With IPods Still Hot, Apple Profit Soars

Apple Computer Inc. offered Wall Street a double surprise Wednesday, saying profit rose more than fivefold in its fiscal third quarter but that earnings for the current quarter would be slightly below expectations.

The Cupertino, Calif.-based computer maker defied analyst predictions that sales of its iPod digital music player would decline, hurting profit.

Instead, iPod sales hit a quarterly record of 6.2 million, up from a previous high of 5.3 million the quarter before. And Macintosh shipments, driven in part by the iPod’s power to draw consumers to the Apple brand, reached a five-year high.

The results were apparent in the company’s bottom line: Net income reached a quarterly high of $320 million, or 37 cents a share, up from $61 million, or 8 cents, a year earlier. Revenue was $3.52 billion, up 75%.

Analysts on average had expected earnings of 31 cents a share on $3.34 billion in revenue, according to Thomson First Call.

“My confidence in the quarter had been mediocre, and they ended up knocking the cover off the ball,” said Gene Munster, an analyst with Piper Jaffray in Minneapolis.

Investors agreed. Apple shares rallied on the news. Up 11 cents to $38.35 in regular trading, they rose to $39.75 in after-hours trading. The stock hit a record closing high of $45.07 on Feb. 16.

But Apple issued cautious guidance for the current quarter, saying profit was expected to be 32 cents a share on sales of $3.5 billion, below analysts’ estimates of $3.6 billion.

Without elaborating, Apple cited uncertainty about the effect of its announcement last month that it would stop using microprocessors from IBM Corp. and Motorola Inc. in the Macintosh and switch to chips from industry giant Intel Corp.

“We feel we’re being prudent,” Chief Financial Officer Peter Oppenheimer said on a conference call with industry analysts.

The cautious guidance gave some analysts concern about whether buyers might delay computer purchases and wait for the Intel-based Macs, with the first due to go on sale in June 2006.

“I wonder if they’re being conservative about guidance because they already see some people holding off from buying Macs,” said Richard Chu, a computer analyst in Boston with SG Cowen.

Analysts expressed some surprise at Apple’s forecast because the company was headed into its two strongest quarters, driven by back-to-school and holiday purchases.

“It’s the first guidance in five or six quarters where they’ve been below consensus,” said Shaw Wu, an analyst in San Francisco with American Technology Research.

The three-month period that ended June 25 was the ninth straight quarter of increased iPod sales, even though the June quarter is traditionally Apple’s weakest.

Company officials said introduction in January of inexpensive new iPod models and improvements to Apple’s online music store helped drive sales.

Oppenheimer said Apple had other new products in development that could help the company keep up its momentum in future quarters.

“We’re hard at work on the next generation of products, and I’m very excited about what’s in the pipeline,” he said, without offering details.

IPods are by far the most popular hard-drive-based digital music players, with more than 70% of that market, according to Apple.

But should Apple be worried about how long it can sustain the popularity of iPods?

Not for a long while, said Michael Gartenberg, a technology analyst with Jupiter Research in New York.

“Consumer penetration share is still low,” Gartenberg said. “There’s a lot of headroom for Apple, and opportunities to grow are continuing to evolve with the devices’ form factor and functionality, so owners will want to upgrade.”

He noted that FM radio, satellite radio, video playback and games are areas into which iPods can expand. “Certainly the market is ready for more devices that are consumer friendly to play more media,” Gartenberg said.