Apple's Q3 stuns Wall Street

While Apple stunned Wall Street yesterday by reporting a profit of $75m (£45.73m), or 50 cents a share, far better than the 33 cents a share analysts expected, its sales fell to $1.

While Apple stunned Wall Street yesterday by reporting a profit of $75m (£45.73m), or 50 cents a share, far better than the 33 cents a share analysts expected, its sales fell to $1.4bn (£.85bn) in its third quarter. The revenue figure represented an 18 percent drop from the $1.7bn (£1.03bn) it posted in the third fiscal quarter of 1997.

Still, analysts gave the company its due. "They clearly had a great quarter," said Kevin Hause, an analyst at International Data Corp. in the U.S. "Apple is making great progress." Hause said he was especially impressed with Apple's ability to make deep cuts to its inventory; he said bloated inventory had contributed to Apple's current financial woes.

But still to come is the August 15 release of the iMac, consumer PCs that need to sell well for Apple's long-term viability. "They've got to sell it to a wider market" than current Mac users, Hause said. "They're depending quite a lot on this product," he said, adding that Apple must both successfully bring it to market and keep its professional users happy.

Apple's chief financial officer, Fred Anderson, predicted that the iMac will reverse Apple's trend of selling fewer machines. He said the company is maintaining higher margins despite volume drops because of its current lack of consumer systems. Apple "continues to look toward the December quarter [fiscal Q1 1999] as the first quarter that offers us an opportunity for significant year-over-year unit growth," Anderson said. He declined to predict the size of the increase or speculate when the company will see year-over-year revenue growth.

If Anderson is right, the impressive gains in both earnings and gross profit margins signals the beginning of a new era for the company, after losing more than $1bn (£.61bn) over the course of three quarters last year. Apple has now managed to post a profit in three consecutive quarters.

Including a $26m (£15.85m) net favourable impact from non-recurring items such as an after-tax gain of $33m (£20.12m) related to the initial public offering of ARM Holdings, Apple raked in $101m (£61.58m), or 65 cents a share.

"Apple had a terrific quarter," said interim CEO Steve Jobs in a prepared release. "We sold a record number of Power Macintosh G3 computers and customers love our new PowerBooks. "Apple earned its highest profits in years, and we ended the quarter with the lowest inventory level among the major PC players."

The strong sales of its G3 Power Macs shows that Apple has finally delivered a product to help it maintain market share and profit margins. In the quarter, Apple's gross margins were 25.7 percent, up from 24.8 percent in the prior quarter.

"This is great news," said Pieter Hartsook, analyst and publisher of the Hartsook Report in the U.S. "It's more evidence that Steve [Jobs] and the team are doing great things."

Despite Hartsook's enthusiasm, the phenomenal turnaround has yet to capture the hearts and minds of institutional investors, however, as 15 of the 22 analysts following the stock maintain a "hold" recommendation.

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