our teams executed really, really well,” said CEO Tim Cook. Apple expects Q4 gross margins to come in between 37% and 38%.

Apple sold 35.2 million iPhones, while analysts were expecting 35.9 million. iPad sales also fell short of expectations, as Apple sold 13.2 million versus the 14.4 million expectation.

Investors yawned in response to the earnings release despite the robust margins, as the Q2 has been one of Apple’s most insignificant quarters in years. Many consumers are waiting to upgrade their iPhones until the iPhone 6 is released. Additionally, Apple didn’t release any new products this quarter, and investors are hoping upcoming products can help restore growth this holiday season.

Apple tends to swing significantly higher or lower on its earnings reports, a trend since the beginning of the iPhone era. However, shares were relatively flat after the bell on Tuesday on the uneventful earnings release, trading lower by around a half percent.

Other Earnings Highlights:

No word on the product pipeline: Investors were hoping Apple would announce or at least hint at its upcoming products. An analyst on the conference call asked CFO Luca Maestri to clarify Apple’s guidance policy, specifically asking whether Apple factored in future products into its guidance figures. Maestri’s response was very ambiguous, giving investors little insight into Apple’s pipelines, as per usual.

However, Tim Cook spoke excitedly about Apple’s product pipeline. “We have a very busy fall. We’re very excited about what we’ve got in the pipeline.” Maestri also acknowledged that iPhone sales were weak this quarter because consumers anticipated a new iPhone, but wouldn’t comment on any “rumors.”

Strength in emerging markets: Domestic iPhone and iPad sales were weak ahead of Apple’s upcoming product refreshment cycle, but Apple’s overseas business was quite impressive. iPhone sales in Brazil, Russia, India, and China (BRICs) rose 55% year-over-year, partially driven by Apple’s deal with China Mobile. Apple also announced that iPad sales in the Middle East rose by over 60% year-over-year.

Cash-on-hand: Apple’s cash hoard also grew a staggering $14 billion this quarter to $164.5 billion despite a recent dividend hike and an increased buyback program. $137 billion of its cash pile remains offshore.

iTunes a strong performer:  iTunes Software and Services billing rose 22% year-over-year, an all-time quarterly high. Apple called iTunes one of the company’s strongest and most surprising performers.                                                                                           

Market share remains strong: Tim Cook cited a few studies and surveys designed to gauge demand for Apple’s products. One study showed that 63% of people who plan to buy a tablet within 90 days plan on buying an iPad. A similar study revealed 50% market demand for iPhone, up from the same quarter a year ago. Cook also said that Macs have gained global market share for 32 of the last 33 quarters.

A Look Toward the Holidays

Up 56% over the past 12 months and just shy of all-time highs, expectations have never been higher Apple. The company faces immense pressure to deliver on its hyped product pipeline or it risks falling behind in current and future product categories.

Tuesday’s earnings were good, not great, but investors will give Apple a pass on the sales miss because all eyes remain on Apple’s pipeline. Apple will need to deliver a big-screen iPhone to compete with the Samsung Galaxy S5 – ideally before the holiday season. KGI Securities recently announced that the large iPhone 6 could be delayed until 2015, while others have since refuted these rumors. A delay would have major implications on Apple’s holiday sales.

CNN also obtained a copy of Apple’s iWatch patent on Tuesday, mounting expectations that the watch will be released this year. This mentality is somewhat dangerous for Apple investors, as the stock could take a beating if Apple fails to release a watch until 2015.

Nonetheless, Apple remains in good shape coming into the holiday season. Domestic and overseas demand appears to be strong and Apple’s cost-cutting efforts have effectively inflated margins, setting the stage for successful product releases in the near future. However, Apple must make haste in releasing these new products in order remain the king of the consumer.