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JULY 15, 2004
By Peter Burrows Apple's Almost Perfect Package Its stronger-than-expected earnings clearly rebuked the skeptics. The only problem now: A dearth of parts for its hot products For most of July, investors have been searching for reasons why Apple Computer couldn't maintain its hot earnings streak. Many seized on its July 2 announcement that due to a product delay, it would have no iMac home PCs to sell for much of the back-to-school season. Result: Over the next 10 days, Apple (AAPL ) shares plummeted 9.5%, to $29.22 (it was trading around $33 as of July 15). When Jobs & Co. announced third-quarter earnings on July 14, however, the naysayers were silenced. Quarterly sales increased 30%, to $2.01 billion -- the best June quarter performance in eight years. The red-hot iPod music player led the way, with sales up 183%, to 860,000, in the quarter. But Apple's earnings also jumped -- up three-fold, to $61 million, from the year before. That's in large part due to solid sales of its G5 PowerMac. Apple sold 173,000 of these high-end, high-margin machines, up 30% from the year before. Maybe the best news is that, after years of selling to its own diehard fans, Apple seems to be making headway in attracting new customers -- and not just with its digital-music products. Mac sales to higher education grew 40% quarter-to-quarter, nearly three times the industry rate. COLLEGE CROWD. In particular, Apple's PowerBook notebook PCs seem to have regained its hip status with the college crowd. That bodes well for the future, since today's freshmen are tomorrow's household heads. Strength with students was a critical factor in Apple's heyday in the late 1970s and 1980s. That's not to say Apple will regain its dominance in education any time soon. Dell (DELL ) now has a lock on that claim, and Apple actually saw sales decline in the K-12 market. Still, it's a rare flicker of good news for Apple in terms of Mac market share, which fell to 2.8% in the U.S. in the first quarter, according to IDC. Of course, some controversy is always raging within the Apple ecosystem. This time, it involves two of key suppliers. Apple disclosed that the reason for the new iMac delay was primarily due to IBM's (IBM ) inability to make enough of its G5 processors. "We are extremely unhappy with these events," said Apple Chief Financial Officer Peter Oppenheimer. While Apple should soon begin working down a backlog of orders for single-processor G5 PowerMacs, Oppenheimer expects the shortage to restrict sales of dual-processor PowerMacs through the end of the quarter that ends on Sept. 30. OUT OF BALANCE. Maybe more frustrating, Apple has been unable to capitalize on the buzz around its multicolored mini iPods, due to a shortage of the tiny Hitachi disk drives they use. In the conference call with analysts, Apple Executive Vice-President Tim Cook waxed superlative about consumer interest in the device. "The demand is staggering in the U.S.," he declared. And since Apple began taking orders overseas a week ago, "the order stream is unprecedented." The bad news: Most of those orders will now go unfilled for weeks or even months because of the disk-drive dearth. Asked to say when he thought Apple would catch up with demand, Cook admitted it was hard to call. And since demand could still increase further, it's a moving target. "It's very difficult to predict when supply and demand will balance." Add it all up, and Apple's outlook is stronger than expected, but not as golden as it might have been. The company expects to boost sales slightly, to $2.1 billion, next quarter, but with slightly lower gross margins (due in part to high air-freight costs to rush those new iMacs to market come September, once it gets enough G5 processors). Remember, Wall Street hates uncertainty, and until it becomes clear that IBM and Hitachi can keep up with the orders Apple has generated, Mac lovers -- and investors -- will still have plenty to fret about.  Burrows is a correspondent in BusinessWeek's Silicon Valley bureau Edited by Douglas Harbrecht
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