What Should Apple Do With The $29 Billion?

Yesterday Apple reported second quarter results that, driven by strong iPhone sales, yet again beat estimates. This June, it will be two years since the iPhone was launched, and Apple has sold over 21 million of them. Apple still seems to be reaping the benefits of its innovative OS, which has transformed the handset sector. Let’s take a closer look at the company’s performance.

Q2 revenue grew 9% to $8.16 billion versus analyst estimates of $7.9 billion. Net income grew 15% to $1.21 billion, or $1.33 per diluted share, beating analyst estimates of $982.3 million, or $1.09 per share. Non-GAAP revenue was $9.06 billion and net income was $1.66 billion. Gross margin was 36.4%, up from 32.9% last year and 34.7% last quarter. Apple ended the quarter with $29 billion in cash. Cash flow from operations in the quarter was $841 million and operating expenses were $1.3 billion. Q1 analysis is available here.

The iPhone has dramatically increased its international presence over the year, and the phone is currently sold in 81 countries. International sales accounted for 46% of the quarter’s total revenue.

In its best non-holiday quarter, Apple sold 3.79 million iPhones in the quarter, a 123% unit growth. Revenue recognized from iPhone handset sales, accessory sales and carrier payments was $1.52 billion compared to $378 million last year, an increase of over 300%. The sales value of iPhones sold was over $2.2 billion in the quarter.

On March 17, Apple provided a preview of the iPhone OS 3.0, which will include an updated software development kit with over 1,000 new developer APIs, enabling in-app purchases, peer-to-peer connections, app control of accessories and push notifications. It will also add over a 100 features including cut, copy and paste, MMS support and spotlight search as well as landscape keyboard. The Palm Pre, to be released soon, is expected to be a keen challenger to the iPhone with its intuitive web OS. Palm has signed on actress Angelina Jolie for its promotion. Palm’s stock has jumped nearly 10 times in anticipation of the Palm Pre and web OS. The competitive environment is getting rather interesting in the smartphone business!

iPod sales also increased 3% to 11.01 million in the quarter. The new iPod Shuffle, introduced in March, has been received well. Apple says it now has over 70% of the US market for MP3 players.

Though the iPhone continued to be a success, Mac sales were affected by the slow economy. Mac sales declined 3% to 2.22 million in an industry that showed a 7% decline. Apple transitioned its entire Mac desktop line in March and is hopeful of a sales rebound. Apple retail stores recognized revenue of $1.47 billion compared to $1.45 billion last year.

For the third fiscal quarter of 2009, Apple expects revenue in the range of about $7.7 billion to $7.9 billion and EPS in the range of about $.95 to $1.00. Gross margin is expected to be about 33% and opex about $1.35 billion. Chief executive Steve Jobs, still on medical leave, is expected to return by the end of June.

Apple is currently trading around $126 with a market cap of around $112 billion. The stock hit a 52-week high of $124.25 on April 17 after a 52-week low of $80.00 on November 20.

By all accounts, the company is going gangbusters. But what about the $29 billion cash that is just sitting around? Is Apple going to do something with it? Any ideas, folks?