Apple: All Systems Go

The tech industry's earnings juggernaut keeps rolling. Apple blew past Wall Street's expectations with a fiscal fourth-quarter report on Oct. 19 that showed profits surged 47% and revenues climbed 25% on lofty Mac computer sales.

The report, for Apple's (AAPL) quarter that ended Sept. 26, continued a streak of strong earnings from tech-industry bellwethers. During the past week, Intel (INTC) and Google (GOOG) reported earnings that beat analysts' expectations, and Intel Chief Executive Paul S. Otellini said the tech sector is leading the economic recovery. IBM's (IBM) results also showed tentative signs of returning strength in corporate technology spending.

Apple rode strong consumer sales of its Mac PCs and iPhones during the quarter. Sales shot up to nearly $9.9 billion, vs. $7.9 billion a year ago. Net income reached $1.67 billion, or $1.82 per share, compared to $1.26 a year ago. Gross margin, a key measure of profitability, was 36.3%.

Profit-Taking Is Possible The results bested the estimates of even the most bullish analysts. Wall Street's consensus estimate was that Apple would report sales of $9.2 billion and earn $1.42 per share. "My estimates were higher than the Street's, people told me I was too high, and they still beat both my numbers," says Brian Marshall, an analyst with Broadpoint AmTech.

Shares of Apple soared in extended trading, adding 6.3% after closing Oct. 19 at 189.86, a gain of 1.81, or nearly 1%. At one point in extended trading, the shares reached nearly 205. Apple's all-time intraday high price during a regular trading session is 202.96, set on Dec. 27, 2007, and it has been trading near its 52-week high of 190 in recent days.

The stock could trade up and down this week as investors sell shares to realize profits, says Charles Wolf, analyst with Needham & Co. But Wolf foresees another march upward through Apple's first quarter of fiscal 2010, which ends in December. "By the time Apple reports its results for the December quarter it could be trading between 220 and 225. The key to the stock is not what happens tomorrow, but what happens through the quarter."

Margins Could Be Squeezed During a conference call with analysts, Apple executives issued a conservative forecast for its fiscal first quarter, which encompasses the all-important holiday selling season. Apple said it expects sales between $11.3 billion and $11.6 billion, in line with analysts' consensus estimate of $11.45 billion. The company expects to earn $1.70 to $1.78 per share, below analysts' expectation of $1.91. Perhaps more telling, Apple said it expects its gross margin to fall more than two percentage points during the quarter, to 34%.

Chief Financial Officer Peter Oppenheimer and Chief Operating Officer Tim Cook hinted to analysts that the profit-margin reduction could come because of upcoming products, likely lower-priced Macs. "We are continuing to focus on delivering state-of-the-art products at price points that our competitors can't match, and we are going to provide ever-increasing value to our customers," said Oppenheimer.

Analyst Bill Fearnly of FTN Equity Capital Markets wrote in on Oct. 19 research note that retailers' supply of MacBook Pro laptops was running low, often a sign that new products are around the corner.

Stealing Microsoft's Thunder Any new product introduction could steal some thunder from Microsoft (MSFT), whose much-anticipated Windows 7 operating system debuts Oct. 22.

The buzz among consumers about Apple's products is already plenty loud. The company sold 3.05 million Macs during the quarter, a record. MacBook notebooks accounted for nearly 2.3 million of those, and generated $3.95 billion in revenue, or 40% of Apple's total. In fiscal 2009, Apple sold nearly 10.4 million Macintosh machines, beating last year's unit sales by more than 681,000.

Sales of 7.4 million iPhones during the quarter were also a high-water mark. Apple sold 20.7 million iPhones in fiscal 2009, and has sold nearly 34 million of the devices since the product's debut in 2007. Apple, which reports iPhone revenue as subscriptions over two years, booked $2.3 billion in revenue from iPhone sales.

The Return of Jobs The iPhone continued to gain market share. Market researcher iSuppli estimates iPhones accounted for 12.1% of smartphone sales as of the end of June, up from 10.1% as of the end of March. Apple's growth is outpacing the overall market's, according to iSuppli.

One area that is in decline for Apple is its iPod music player. Unit sales fell to 10.2 million units during the quarter, vs. 11.05 million a year earlier. Revenues declined 6%. In September, Apple CEO Steve Jobs announced a new lineup of iPods and, more important, appeared on stage at an Apple for the first time in nearly a year. Jobs had been absent after undergoing a liver transplant and other medical problems.

For the fiscal year, Apple recorded revenues of $36.5 billion, up more than 12%. Profits of $6.29 per share beat Wall Street's estimates by 41¢ per share, and the company finished the year with more than $34 billion in cash.

With Mac and iPhone sales humming and Jobs back at the helm, investors look ready to lift Apple's shares to even loftier levels.

Before it's here, it's on the Bloomberg Terminal.