Apple's Sweet Profits and Sour Legal Woes

Its stellar earnings release drew some attention from its options scandal. But questions about Steve Jobs' role aren't going away

by Arik Hesseldahl

Apple CEO Steve Jobs Justin Sullivan/Getty Images

There's nothing like an 88% surge in quarterly profit to quell concerns over product delays and stock option grants.

Just ask the folks at Apple (AAPL) who on April 25 reported per-share earnings of 87 cents, blowing past analysts' expectations by more than 20 cents. Net income leapt to $770 million as sales rose 21%, to $5.26 billion. The gains were fueled by sales of 10.5 million iPod digital music players and 1.5 million Macintosh computers.

iPhone Feint

It was almost enough to make one look past remarks, issued a day earlier by a former chief financial officer, that placed blame for the options scandal on the shoulders of Apple Chief Executive Steve Jobs, or to forget that Apple recently delayed the release of its operating system to divert engineers to its music-playing cell phone—this after missing the planned introduction of Apple TV by a few weeks.

Almost—but not completely. Indeed, Apple preceded its earnings release with a statement from directors in defense of Jobs and his role in the handling of option grants, while questions about the coming iPhone and whether it will live up to the hype were sprinkled throughout the conference call discussing results—and remain on the minds of many analysts and investors.

Apple did shed some light on its plans for iPhone, including how it will account for the device's revenue. Apple will record sales of the phones over a 24-month subscription period, rather than at the time of purchase. It will do the same thing with AppleTV, the newly released set-top box that plays video and music stored on Macs or on PCs based on Microsoft's (MSFT) Windows. Apple CFO Peter Oppenheimer said this is because the company expects to offer ongoing software updates to add new features to the product.

Asked during a conference call if this implies a shift toward offering a video or music subscription service through the AppleTV device, Oppenheimer declined to be specific. "We have a number of ideas for features on AppleTV, and we'll provide them as they become available," he said.

Pointing Fingers

And what of Apple's core computer business? Shipments of the Mac rose an impressive 36%, helping Apple gain 5% of the U.S. personal computer market, up from 4% a year earlier. But can the sales be sustained in light of a reallocation of software engineers away from the Leopard operating system, now due in October instead of the spring, as previously expected? Andrew Hargreaves of Pacific Crest Securities in Portland isn't so sure.

"Mac sales have never been so closely tied to software upgrades as have Windows PCs," Hargreaves says. "New Mac sales are usually tied to new hardware being released." However, the imminent release of Adobe's (ADBE) Creative Suite 3 will likely spur many Mac-using creative types to finally take the plunge and upgrade their machines.

Then there are the lingering questions over the role of Steve Jobs in the handling of options grants. Apple in December exonerated Jobs. But former CFO Fred Anderson is settling legal charges from the Securities & Exchange Commission and coughing up some $3.5 million to walk away from the matter without admitting any guilt. A day before the earnings release, Anderson did his level best to point an accusing finger at Jobs (see BusinessWeek.com, 4/25/07, "Parting Shots At Apple's Jobs").