Apple Earnings Beat the Street

Apple offered Wall Street some good news and some bad news Tuesday. On the bright side, the company reported a quarterly profit that beat analysts' expectations in a sour economic climate, reported strong iBook sales, and saw 7 percent year-over-year growth in its education sales. But Apple CFO Fred Anderson also lowered the company's sales forecast -- an indication that Apple might have trouble meeting its revenue projections of $5.6 billion to $5.8 billion for the 2001 fiscal year.

Guess which news Wall Street took to heart?

The price of Apple stock fell in after-hours trading, largely amid investor fears that the company will have a tough time maintaining its performance in the coming months. And while it's certainly true that Apple has a tough road ahead of it -- much like the rest of the tech world -- it still doesn't diminish the fact that the company had a solid quarter during a gruesome time for computer-makers.

Apple reported a $61 million profit for the fiscal third quarter that ended June 30. That translates to 17 cents a share, down from a 55-cent-a-share profit for the same period last year.

In ordinary times, a 70 percent drop in profits is enough to make financial wizards recoil at the sight of their own shadow and go into hiding for three more months of grim economic forecasts. But these aren't ordinary times. As technology sputters along in the summer of 2001, a profit is a profit -- and Apple's third-quarter numbers happened to beat the expectations of Wall Street analysts. First Call, which tracks analyst estimates, had a consensus projection of 15 cents a share for Apple's third-quarter profit.

Revenue slumped from last year as well, dropping to just under $1.48 billion from $1.83 billion. But sales are tough all over -- witness Intel's quarterly revenue, which fell to $6.3 billion from $8.3 billion. And Apple's sales at least improved from the $1.43 billion the company reported in the second quarter of 2001.

Besides, Apple saw a sales gain in an important segment for the company -- education. Last year, the company saw its lead in the education market slip away to Dell, a situation Apple CEO Steve Jobs vowed to reverse. Since that time, Apple has added new executives to spearhead its education efforts and rolled out new products, including the iBook.

Those moves apparently paid off. Anderson attributed the 7 percent jump in education sales to strong leadership, a rejuvenated sales team, and the popularity of the iBook -- Apple sold 182,000 of the slimmer, lighter notebooks.

"We feel that we've turned the corner in education and can continue to grow," Anderson said.

Still, sales could dog Apple's near-term fortunes. When the company announced its second-quarter numbers, it forecast sales of $3.2 billion to $3.4 billion for the second half of 2001. On Tuesday, Anderson told analysts that the forecast was now a "number north of around $3 billion plus" -- a matter of semantics that analysts took as a sign of a tough quarter ahead.

It's tempting to look at that as nit-picking -- what's a couple hundred million dollars among friends, anyway? But it underscores the challenges facing Apple. After a first quarter stained with red ink, Apple has turned a profit for two consecutive quarters on the strength of new products like the Titanium PowerBook G4 and the iBook. Does Apple have anything left up its sleeve to entice consumers -- especially when overall consumer demand for computers is sluggish?

Apple certainly anticipates a challenging market. "We haven't seen any signs of an upturn in the consumer PC market," Anderson said. "As far as a seasonal recovery, we aren't counting on one."

Still, Apple has plenty to be cheerful about -- its gross margins remained steady, its inventory remains at a manageable level, it still has $4.2 billion in cash and short-term investments on its balance sheet, and it plans to keep rolling out retail stores in 2001. Anderson indicated that 10 stores would open in August, throwing out such far-flung locales as Plano, Texas; Bloomington, Minnesota; Schaumburg, Illinois; and Peabody, Massachusetts.

Then, there's the small matter of a keynote Wednesday, when Apple could announce a slew of new products.

But whether there's a flood of new Macs or just a trickle, when Jobs steps up to deliver his speech to the Mac faithful Wednesday, he'll be doing it in the warm glow of profitability -- and with the added weight of heightened expectations.

MATHEW HONAN contributed to this report.

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