A Late Spring for Apple's Earnings


By Peter Burrows Apple Computer has always danced to its own drummer. Rather than go for a mass audience, it focuses on making stylish, elegantly designed products for sophisticated consumers. But Apple (AAPL) has never had an easy existence -- as was treacherously clear during the recent three-year downturn. Value-conscious consumers and budget-strapped school districts, two traditional strongholds, began moving to cheaper Microsoft (MSFT) Windows machines. And spending by creative professionals such as graphics artists and publishing houses, its most loyal customers in the past, almost disappeared.

Now, Apple's fundamentals are brightening again. On Oct. 15, it posted 19% revenue growth for its fiscal fourth quarter, to $1.7 billion. Profits hit $44 million, up from a $45 million loss in the same period the year before. The reason: improved orders from schools, a 203% increase in sales of its slick PowerBook portables, and a long-awaited uptick in demand for Apple's powerful new G5 PowerMac models for professional customers.

Sales of the G5, and the lower-price G4, drove PowerMac sales up 79% from the prior quarter as Apple finally replaced older models. Demand was so brisk that Jobs & Co. had to incur hefty charges to air-freight units to customers -- the kind of problem it doesn't mind having after so many hard years (see BW Online, "Will This Be the Summer of Mac?").

DIVERSITY PAYS. Better yet, Chief Financial Officer Fred Anderson predicted that sales would hit $1.9 billion in the quarter that ends Dec. 31, with slightly improved earnings. As overall PC industry sales suddenly show signs of life, Apple expects improved demand from consumers. As for those PowerMacs, "We believe we're very well poised for an upgrade cycle from our professional customers," Anderson told analysts.

Apple's efforts to diversify away from the Mac are also paying dividends. Critics have long scoffed that its decision to create 60-plus retail stores was sure to result in a hemorrhage of red ink. Yet, Apple earned a slight profit from the stores in the quarter that just ended.

Then there's the music business. Apple's iTunes Music Store is selling roughly 500,000 songs a day. Profits are scant -- but these music lovers are snapping up the iPod portable music player so they can take their tunes around with them. Apple sold 336,000 of the devices, bringing in $121 million in revenue. That's 7% of total sales -- a big chunk in an industry that has struggled to find lucrative new businesses.

iMAC SLOWDOWN. Analysts look for 50%-plus growth in iPod sales in the fourth quarter -- driven in part by Apple's unveiling today of its iTunes Music Store for Windows PC users (see BW Online "How Apple Spells Future: I-P-O-D").

Of course, Apple has its weak spots. Sales of the iMac consumer PC fell 25% from the same quarter the year before, and 7% sequentially from the June quarter. And investors drove Apple shares down more than 7% after it announced its quarterly earnings. Ostensibly, that 19% top-line growth wasn't enough to warrant the 70%-plus rise in the stock since iTunes Music Store for Mac users was launched in April.

Still, Apple looks to have reliable growth in front of it on many fronts, at least for a while. That's a much happier tune. Burrows covers Apple from BusinessWeek's San Mateo bureau


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