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Apple forecast: mostly sunny, with increasing chance of profits

Once again on Wednesday, Apple reported excellent earnings.

Though most of the reaction was positive, some expressed concern over whether Apple's good fortunes will prove sustainable in a challenging U.S. economy. It strikes me Apple has just proved its powerful brand can keep drawing consumer's cash even in a souring economy.

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Apple could not have done much better in the March quarter, the best 2Q in company history. Revenue hit $7.51 billion, representing 43 percent growth year over year. Apple made a $1.05 billion profit, increasing its cash stash to $19.4 billion. Every operating segment did well, led by extraordinary growth in Mac sales.

Apple's conservative guidance for the June quarter did generate some hand wringing among analysts, particularly the bit about Apple's gross margins hovering around 33 percent.

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I don't see much of a problem here. Even if Apple just barely makes its numbers, the June quarter will be far from a disaster. Apple Chief Financial Officer Peter Oppenheimer said the company expects revenue of $7.2 billion – a 33 percent year over year increase. He estimates earnings per share at about $1.00, which translates to about $900 million in profits.

Of course, Apple always lowballs its guidance to make it easier to exceed the numbers.

In a MarketWatch story yesterday BMO Capital Markets analyst Keith Bachman pointed out that over the past three years Apple has predicted an 18 percent drop from 2Q earnings, but in fact reported gains averaging 10 percent in the June quarter.

If Apple follows this historical pattern, it will earn about $8.25 billion in revenue and $1.15 billion in profits. Not bad in a struggling economy.

Now let's take a look at Apple's 2Q report segment by segment:

The Mac: Three words: growth, growth, growth. Desktop sales were up 37 percent, powered by strong iMac sales and a refresh of the Mac Pro. Laptop sales were up 61 percent, helped by the new MacBook Air and a refresh of the MacBook and MacBook Pro lines. Apple shipped a total of 2.29 million Macs in the quarter, a prodigious 51 percent increase year over year.

Oppenheimer noted in his remarks that Mac sales grew 3.5 times faster than the overall PC market growth rate. He also said Apple's U.S. education business increased 35 percent year over year, "its highest growth rate in any quarter in the last eight years."

And the Mac's strength extended beyond U.S. borders. Apple Chief Operating Officer Tim Cook said sales in the Americas were up 52 percent year over year; in Europe up 48 percent; and in Japan up 47 percent.

Each of the past several quarters has set some sort of record for Mac sales. I see this trend continuing for quite some time.

The iPod: Sales of the iPod increased only 1 percent year over year to 10.6 million units. Many observers interpreted the small increase as a "maturation" of the MP3 player market and a sign that Apple can no longer expect much growth in this segment.

But mere units sales of iPods doesn't tell the whole story. Revenue from the iPod increased 8 percent because many of those sold were more expensive iPod Touches. And let's not forget the 1.7 million iPhones – they also serve as fancy iPods.

In any case, Apple has retained its market dominance in this space, holding 73 percent of the MP3 player market in the U.S.

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Meanwhile, Oppenheimer said the iTunes Store holds 85 percent of the legal download market, hinting that rivals such as Amazon have not proven as formidable a threat as once feared.

The iPhone: On the one hand, the 1.7 million iPhones Apple sold exceeded the company's expectations, leading to shortages in some areas. But unless the pace picks up significantly, Apple can't meet its target of selling 10 million iPhones in 2008. At the 2Q rate, Apple would sell 6.8 million iPhones by year's end.

With the iPhone 2.0 software due out in June – near the end of the next quarter – and widespread anticipation of a 3G iPhone in the same time frame, one would expect diminished iPhones sales in 3Q while customers await the new goodies.

Yet in his remarks Oppenheimer reiterated the 10-million iPhone goal for 2008. Apple rarely lets its expectations get too far out of line with reality, so I'm guessing it's figuring on several factors to alter the equation.

The factors that could hamper sales in the coming quarter will accelerate them in the second half of the year. Beyond that, Apple will continue to introduce the iPhone into new international markets throughout 2008.

Will it be enough to hit 10 million units by December? Apple must think so.

Apple Retail: The performance of Apple's retail stores has gotten scant mention, but this segment continues to amaze. Revenue from the stores grew 74 percent year over year. Sales of Macs in the stores rose 67 percent. Operating profit doubled.

Apple continues to expand the chain, adding four more stores for a total of 208, including 15 in the United Kingdom. Oppenheimer said Apple plans to open its first stores in Australia, China and Switzerland in the next few months. Overall, Apple expects to add 45 more stores in 2008.

Oppenheimer as usual noted that half of the stores' computer sales were to customers "new to the Mac," a statistic that makes more sense now that Mac sales are exploding.

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