Three months ago, Apple Chief Financial Officer Fred Anderson told Wall Street analysts and reporters to expect the computer maker to rack up $1.5 billion in revenue during its fiscal second quarter. Anderson also predicted flat earnings growth for the quarter, resulting from rising component costs and ramped-up production of the new iMac.
So on Wednesday, Anderson announced Apple's actual results for the three months ended March 31--$1.5 billion in revenue and flat earnings growth as a result of higher component costs and ramped-up production of the new iMac.
If Apple's second-quarter results lacked any major surprises, you won't hear analysts complain. The company enjoyed solid sales growth while maintaining profitability during an otherwise dour time for computer makers. The credit, analysts say, goes to Apple's steady management and appealing products.
"Overall, Apple did a superb job operationally during the March quarter," said Andrew Scott, a research associate with Needham & Co. "Really, on the strength of growing iMac sales, revenue should continue to increase during the year."
Apple's $1.5 billion in second-quarter sales marked a 4 percent increase from the same period a year ago. Revenue was also up from the $1.38 billion the company reported during the fiscal first quarter--making Apple one of the few computer makers to see sequential revenue growth during the past two quarters. Although earnings per share fell 8 percent from a year ago to 11 cents a share, Apple was still able to turn a profit while edging out analysts' expectations. Analysts surveyed by Thomson Financial/First Call had expected Apple to earn 10 cents a share on revenue of $1.46 billion.
"Their operations were outstanding," said research analyst David Bailey of Gerard, Klauer, Mattison & Co. "One of the traditional knocks on Apple is that when they have a hot product, they can't meet demand... It turned out that they beat estimates."
"We're pleased to have delivered solid results while executing a challenging product transition," Anderson said.
Apple certainly faced plenty of challenges in the past three months when introducing its redesigned iMac. On top of the usual logistical hurdles that come with ramping up production on a new product, Apple also had to deal with sharp increases in the cost of flat panels and memory. Rising component costs forced Apple to up the price of the iMac by $100 for each of the three configurations. With a backlog of iMac orders, Apple has been shipping computers by air to catch up with demand. That adds a cost of about $35 per iMac, Scott said, further eating into Apple's profits. Apple saw operating margins of 27.4 percent this quarter, up from 26.9 percent a year ago, but down from the 30.7 percent profit margin Apple enjoyed in the December quarter.
Still, with all the challenges faced by Apple, the company managed to ship 220,000 iMacs this quarter. The iMac is now in volume production, and Apple hopes to take care of its backlog by May. The component costs that forced Apple to raise the iMac price appear to have stabilized, Anderson said.
A Rise in the Fall?
Apple expects its profit margin to dip in the third quarter, as it honors existing iMac orders at the original prices and continues to ship computers by air to meet backlogged demand. That means flat earnings growth for the third quarter, although things could improve in the fourth quarter as Apple starts to see the benefit from the $100 price hike and cost-cutting measures.
"[Margins] should rebound nicely in the September quarter," Scott said.
Apple believes its sales will continue to grow, with Anderson forecasting $1.6 billion in revenue for the quarter ending June 30. The company reported $1.48 billion in sales for the same three months in 2001.
Scott expects iMac sales to drive Apple's business for some time to come. "If history serves as any guide, new iMac sales should not peak before the December quarter of 2003," he said.
Apple faces some concerns in the coming months. The company sold 211,000 Power Mac G4s during the second quarter--about the same number it sold during the first quarter and down 19 percent from the same period a year ago. Anderson believes Apple's pro users are putting off purchases, due to the weak economy and the continuing transition to Mac OS X. Likewise, sales of PowerBook G4s slowed during the quarter, suggesting that an update to the laptop is due. Apple sold 89,000 units, down 34 percent from the previous year and 23 percent from the first quarter. Finally, sluggish tax revenue is forcing school districts and educational customers to defer purchases--something to keep an eye on as Apple enters what is traditionally its strongest quarter for K-12 sales.
"Education is the key factor in the June quarter," Bailey said. "With tax revenues down, it could cause schools to push out purchasing PCs. That would affect every [computer maker], but it would particularly affect Apple."
But Apple has plenty of good news to carry it into the coming months. The past three months proved to be a particularly strong quarter for the pro video market, with Apple adding 75 value-added resellers to double the size of its pro video channel. "That's been our primary strength in the professional area," Anderson said.
A Winning Strategy
Apple also tallied $70 million in sales from its brick-and-mortar retail stores. While the Apple stores continue to lose money, the company cut its losses in half to $4 million for the quarter. With plans to open 20 more stores by year's end, Anderson said he's hopeful that Apple's stores could turn a profit by the end of 2002.
Regardless of profits and losses, the Apple stores are certainly attracting plenty of customers. Anderson said 1.7 million people visited the 29 Apple stores during the March quarter, with anecdotal evidence suggesting that 40 percent of those shoppers are Windows users.
"At this point, it's probably most constructive to view the stores as a marketing vehicle," Bailey said. "Just the ability to bring in people not familiar with the Mac and articulate its benefits has been good for the Mac platform."
"We firmly believe our retail strategy is helping us reach out beyond our existing customer base," Anderson said.
Add it all together, Anderson said, and Apple is very optimistic about its future prospects. "While most of our competitors reduced their investment in research and development and head-count, Apple has been increasing its investment in research and development," Anderson said. "We're positive about the investments we've made in the past year, and we feel Apple is poised to take advantage of them."