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Apple: Augur of Recovery?

Apple could join the ranks of companies whose results portend a comeback in technology buying. Apple's ( (AAPL)) fiscal third-quarter earnings report, due after markets close on July 21, will likely surpass Wall Street analysts' expectations, advancing the argument made by chipmaker Intel ( (INTC)) this month that spending on computer equipment is snapping back. New market research forecasting record third-quarter Macintosh sales, combined with Apple historical proclivity toward issuing conservative guidance for its upcoming quarters, are leading Wall Street analysts to look for a surprisingly strong report. Apple is also building up inventory levels of iPhones and Macs, which could help fourth-quarter results. "I'm expecting a big jump [in iPhone sales] in the September quarter," says Shaw Wu, a senior analyst at Apple Shares Climbing For the third quarter ended June 27, analysts expect Apple to report sales of $8.2 billion and earnings of $1.16 per share. A year ago, Apple reported $7.5 billion in sales and $1.08 in per-share profit. Shares of Apple have been on the rise since the company's last earnings report Apr. 22. The shares have gained nearly 26% since then, compared with a 15.5% gain for the Nasdaq Composite Index. A strong report would make Apple the latest tech company to exhibit strength that could point to a recovery in technology spending, especially among consumers. During its second-quarter earnings report July 14, Intel credited strong consumer PC sales in the U.S. and China for results that bested analysts' expectations. Yet there are also reasons for investors to temper expectations of a broad tech spending comeback. IBM's ( (IBM)) second-quarter results, issued July 16, showed no sign of a recovery in corporate computer buying. Record Mac Sales Possible Analysts will be paying close attention to Apple's sales of two key product lines: the iPhone and Mac desktops and notebooks. Apple updated its iPhone hardware and software in June, while cutting the price of an older model. The moves may have been a catalyst for iPhone sales during the final weeks of Apple's quarter. Apple has sold 8.1 million iPhones in the first two quarters of its 2009 fiscal year, and some analysts expect third-quarter sales of more than 5 million units. Others are more conservative. Kaufman's Wu expects iPhone sales of 3.8 million units, which would be about even with iPhone sales in the quarter ended in March. Apple sold iPhones to distributors before the beginning of the quarter, meaning less demand by retailers for new shipments once the quarter got under way, he says. "I'm concerned about some draw-down they had in inventory," says Wu. Mac sales, on the other hand, may set a record. Piper Jaffray ( (PJC)) analyst Gene Munster wrote in a July 20 research note that new data from market researcher show that North American Mac sales in June were up 16% compared with a year ago, and that third-quarter Mac sales rose 5%. That implies sales of about 2.6 million Macs; anything more than 2.61 million units sold would set a quarterly record for Apple. Drop in iPod Sales? There are other indications that Mac sales will be surprisingly strong. Craig Berger, an analyst at FBR Capital Markets ( (FBCM)), found in a survey of Apple suppliers that MacBook notebook inventories rose during the quarter, and that Apple could sell 7 million MacBooks in 2009, for about a 4% to 5% share of the worldwide laptop market. Apple sold 6 million notebooks in 2008. "Apple is using the seasonally slow second quarter to increase inventory levels ahead of the back-to-school notebook promotions," Berger wrote in a July 20 report. Not all of Apple's products are expected to post rosy results. The company could report its first year-over-year decline in iPod sales, reflecting a saturated market and overlapping functions between the iPod and iPhone. A year ago, Apple reported sales of 11 million iPods, and NPD's data forecast that Apple could report sales of 9.6 million iPods this time around. "One of these days iPod sales will decline, and maybe it will be this quarter," says Andy Hargreaves, an analyst with . Apple's gross profit margins could also feel some pressure. A year ago, Apple Chief Financial Officer said the company's margin would suffer because of a "future product transition." Since then, Apple has redesigned its notebooks and cut their prices. An entry-level 13-inch MacBook Pro now sells for less than $1,200, a $100 cut from a prior comparable model. Price Cuts Could Hurt Margins The lower prices have helped spur sales. But they could eat into Apple's profitability. "There are concerns about gross margins," says Shannon Cross, head of . "Prices on commodity components are up." Apple's skill at negotiating low prices with its suppliers could mitigate the decrease in margin, she says. Apple Chief Executive could surprise investors by appearing on the company's quarterly conference call with analysts. recently returned to work after a six-month medical leave. In October, Jobs told investors that "Apple would be fine" in his absence. Many signs suggest he was right.

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