Profit Rises at Apple, but Shares Tumble

http://www.iht.com/articles/2006/01/19/business/techearns.php
http://www.nytimes.com/2006/01/19/technology/19apple.html

January 19, 2006
Profit Rises at Apple, but Shares Tumble
By LAURIE J. FLYNN

Correction Appended

SAN FRANCISCO, Jan. 18 - Benefiting from brisk holiday sales of iPod music players, Apple Computer reported on Wednesday that its profit nearly doubled in the first quarter. But its outlook for the second quarter fell well below Wall Street's expectations, causing its stock to fall as much as 7 percent in after-hours trading.

Apple's report came after disappointing forecasts from Intel and Yahoo on Tuesday sent the technology sector into a sell-off that continued into Wednesday. EBay's outlook, announced late Wednesday, also fell short of expectations, and its after-hours trading suffered. [Page C6.]

Bucking the trend in technology stocks, Advanced Micro Devices, the No. 2 chip maker after Intel, soared almost 11 percent in extended trading after it far surpassed analysts' forecasts with its fourth-quarter results. [Page C11.]

Apple investors were not satisfied after the company said net income for the first quarter, ended Dec. 31, increased to $565 million, or 65 cents a share, a 95 percent increase over the same quarter a year ago when net income was $295 million, or 35 cents a share.

The company, based in Cupertino, Calif., had revenue of $5.75 billion in the first quarter, a figure that Steven P. Jobs, the chief executive, had already revealed last week at the annual Macworld Expo in San Francisco. That is a 64 percent increase over the first quarter of 2004, when the company posted revenue of $3.5 billion. The first quarter included 14 weeks, rather than the usual 13.

"We are thrilled to report the best quarter in Apple's history," Mr. Jobs said. "Two highlights of an incredible quarter were selling 14 million iPods and getting ready to launch our new Macs with Intel processors five to six months ahead of expectations."

Despite the record results, investors were concerned about Apple's profit forecast for the second quarter, which calls for 38 cents a share on revenue of $4.3 billion, including a 4-cents-a-share expense related to stock-based compensation. The outlook is far lower than the analysts' forecast of 48 cents a share on $4.67 billion in sales. Before the report, shares of Apple declined $2.22, to close at $82.49, and continued the decline in after-hours trading.

The lower-than-expected outlook is because of a slight "pause" in sales as the company switches to Intel processors, the company said, starting with an Intel-based iMac that the company announced last week and that has just begun shipping. The new Intel-based systems run up to twice as fast as the current model for the same price. Apple plans to switch its entire Macintosh line to Intel processors by the end of this year.

Apple executives said anticipation of the company's move to the Intel chip, a major strategic shift, also led some customers to delay Mac purchases during the holiday quarter. But Peter Oppenheimer, the company's chief finance officer, said Apple had expected an even greater effect. The company sold 1.25 million Macintosh computers in the quarter, a 20 percent increase over last year's first quarter.

Timothy D. Cook, Apple's executive vice president for worldwide sales and operations, told analysts that the company was anticipating a shortage of MacBook Pro computers in the second quarter. The first of Apple's notebook line to use the Intel chip is expected to ship in February. "We may not be able to meet demand for MacBook Pro," Mr. Cook said. He also said a version of the iPod Nano, the 4-gigahertz model, was "lean" in certain regions. "We are working hard to get those out there."

Charles R. Wolf, an analyst with Needham & Company, said the pause in Macintosh sales was not worrisome, because the company's sales outlook was still encouraging. "Am I disappointed? No," said Mr. Wolf, who owns Apple stock and currently has a neutral rating on it. "They aren't talking about a big pause in units." He added that he expected Apple to continue to release new products in 2006 that would have a positive impact on its performance.

The 14 million iPods sold during the holiday quarter was a huge increase from the 4.5 million sold during the 2004 holiday season, and a figure that analysts said would be hard to sustain. "It's a consumer electronics product that is highly seasonal," Mr. Wolf said. "We've also passed the inflection point in the iPod story. Growth is going to slow because the numbers are so large, but it's still going to grow."

Apple music sales now account for 59 percent of the company's total sales. Mr. Oppenheimer told analysts that the company now has 83 percent of the United States market for downloaded music.

Sales at Apple's retail stores rose to over $1 billion for the first time, the company said. It now has 135 retail stores, after adding 11 stores worldwide last year. Revenue per store increased 41 percent in the first quarter, to $8.3 million. It also sells its products at other computer retailers and on the Internet.

Correction: Jan. 20, 2006

An article in Business Day yesterday about Apple Computer's quarterly earnings referred incorrectly to the iPod Nano music player that one Apple executive said was in short supply in some areas. It is a four-gigabyte version, not four-gigahertz.