JANUARY 18, 2007
News Analysis
By Arik Hesseldahl
Apple: What Options Scandal?
As the giant computer and consumer electronics maker shows, nothing effaces the stigma of a scandal like a billion-dollar profit
Buoyed by record sales of 21 million of its signature iPod digital media players, computer and consumer electronics maker Apple reaped that billion-dollar bottom line on revenues of $7.1 billion in its fiscal first quarter. Net income surged 78% in the period that includes the yearend holiday season, yielding per-share profit of $1.14, Apple said on Jan. 17.
The results beat the consensus estimates of Wall Street analysts considerably. The average EPS forecast was 78¢, and the average guess on revenue was $6.42 billion. With the current EPS forecast for the year at $2.80, Apple has already met 40% of its profit expectations for the year, suggesting that many analysts may have to revise their estimates in the coming weeks.
The news added to a wave of positive attention paid to Apple in the wake of recent revelations about the company's backdating of options and Chief Executive Steve Jobs' involvement in the matter (see BusinessWeek.com, 1/4/06, "Is Steve Jobs Untouchable?"). Apple has said that no member of the current management team was implicated in wrongdoing and that it turned the results of both its own investigation and that of an independent investigation to federal regulators. The company shed no new light on the options issue during a postresults conference call with analysts, but concerns over the long-term impact of the options mess had already begun to abate amid the release of Apple's iPhone in early January.
"Favorable Pricing Cycle" Apple said it sold 21.6 million iPods in the quarter, far ahead of the 15 million to 16 million that analysts had been expecting. That brings the total number of iPods sold over the product family's lifetime to nearly 90 million, suggesting that some time this quarter, Apple will break the 100-million-unit mark. Much of that success—though Apple didn't spell out exactly how much—was due to the release of the $79 iPod shuffle, which first shipped to stores in November, 2006.
Also helpful were favorable prices on commodity components used in the iPod and the Mac, especially computer memory chips, flash memory chips used in iPod nanos and shuffles, and liquid-crystal display screens used in the iMac, MacBook, and Apple Cinema Display product lines. Lower prices contributed to operating margins of more than 18%. "We realized we're in a very favorable pricing cycle with commodity parts, and we would never expect that to continue over the long term," Chief Operating Officer Tim Cook said. "Don't get used to operating margins of more than 18%." That measure of profitability will be "slightly more than 12%" in the current quarter, which ends in March, Cook told analysts on the conference call.
Selling Songs But the quarter wasn't completely faultless. Sales of Macintosh computers, which some had expected to hit as many as 1.8 million units, came in at 1.61 million. Even so, Apple executives pointed out that growth in Mac shipments was far ahead of sales growth in the wider PC industry. Mac unit sales were flat from the prior quarter but grew from the 1.2 million sold in the year-ago quarter.
The Mac accounted for $2.4 billion, or 33%, of total sales in the quarter. There was strength in sales of Apple's portable MacBook and MacBook pro lines, which improved by 382,000 units over the year-ago quarter, hitting 969,000 for sales of $1.4 billion, or about 20% of revenue. "Mac sales were the only chink in the armor that I can see," says analyst Shaw Wu with American Technology Research in San Francisco. "They came in a little light, but I think that some investors were a little overzealous on their forecasts."
By comparison, iPod sales surpassed all reasonable expectations. Sales of the iPod and related products, including songs from the iTunes store, accounted for more than $4 billion, or more than 57% of total sales. Little wonder Jobs removed the word "Computer" from the company's official name earlier this month.
Additionally, Apple gave some conservative guidance for the current quarter, saying it expected to report sales of $4.8 billion to $4.9 billion, with gross margins of about 29.5% and per-share earnings of between 54¢ and 56¢. The company's shares slipped 90¢, or less than 1%, in extended trading.
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