Analysts on Apple: Tune in Tomorrow

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Apple turned a tidy $38 million dollar profit for its first fiscal quarter of 2002 -- a solid turnaround for a company that, 12 months ago, was coming off its first quarterly loss in three years. But as far as Wall Street is concerned the best may be yet to come.

After downplaying expectations for most of 2001, Apple Chief Financial Officer Fred Anderson told analysts Wednesday that Apple expects to tally $1.5 billion in revenues for the three months ending March 31 -- a 9 percent increase from the just-completed quarter. Anderson also spoke of "an opportunity for growth" in the second half of 2002, potentially driven by sales of the new iMac, continued momentum in the OS X transition, the continued success of the iPod, and -- most tantalizingly to Mac users -- a pipeline of yet-to-debut products.

"We think our product offerings are going to be stronger this quarter and for the rest of the fiscal year than they were last quarter," Anderson said.

That was good news to analysts, who, while cheered by Apple's first-quarter results, weren't exactly blown away by the numbers. Apple's earnings of 11 cents per share were a vast improvement over the 58-cent loss the company posted for the same period last year -- especially considering the torpid economy. Then again, Apple's profits took no one by surprise. The results were in line with earnings expectations, according to market research firm Thomson Financial/First Call. Sales for the three months ended December 31 rose 37% from last year to $1.38 billion -- but still fell short of the $1.43 billion that analysts were expecting.

"The quarter itself wasn't necessarily great," said Lehman Brothers analyst Daniel Niles, noting the dip in revenue. "But the guidance (for the coming quarter) was phenomenal."

Normally, failing to live up to revenue expectations would cause anything from a mild uproar to an all-out pity party on Wall Street. But Apple noted that the slower-than-expected sales were the result of two one-time events -- a 23 percent drop in iMac sales and deferred sales in the education market thanks to the weaker economy. Apple thinks the former is the result of consumers putting off purchases in anticipation of the redesigned iMac's release. It's not too worried about the latter, either, with Anderson pointing out Apple's record $37.2 million contract to equip middle school students and teachers in Maine with 36,000 iBooks.

"The quarter came in pretty much in line with expectations," said David Bailey, a research analyst with Gerard, Klauer, Mattison & Co. "I think investors should concentrate on the second half of the year."

First, though, comes Apple's second quarter, in which the newly unveiled iMac figures to play a prominent role. "Initial orders for the iMac have exceeded expectations," Anderson said. "First week pre-orders are at the highest level of any product since the introduction of the original iMac."

But with the 800MHz iMac not slated to hit retail shelves until the end of this month, Apple faces a challenge in filling all those orders. "It will take most of the quarter to ramp up production of the iMac," Anderson said. "We don't expect to meet the demand."

While the iMac could help spur increased sales in the second quarter, it's not expected to have the same effect on the bottom line. First Call gives a consensus earnings estimate of 9 cents a share for the March quarter; Apple earned 12 cents a share for the same three months in 2001. Apple projects flat earnings growth for the next three months, thanks to ramped-up production spending and higher prices for components such as LCD screens and RAM.

Higher costs should reduce some of Apple's high margins in second quarter, a prospect that doesn't necessarily faze anyone from Cupertino. "A 30.7 percent gross margin is pretty lofty to sustain long-term," Anderson said. "We would trade some of that for (sales) growth."

And that's exactly what analysts are expecting for the rest of 2002. Bailey looks for a favorable second half fueled by more OS X-native software releases and "significant upgrades to Apple's entire desktop line."

The Power Mac G4 desktops certainly seem like ideal candidates for an overhaul. Apple sold 212,000 of its high-end desktop machines during the first quarter, a modest 5 percent increase a year-ago. In contrast, unit sales of PowerBooks and iBooks soared 206 percent and 67 percent, respectively, during the quarter.

Whatever products Apple winds up releasing in the coming months -- and Anderson wasn't saying Wednesday -- no one would argue the company's financial outlook is assured. As the G4 Cube proved, attention-grabbing new designs don't always translate into stellar sales. And the longer the current recession lingers, the tougher row Apple has to hoe.

Still, Apple can quiet some of these concerns by pointing to an array of recent successes. The PowerBook and iBook have enjoyed stellar sales since undergoing redesigns in 2001. Since unveiling the white iBook in May, Apple has sold 600,000 of the consumer portables. That compares to 700,000 sold during the original iBook's 20-month product cycle. Despite some concerns about the iPod's $399 price tag, Apple still sold 125,000 of the new MP3 player during its first two months on the market. Apple's retail stores lost money during the quarter as expected but still tallied $48 million in revenue. More important, 40 percent of the people who visited an Apple retail outlet during December were new to the Mac platform -- an indication that Apple is having some success using the stores to reach new customers.

All together, it adds up to a good start to 2002 for Apple. And analysts hope that it's only a start.

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