January 18, 2006 1:53 PM PST

Apple posts strong earnings, cautious outlook

After selling a bundle of iPods over the holidays, Apple Computer on Wednesday reported better-than-expected earnings, but offered an outlook that was below some analysts' forecasts.

The Cupertino, Calif.-based company said it earned $565 million, or 65 cents per share, on revenue of $5.75 billion, for the 14 weeks ended Dec. 31. That compares with earnings of $295 million, or 35 cents per share, on revenue of $3.49 billion for the same quarter a year earlier.

That's well ahead of the outlook the company offered in October, when it predicted sales would be around $4.7 billion.

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During an earnings conference call, Apple Senior VP and CFO Peter Oppenheimer says the company is off to a great start in 2006.
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However, the company's outlook for the current quarter, which runs through March, was below what many analysts were predicting. Apple said to expect revenue of about $4.3 billion and earnings per share of about 38 cents per share, including an impact of 4 cents per share from stock-based compensation. According to First Call, analysts had been looking for per-share earnings of 48 cents and revenue of $4.63 billion.

Apple shares headed lower in after-hours trading. Shares traded recently at $78.30, down $4.19 from the close of regular trading, a drop of more than 5 percent.

For the just-ended quarter, Apple's sales were a record, but they did not come as a surprise. CEO Steve Jobs announced at Macworld Expo last week that the company had about $5.7 billion in revenue for the December quarter. He also announced that the company sold 14 million iPods and 1.25 million Macs.

Apple's 14 million iPods accounted for $2.9 billion in sales, or more than half of the company's total revenue for the quarter. Other music products, including sales from the iTunes music store as well as revenue from both Apple-made and non-Apple iPod accessories, totaled $491 million, up 177 percent from a year earlier and 85 percent from the prior quarter.

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Apple COO Tim Cook warns that the company may not meet demand for MacBook Pros when they begin shipping in February.
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Mac sales added $1.7 billion in revenue, up 7 percent from both the year-ago and prior quarter levels. Desktop revenue of $912 million came in slightly above Apple's notebook sales of $812 million. Software and services revenue totaled $325 million, up 11 percent from the prior quarter and 53 percent from a year earlier. Peripherals and other hardware accounted for $303 million, also up sequentially from a year ago.

Apple is in the midst of transitioning its Mac line to Intel-based chips. Jobs had promised Intel-based Macs would appear by the middle of this year, but last week unveiled the first such machines--a revamped iMac and the new MacBook Pro.

"We are working on more wonderful products for 2006, and I can't wait to see what our customers think of them," Jobs said in a statement. Although he did not provide specifics, Jobs said last week that Apple plans to shift its entire Mac line to Intel-based chips by the end of this year.

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Strange perspective
Apple is predicting a better than 30% growth year over year for their second fiscal quarter (first calendar quarter of 2006) and people call this "conservative"?

For most businesses that have been around for almost 30 years a prediction of 30% year over year growth would be considered pure fantasy.
Posted by shadowself (202 comments )
Reply Link Flag
Consider the Source
... That is all I can think of. This is a golden company, living
through another era of its own version of Camelot. Its never
been an "evil empire", nor an apathetic cow. One can honestly
say that this company has fought through a lot of things, and
yet still works hard to maintain, in earnest, it's identity. The fact
they can accomplish all this, and still succeed, is remarkable in
itself.

There is a new wave in our industry (it's about time), and it is
multi-colored.

Because of this, "agents" will fabricate, expound, mis-interpret
just about any information they can get their hands on. For this
story to even attempt to imply that things aren't so good for
Apple, is laughable. It's like spitting in the wind.
Posted by Thomas, David (1947 comments )
Link Flag
Apple is being conservative
compared to expectations. That's the key, I think. The stock
price can only be justified on expectations that Apple's utterly
pheonomenal pace of growth will be sustained by an increasing
market share of Macs and products yet-to-be-announced. The
stock price is thus very sensitive to any hint of things slowing
down, even if the overall picture is still extraordinarily good.

It will be hard for Apple to increase sales much this quarter
because the MacBooks won't start shipping until mid-February,
and the lack of adequate supply of chips (all the manufacturers
are after the Core Duo for right now) means that there is no way
Apple can meet demand for the time being. As Intel ramps up
production, things will get better.
Posted by Thrudheim (306 comments )
Link Flag
Spin City on Steroids ...
is the only way one can describe the wacky world of "managing investor expectations", especially when your company's CEO is a Master Jedi capable of generating his very own Reality Distortion Field (and this isn't necessarily a bad thing). Anyone who pays much attention to the bleating of stock analysts needs to take a look at the track record of these bozos. As has been shown time-after-time, the Tic-Tac-Toe chicken and a chimp with a dartboard consistently outperform the "experts", and even the index funds, over the long haul. The relentless focus of the analysts on quarter-to-quarter (and even year-to-year) performance is completely useless information for any serious investor.

I'm guessing that part of the Apple/Intel alliance means that Steve is paying Paul a premium for all the Dual Cores that can be pumped out for delivery to Apple. It takes a couple of months to fabricate any given modern complex microprocessor (but millions of them are being masked, etched, gassed, baked, polished, rinsed, and repeated in parallel), so it's not possible to throttle production up or down very easily. Apple can and does fetch a premium for its products, so they will have easy head-of-the-line priveleges at the loading docks at Intel's fabs, compared to the typical PC manufacturers that are essentially stuck pushing me-too commodity products where about the only differentiator is price, which means profit is dicey, at best, and certainly not in the realm of being able to charge any kind of premium. There are some amusing brand plays going on, such as the Red Ferrari slim laptops, but the volume of those is so low as to be negligible (although, I have to admit, I'll probably pick one of those up off ePrey long after the market has been satiated at MSRPs, because I do collect interesting computing variants as a senior docent and restoration engineer for a technology museum).

Another manufacturing timing factor is that this is the low point for consumer electronics production volume of completed products (e.g., laptops, desktops, DVD players, set-top boxes, PVRs, etc.) during the year. So, this is when ramp-up of new products occurs (i.e., final debugging of the manufacturing processes and training of fab employees), because production of high-volume finished products such as DVD players, HDTVs and low-price computers for the next holiday season will begin by the Summer. Whatever is going to be built in the way of subcomponents (motherboards, display panels, video and audio daughterboards, power supplies, etc.) for all lower-volume products (e.g., high-end laptops) will be happening over the next few months. After that, market demand will determine what availability will be over the rest of the year. I guess iPods may actually be entering the highest tier of production, given that the annual sales are now firmly in the eight-digit range, but production of those has likely been well wrung-out over the past few years, so they will continue to be made through the latter part of the year for delivery just in time for holiday buying.

Therefore, Apple has to be conservative about its estimates, relative to its record performance over the last couple of years, not the much lower performance typical of the commodity PC makers. For every MacBook Pro they can't deliver when someone is ready to order it, they're going to lose bookable revenue, at least quarter-to-quarter, if not altogether. My company is considering buying MacBook Pros as part of its annual computing acquisition and upgrade cycle, and a total number of several brands will be purchased, but it's up to Apple as to how many of those will be MacBook Pros. Any orders that can't be filled, will go to another manufacturer.

Go get a container of Morton's Iodized Salt to toss over your shoulder after the analysts have done their blathering.

All the Best,
Joe Blow
Posted by Joe Blow (175 comments )
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