Apple's (AAPL) strong, fiscal fourth-quarter results came in ahead of both the Street's, and our own, expectations. More importantly, 
Apple's solid December-quarter outlook points to healthy demand for the company’s new iPhones and iPads. We're maintaining our $600-per-share fair value estimate, and our narrow economic moat rating.
For the September quarter, revenue of $37.5 billion and earnings per share (EPS) of $8.26 also exceeded the company’s prior forecast. We suspect that the strong results were driven by a tremendous iPhone launch during the quarter's closing days. Apple’s iPhone unit sales held up well, at 33.8 million units, while a 1% sequential decline in the average selling price, or ASP, appears reasonable in light of Apple selling older iPhones during most of the reporting period. Apple's iPad unit sales and revenue declined modestly, but again pertains to the sale of older models, as customers likely pushed out new iPad purchases until the new lineup of tablets rolls out in November.
Apple’s strong outlook for the December quarter still points to robust ongoing iOS adoption, and we continue to view Apple's shares as modestly undervalued. We calculate that revenue in the range of $55 billion to $58 billion likely implies iPhone unit sales in the low-to-mid 50 million-unit range, ahead of unit sales of 47 million during last year's iPhone 5 launch. We attribute most of the projected unit growth to new carrier deals with NTT DoCoMO (NDCM) and T-Mobile (TMUS), as well as launching iPhones in China a quarter earlier than usual. The guidance also hints at strong, but not exponential, iPad growth from new product launches, although even the company is unsure whether it can fulfill all iPad Mini demand this holiday season. Gross margin of 37% is a nice forecast, in our view, once adjusted upward by about 150 basis points for deferred revenue associated with free software giveaways.
We're encouraged by Apple’s December-quarter revenue forecast, as well as management's comments that it remains confident that iPhone 5s production can continue to ramp up in order to satisfy tremendous demand. We recognize concerns that Apple misjudged its iPhone 5s versus 5c product split by building far too many devices of the latter, while possibly being unable to fulfill all demand for the former. Production may shift heavily toward the 5s in the near-term, but based on the company’s healthy revenue guidance, we don’t believe that the firm will be missing out on many iPhone sales to potential customers this holiday season.
Our narrow economic moat thesis for Apple still revolves around modest switching costs around the iOS platform, assuming that the firm’s products are relatively equal to the competition. In this context, Apple’s iPhone 5s and 5c initial weekend sales were the first sign that the company remains at the head of the smartphone pack, but we view the firm's guidance as another sign that iPhone demand and customer satisfaction remain strong. In turn, we think that iOS switching costs will continue to allow Apple to retain a good portion of its user base over at least the next year and, most likely, many more.
Perhaps the biggest negative data point from the quarter pertains to the iPad. In addition to only flat year-over-year iPad unit growth in the September quarter, we also believe that Apple's revenue forecast implies about 60% iPad unit growth, sequentially, in the December quarter. If accurate, such results would lead to only 8% iPad unit sales growth in calendar 2013, a less-than-stellar sign for what we perceived to be a high growth category. Apple's management commented that it expects the December quarter to be an "iPad Christmas," and CEO Tim Cook feels confident that the iPad will achieve year-over-year revenue growth, but we would have previously expected faster growth out of these devices.
While the iPad launch may represent the greatest potential product for revenue upside in the period, supply constraints around the new iPad Mini with Retina Display may potentially limit Apple’s revenue in the upcoming months, and replacement cycles for tablets--and particularly, iPads--among Apple’s loyal customers may be a bit longer than previously anticipated. We're modestly less optimistic about iPad unit sales in the long-term, as skyrocketing tablet growth may be winding down. Still, we think that Apple will be able to maintain premium pricing on these products, which could help cushion any potential blow from sluggish unit sales.
