Apple in Q1 profit, new iMac to spur sales

Peter Henderson

SAN FRANCISCO: Apple Computer Inc. on Wednesday posted a fiscal first-quarter

profit, directly in line with expectations and a turnaround from the year-ago

loss, despite sluggish sales ahead of the launch of its newly designed iMac

desktop computer.

Apple, based in Cupertino, California, said demand for the sleek iMac,

unveiled last week, was outpacing its expectations and would help drive up

revenue in the second quarter from the first, although earnings per share would

be steady. Both financial targets were higher than Wall Street consensus

expectations, and Apple shares rose in after hours trade to $21.80 from a close

of $20.78 on the Nasdaq.

"That's not bad at all," said David Dreman, head of Dreman Value

Management, who along with analysts praised the lift attributed to the new iMac,

which looks similar to a desktop lamp, with a swiveling flat screen monitor

attached by a moving stainless-steel arm to a white-domed base.

Apple posted a net profit of $38 million, or 11 cents per share, in the

quarter ended in December compared with a loss of $195 million, or 58 cents per

share, in the year-earlier period.

That included one-time items, which effectively canceled each other out:

Apple balanced a $24 million restructuring charge with a $23 million investment

gain. Sales were $1.38 billion in the quarter, which typically gets a boost from

holiday sales, compared with $1 billion a year ago and $1.45 billion in the

September quarter.

Apple in October had forecast a profit of at least a 10 cent per share on

sales of at least $1.4 billion, while analysts polled by Thomson Financial/First

Call had cut their estimates from 18 cents per share in October to an average of

11 cents per share on sales of $1.43 billion.

"The current revenues are a little light but guiding up quarter to

quarter revenues is very bullish," said Dan Niles, an analyst at Lehman

Brothers. Since Oct. 1, Apple shares have risen 35 per cent but underperformed

the leading PC maker, Dell Computer Corp., which have risen about 50 per cent.

Chief Financial Officer Fred Anderson said in an interview with Reuters that

initial orders for the newly designed iMac were the highest for any product

since the initial iMac about three years ago, and he forecast revenue would rise

sequentially in the current quarter to $1.5 billion.

Earnings per share in the current quarter would be steady from the December

quarter's 11 cents, failing to match the rise in sales as Apple deals with costs

from ramping up a new product, higher component costs for the computers, and

aggressive pricing which cut profit margins on the new line, he said.

Analysts' consensus estimates for the second quarter, prior to the company's

new guidance, were for earnings of 9 cents per share and revenues of $1.3

billion.

"The wild card here is the ramp and how many we will be able to

produce," Anderson said on a conference call with investors. "While

the March quarter will be a quarter of product transition, we remain very

optimistic about our prospects for growth in the second half of our fiscal

year."

Some analysts have seen Apple cutting prices in order to widen its market

share, capped at around 5 per cent or less of US personal computer sales.

Anderson said Apple was giving up some of its profit margin in a bid to secure

sales growth.

Anderson said the slightly light December quarter sales reflected the slow

economy as well as sluggish sales of the old iMac line. He expected the new iMac

also to lift sales at Apple's new retail stores.

The 27 existing stores lost $8 million in the quarter on $48 million in

sales, and Apple said the retail outlets are helping to win converts, since

roughly 40 per cent of the computers in December were sold to customers who did

not already own a Macintosh.

One cloud on the horizon, however, was sales to schools, a key Apple market

which is starting to feel the effects of recession, Anderson said. Some schools

are deferring purchases, although Apple had factored in a decrease in its

expectations.

Analyst Martin Reynolds of technology research firm Gartner Inc. said the

December sales showed Apple needed to boost its sales with products like the

iPod digital music player. The relatively cheap iMac was still too expensive to

turn around Apple's market share, he said.

"It's very cool, but the price won't lead to market expansion, he

said."

(C) Reuters Limited.