Apple Tops Its Quarterly Earnings Record

Driven by soaring sales of Mac computers and iPods, the company reports "the highest revenue and earnings" in its history. But the outlook for the next quarter is not so rosy.

Apple Computer on Wednesday reported the financial results of its third fiscal quarter, characterizing the numbers as "the highest revenue and earnings in the companys history."

The reported net quarterly profit of $320 million beat Apples estimate of just under $250 million and an estimate of $274 million that was compiled by 18 analysts surveyed by Thomson Financial and reported by Bloomberg.com.

The $320 million quarterly profit translates to a profit of 37 cents per diluted share on revenues of $3.5 billion. Year-over-year net profit leaped 425 percent and revenues were up 75 percent.

In the year-ago quarter, Apple reported a net profit of $61 million with $2.01 billion in revenues. Gross margins, which many analysts see as critical to Apple, rose to 29.7 percent, up from 27.8 percent in the year-ago quarter.

Apple Computer Inc., based in Cupertino, Calif., said sales of Macintosh computers rose 35 percent to $1.2 million compared with the third quarter of 2004, with about 495,000 of them being portable models. In addition, iPod sales rose 616 percent in the time period.

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Prior to Apples announcement, some analysts had said publicly that they expected a drop in quarterly iPod sales compared with the previous quarter, reflecting a cooling trend in the digital music player market.

But in a conference call with analysts, Peter Oppenheimer, senior vice president of finance at Apple, said this was a "record quarter" for iPod sales and the ninth straight quarter of increased iPod sales. In addition, Oppenheimer said the iPod held about a 75 percent share of the entire MP3 player market, according to The NPD Group.

Oppenheimer declined to break out sales of different iPod models or sales of iPods by region, saying that doing so would help competitors.

Apples iTunes Music Store is close to reaching the half-billion mark in songs sold, Oppenheimer said, while holding more than an 80 percent share of the online music sales market, according to Nielsen SoundScan.

But Oppenheimer said Apples positive numbers were not solely due to iPod and music sales. He pointed to the year-over-year 35 percent increase in Mac computer sales, with a 65 percent gain in desktop system sales and an 8 percent rise in laptop sales.

Oppenheimer stressed that Mac unit sales grew at three times the market rate of growth. But he did not comment on how this could affect Apples overall market share in the personal computer business.

Oppenheimer attributed much of Apples product margin increase to the sales of software, including the recently released Mac OS X 10.4 operating systems, aka Tiger, and Final Cut Studio. The former, he said, was the best-selling software release in Apples history, bringing in more than $100 million in revenue.

Overall educational sales were strong, Oppenheimer said, rising 16 percent in both revenues and unit sales. Higher-education sales constituted the lions share of this, with a 34 percent increase in revenue and a 35 percent increase in unit sales. But Oppenheimer said a large part of the revenue came from Tiger and iPod sales.

Cash reserves, Oppenheimer said, increased by $450 million in the quarter and $2 billion in the fiscal year to date.

Looking ahead to the next quarter, Oppenheimer offered a cautious outlook. He said Apple expects to see revenues of about $3.5 billion, which would be an increase of nearly 50 percent compared with the year-ago quarter, with earnings per share of about 33 cents.

He noted that part of his flat-to-neutral guidance was due to the next quarter being Apples first since its announcement that the companys computers will be moving to processors built by Intel Corp., but also because the third quarter of 2005 "exceeded expectations." Oppenheimer also said he expects to see a slowing of software sales, especially of Mac OS X 10.4.

Oppenheimer said Apple is "looking forward to completing the best fiscal year in decades."

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