Headline Feeds
Apple (Nasdaq: AAPL) executives tried to lower expectations for the coming quarter, but it's clear that investors and many analysts still have stars in their eyes from a blockbuster earnings report, believing the good times will continue to roll for a while longer.
The quarter was, as expected, powered by iPod sales and Apple's online music domination, but also spread to areas such as desktop and notebook computer sales and even software, which saw a surge on the back of the Tiger operating system.
However, in a conference call with analysts and reporters, Apple Chief Financial Officer Peter Oppenheimer surprised many by issuing relatively modest guidance for the traditionally strong fourth quarter.
Back-to-School Season
Oppenheimer said Apple is being conservative in light of the impending shift to Intel (Nasdaq: INTC) processors. Apple worries that some would-be computer buyers might hold off as Apple transitions to the Intel chips in coming months.
Oppenheimer acknowledged, however, that the first three weeks since the Intel announcement saw no drop off in computer sales. Some analysts expect buyers might hold off on purchases ahead of the switch, but most see little impact, especially heading into the busy back-to-school season and what is typically one of Apple's strongest quarters.
In fact, many analysts have brushed that caution aside and have trumped Apple's own forecasts for the current quarter, which includes the key back-to-school season. Apple has forecast sales of US$3.5 billion and earnings of 32 cents per share in the fourth quarter, below where Wall Street had predicted the quarter would come in.
Investors also seem to believe Apple is playing possum, driving up the company's shares by more than 7 percent trading today to $41.14.
Apple the Software Company?
Many analysts say the Intel switch is one of several wild cards that will greatly effect Apple's results over the next year.
Gartner (NYSE: IT) analyst Stephen Kleynhans said the switch from IBM (NYSE: IBM) to Intel chips should not be too disruptive and "comparatively simple for Apple to manage" and should not dramatically alter the purchasing decision of Apple customers.
The strength of the iPod in the most recent quarter was hardly a surprise -- though even bullish forecasts predicted around 5.5 million units sold, compared to the actual number of 6.1 million. However, investors were also buoyed by the across-the-board strength in Apple's numbers.
Macintosh sales rose 35 percent to 1.18 million units in the latest quarter, while a surge in sales of the Tiger OS helped the software division add $100 million in profit.
Despite the general sense of optimism, some used the results to renew the question about what Apple does next, as an encore to the success of the iPod. Conventional wisdom is that Apple will continue to see iPod sales grow sharply for another six months or so before demand begins to slow.
"The past two to three quarters left no doubt there's been a 'halo effect' from the iPod," Piper Jaffray analyst Gene Munster said. "The question is what happens when iPod reaches the inevitable plateau."
What's Next?
Many analysts believe that next product isn't yet in the works, with most saying that spinoffs of the iPod, such as those with video playback capabilities or iPod-branded smartphones, might not be unique enough to replace the magic of the iPod. Munster believes it's critical for Apple to have a new, hit product sometime in 2006 to keep its momentum alive.
Meanwhile, Apple might have at least that long of a horizon to enjoy control of the online music market. Oppenheimer told analysts during the conference call that the company's iTunes Web site still controls 80 percent of the market for legally downloaded music, despite a barrage of competitive challenges from Yahoo, the new Napster and others.
One of the few negatives in the Apple report was its results from Japan, where sales were down 7 percent year-over-year. Apple blamed its retail channels in that country for the shortfall and said it would examine possible solutions going forward. Despite the Japanese results, overseas sales are booming, accounting for 39 percent of revenue in the quarter.
Naysayers Wrong
During the conference call, Apple also highlighted the success of its retail strategy with the iPod, saying it was now available in some 25,000 stores worldwide, with the iPod shuffle available in 95 percent of Wal-Mart (NYSE: WMT) stores. Re-seller channels have also proven effective, with Hewlett-Packard (NYSE: HPQ) responsible for 8 percent of all iPod sales in the quarter, a record level.
Jupiter Research analyst Joe Wilcox said some people will undoubtedly see the strong results and lower forecast as the beginning of the end of Apple's great run. However, he said such naysayers have been wrong about Apple many times in the past. "Seems like there's always a 'death of Apple' story whenever there's big news and they're always wrong," Wilcox told MacNewsWorld.
