Results Of The Bet With Paul Kedrosky

Posted by: Arik Hesseldahl on October 22

So remember that bet I had with Paul Kedrosky? Yeah. I lost. But just barely.

It turns out I was just a tad too bullish on Apple’s outlook to prevail, and he was just bearish enough on Apple’s results for the quarter reported yesterday.

Paul originally argued in August on Yahoo’s Tech Ticker that Apple’s back-to-school quarter would be bad and that would kill results. I argued otherwise, saying at the time that college students hadn’t yet returned to class and hadn’t get gotten to the point of spending their scholarship checks on new computers. And I was mostly right. Apple once again set a single-quarter record on Mac unit sales, moving 2.6 million machines, more than in any other quarter ever. But as you can read in the conference call transcript, sales to K-12 schools were down because of shrinking budgets.

Let’s go back over the terms of the bet. Paul bet that Apple would miss consensus earnings and give forward guidance saying gross margins would be south of 30%. He was wrong on both counts, and I was right.

But the forward guidance was clearly below consensus, which was also part of the bet and was central to Paul’s original point. Apple is always, always ridiculously conservative when it gives guidance. The bar is always one that management knows it can get over, and so analysts wrestle and cajole to guess by how much Apple will beat the guidance. Piper Jaffray’s Gene Munster went to far as to call Apple’s guidance on earnings per share each quarter, “useless,” because its always way below what the company actually reports.

But yesterday’s guidance was something different. It was as if did what it normally does to estimate sales and earnings, and then added in an extra half-portion of pessimism just for good measure.

Projecting revenue of $9 to $10 billion is a full half-billion dollars below consensus, and the $1.06 to $1.35 range per-share earnings is so wide you could sail a cargo chip carrying iPhones through it.

What I didn’t write in the column about the bet was the provision for the split decision scenario, which is where we find ourselves now.

Paul and I were both right: I was correct about the quarter just reported, and he was right about the guidance going forward. Apple turned in a great quarter but gave lousy guidance because of all the uncertainty around the economy. In a sporting gesture I offered to give him the nod in the event of a result that points in both directions. I figured this was unlikely. Silly me. My $50 check to the Natural Resources Defense Council will be in the mail by the end of the week.

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