How Do You Like Them Apples?

The computer maker silenced skeptics with an avalanche of notebook sales. iPod sales held steadyand brought PC users into Mac stores

Apple Computer showed that concerns about its sales are overblown. The company reported a 48% surge in profits year over year, while holding steady on iPod sales volume, which had been the subject of some concern among analysts. For the fiscal third quarter, Apple's revenues came in at $4.37 billion vs. $3.5 billion a year ago. Net income was $472 million, or 54 cents per share.

But Apple (AAPL) turned in a huge surprise when it came to sales of its Macintosh computers, particularly in the area of notebooks. The company sold 798,000 notebooks, an improvement by 300,000, or 61%, over the year-ago quarter. "They absolutely blew my expectations away with notebook sales," says analyst Charlie Wolf of Needham & Co. in New York. "And to think they only had six weeks with the new MacBook."

The surge in laptops offset a drop in desktop sales, largely attributed to weakness in the pro desktop sector, where Apple has yet to ship a new machine based on Intel (INTC) processors. Introduced in 2003, the PowerMac G5 was last updated in Oct. 2005. A new machine is expected to be called Mac Pro and should be out by the end of the summer.


Overall Mac sales came in at 1.3 million units, a 12% improvement over the year-ago quarter. Apple CFO Peter Oppenheimer called the quarter the "best 13-week sales period of the Mac in the company's history." He also described the quarter as the second-best in Apple's history in terms of revenue and profit.

Still, Apple gave guidance for the current quarter that was slightly below the $4.94 billion consensus estimate. The company said it expects revenue of $4.5 billion to $4.6 billion.

That didn't seem to turn off investors. In after-hours trading, investors bid the stock up by more than $4, or 8%. "Normally a stock does not go up after the company guides below the estimates," says Shaw Wu, analyst with American Technology Research in San Francisco. "But the stock was so weak intra-quarter, so the market is responding with confidence." Wu has maintained a buy rating despite persistent concerns among other analysts that Apple could face potential weaknesses, particularly in iPod sales.


Another interesting figure to come out of the conference call was that 50% of customers polled at Apple's retail stores described themselves as "new to the Mac," indicating a surge in interest from people more accustomed to using computers running Microsoft's (MSFT) Windows operating system. This figure has been the subject of much conjecture that Apple might begin to turn around its sagging market share figures versus Windows-based PCs from Dell (DELL), Hewlett-Packard (HPQ), and others, if only slightly.

It has also served to prove the so-called iPod halo effect, under which iPod owners become Mac owners. Running Windows as an option—which the Mac now does using an Apple program called Boot Camp—hasn't hurt the Mac's attractiveness to Windows users either.

Apple says it is on track to complete its transition to using microprocessors from Intel in its computers, saying a replacement for the PowerMac G5, which uses chips from IBM (IBM), is expected before the end of the year. An Intel-based server in the XServe family also is expected before the end of the year.


IPod sales held their own at 8.1 million units or 32% more than a year ago, accounting for $1.5 billion or 34% of sales. Overall, Apple's music business—iPod sales and music downloads from the iTunes Music Store—accounted for $1.95 billion, or 44% of sales. "You have to say that iPod sales held up really well, considering they haven't had anything new since October," Wolf said.

Something new is expected. A "true video" iPod sporting a larger screen than the current model and more fully dedicated to video is reportedly in the offing for the coming months, as well as a refresh to the iPod and iPod nano products. The back-to-school season, coupled with an expected boost in sales to Apple's core constituency—graphics and video professionals awaiting the Intel-based professional Mac—should combine to give Apple a boost as it heads into the remainder of its fiscal year.

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