Apple: All Systems Go

Another tech-industry bellwether reported robust demand for its products, as Apple Mac and iPhone sales set records in the fiscal fourth quarter

By Arik Hesseldahl

The tech industry's earnings juggernaut keeps rolling. Apple blew past Wall Street's expectations with a fiscal fourth-quarter report on Oct. 19 that showed profits surged 47% and revenues climbed 25% on lofty Mac computer sales.

The report, for Apple's (AAPL) quarter that ended Sept. 26, continued a streak of strong earnings from tech-industry bellwethers. During the past week, Intel (INTC) and Google (GOOG) reported earnings that beat analysts' expectations, and Intel Chief Executive Paul S. Otellini said the tech sector is leading the economic recovery. IBM's (IBM) results also showed tentative signs of returning strength in corporate technology spending.

Apple rode strong consumer sales of its Mac PCs and iPhones during the quarter. Sales shot up to nearly $9.9 billion, vs. $7.9 billion a year ago. Net income reached $1.67 billion, or $1.82 per share, compared to $1.26 a year ago. Gross margin, a key measure of profitability, was 36.3%.

Profit-Taking Is Possible

The results bested the estimates of even the most bullish analysts. Wall Street's consensus estimate was that Apple would report sales of $9.2 billion and earn $1.42 per share. "My estimates were higher than the Street's, people told me I was too high, and they still beat both my numbers," says Brian Marshall, an analyst with Broadpoint AmTech.

Shares of Apple soared in extended trading, adding 6.3% after closing Oct. 19 at 189.86, a gain of 1.81, or nearly 1%. At one point in extended trading, the shares reached nearly 205. Apple's all-time intraday high price during a regular trading session is 202.96, set on Dec. 27, 2007, and it has been trading near its 52-week high of 190 in recent days.

The stock could trade up and down this week as investors sell shares to realize profits, says Charles Wolf, analyst with Needham & Co. But Wolf foresees another march upward through Apple's first quarter of fiscal 2010, which ends in December. "By the time Apple reports its results for the December quarter it could be trading between 220 and 225. The key to the stock is not what happens tomorrow, but what happens through the quarter."

Margins Could Be Squeezed

During a conference call with analysts, Apple executives issued a conservative forecast for its fiscal first quarter, which encompasses the all-important holiday selling season. Apple said it expects sales between $11.3 billion and $11.6 billion, in line with analysts' consensus estimate of $11.45 billion. The company expects to earn $1.70 to $1.78 per share, below analysts' expectation of $1.91. Perhaps more telling, Apple said it expects its gross margin to fall more than two percentage points during the quarter, to 34%.

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