Apple Rides High on IPod, but Expectations Are Ever Higher

The phenomenally popular iPod continued to rock Apple Computer Inc.’s bottom line: Fiscal second-quarter profit soared as strong sales of the digital music player lured buyers to the computer maker’s other products.

Apple said Wednesday that it earned $290 million, or 34 cents a share, more than six times as much as the $46 million, or 6 cents, that the company reported a year earlier. Revenue rose 70% to $3.24 billion.

The results -- 10 cents a share higher than the average estimate of analysts surveyed by Thomson First Call -- appear to bolster Apple’s strategy of using the iPod’s “halo effect” to sell its desktop and laptop computers.

Sales of Apple’s iMac, for instance, more than doubled to 467,000 units.

Despite the strong showing, Apple shares slid $1.62 to $41.04 on Nasdaq. They dropped an additional 54 cents in after-hours trading following the earnings announcement on concern that Apple’s growth may stall if the iPod’s popularity falters.

“The problem Apple has now is ... to meet Wall Street’s expectations, they need something beyond iPods,” said Mark Stahlman, a computer analyst in New York with brokerage firm Caris & Co. Stahlman who on Monday downgraded Apple stock from “above average” to “average.”

Apple Chief Financial Officer Peter Oppenheimer predicted a third-quarter profit of 28 cents a share on revenue of $3.25 billion. Analysts surveyed by Thomson First Call expect profit of 24 cents on sales of $3.24 billion.

Some analysts have predicted that Cupertino, Calif.-based Apple, which has sold 10 million iPods since 2001, will sell an additional 20 million this year, encouraging owners of computers using rival Microsoft Corp.’s Windows operating system to switch to Apple.

“The bottom-line measure of any positive impact of the iPod is on [computer] shipments,” Oppenheimer said, pointing out that Apple’s growth in PC sales was more than four times as much as the overall growth in the U.S. PC market.

Nonetheless, Apple’s share of the PC market in the U.S. remains well below 5%.

Apple’s production of iPods has caught up with demand. For much of last year, Apple was unable to ship certain iPod models to retailers fast enough. It now has an inventory of four to six weeks, said Tim Cook, Apple’s executive vice president for worldwide sales and operations.

Stahlman saw that as a warning iPod sales may soften.

“So there are a lot of iPods that haven’t been sold yet,” Stahlman said. “I think it would be fair to infer that iPods likely will be down in the next quarter.”

Apple said it sold 5.3 million in the period. It was an unusually strong performance in that Apple’s January-to-March quarter is traditionally its weakest, after holiday spending. But the number of iPods sold in the latest quarter beat the October-to-December mark of 4.6 million.

The computer maker, however, earned less from iPods last quarter -- $1.01 billion, down from $1.2 billion the previous quarter -- because of the less expensive iPod shuffle player, which sells for $99 and $149.

IPod shuffles, at 512 megabytes and 1 gigabyte of memory, have much less capacity than the 20-, 30- and 60-gigabyte iPods that have hard drives and sell for $299 to $449. IPod shuffles, unveiled in January but on sale in volume only since February, zoomed to 43% of flash-memory-based digital music players, the No. 1 position, Cook said.

Apple’s $1.01 billion in revenue from iPods was by far the company’s largest segment, well ahead of iMacs at $483 million.

Investors are looking for Apple to tell a new story, Stahlman said.

“I think they need to get into gaming,” he said, adding that Apple should explore tie-ins with Sony Corp.’s PlayStation game platform.