Apple beats Street, eyes big December quarter

First Call consensus expected Apple to earn 64 cents a share in the quarter, though some analysts were looking for as much as 67 cents a share. Its shares closed up 2 1/4 to a 52-week high of 55 15/16 ahead of the earnings report.

The story this quarter wasn't so much the revenue growth, which was an 11 percent improvement versus the year-ago quarter, but gross profit margins of 27.4 percent in the quarter. In the year-ago quarter, gross profit margins were 25.7 percent.

Wall Street, however, is focused on revenue, both Apple's current and future sales. Apple's sales figure for the current quarter was a bit below projections. On a conference call with analysts, Fred Anderson, Apple's financial chief, lowered sales expectations for the September quarter because of product transitions. Revenue and unit shipments will both be "up slightly" in the next quarter, he said. Anderson was comfortable with estimates of 76 cents a share for its fourth quarter.

Anderson said Apple is expecting its December quarter sales to be strong sequentially and year over year. Anderson said all four of Apple's products would be shipping in volume in the December quarter. Apple currently has three product lines, but as is custom, Anderson "won't comment on unannounced products."

The new Apple product, a consumer notebook computer, are likely to be revealed at next week's MacWorld in New York. Investments also added to Apple's performance. Including an $89m profit from the sale of 10 million shares of ARM Holdings Plc., Apple made $203m, or $1.20 a share in the quarter.

Strong sales of its popular iMac PCs were responsible for a 40 percent jump in overall unit sales in the quarter. International sales contributed 45 percent of the quarter's sales. Anderson said Apple shipped 487,000 iMacs in the quarter out of a total of 905,000 units.

Since the lower-priced iMacs represented 54 percent of sales this quarter, up 42 percent sequentially, Apple's revenue per system fell to $1,683 from $1,813 last quarter and $2,019 a year ago. Apple ended the quarter with more than $3.1 billion in cash. Company officials decided the extra cash would be well used to repurchase up to $500 million shares of its stock. Jim Poyner, an analyst at CIBC World Markets, said the upside surprise wasn't all that unexpected. "We knew their profit margins would be around 27 percent," Poyner said. "They weren't hit as bad on average selling prices as some had thought. But they still have some considerable revenue issues going forward, namely how will they respond to a consumer PC market that's basically demanding free boxes?" Anderson said there weren't a lot of concern about pricing pressures -- the company moved nearly half a million $1,199 iMacs. Last quarter, Apple easily hurdled analysts' estimates, earning $93m, or 60 cents a share, on sales of $1.53bn. Last week, BancBoston Robertson Stephens upgraded the stock and set a 12-month target price of $75 a share. But Apple investors might want to savour the third-quarter earnings for a while since future earnings might not be as spectacular. Thanks to some huge losses in 1997 and part of 1998, Apple was able to shield some of these recent profits while being taxed at around 11 percent.

Now that it's running in the black again, it will likely be taxed at around 25 percent in fiscal 2000. Apple is counting on some of its new products, namely notebook computers priced between $1,200 to $1,500 and some second-generation iMacs, for future sales growth. Although Anderson wouldn't comment, CEO Steve Jobs is likely to unveil the new products in one of his patented keynotes at MacWorld in New York next week.

It's important for Apple to keep moving. Competitors are looking to package free Internet service with the purchase of a cheap PC or vice versa, Apple will have to branch out its business model to maintain its momentum. Anderson said Apple will have an Internet service strategy in six months. "With the way the PC market is going right now, the challenge now is to diversify their other product areas and find a way to make a buck," Poyner said. "In the near-term they're going to have to cut prices on their iMacs to some degree." Later in the year, Apple is expected to come out with a new generation of the popular iMacs with larger screens, and the company may even re-enter the handheld market with a branded PalmPilot device. But you won't hear about any of these new plans until next week.

Apple shares were trading at a 52-week low of 28 1/2 in August.

Thirteen of the 21 analysts following the stock maintain either a "buy" or "strong buy" recommendation.