IPods Boost Apple Results, Outlook Clouded by Intel Switch

Booming sales of iPods helped Apple score another winning quarter, but a lowered outlook may be raising the stakes for the pending switch to Intel chips in the company’s notebook and desktop computers.

Apple exceeded earnings expectations, posting a profit for its first quarter, which included the holiday period, of US$595 million, nearly double the year-before income. It also beat the revenue number, with sales up 65 percent to $5.75 billion.

Apple was “particularly proud” of the strong iPod sales numbers, CFO Peter Oppenheimer said in a conference call, adding that it highlighted the company’s ability to execute new product launches on the fly at a key time of a year. Both the iPod nano and new 5G iPod with video playback capability were rolled out shortly before the quarter began.

Oppenheimer also said the iTunes Music Store continues to grow rapidly, now averaging some 3 million per day and having sold some 890 million songs since its launch and still holding an 83 percent market share despite a slew of new service launches over the last year.

Computer sales were up as well, but not as strong, leading to speculation that some buyers are holding off on purchases of Apple computers until the next-generation of machines is launched this year.

Those machines will be the first to be equipped with Intel chips after Apple broke away from a long-standing partnership with IBM late in 2005 and said it would offer machines with Intel processors.

Inside the Numbers

Apple guided lower for several reasons, including a shorter quarter — with one less week than the first quarter.

The company set a revenue target of $4.3 billion, which would represent a 33 percent gain over last year, and profits of $365 million.

Apple may be trying to set expectations it can easily meet or exceed, especially after fellow tech heavyweights Yahoo and Intel saw their stocks hammered this week after they missed ambitious growth and profit targets for the fourth quarter of 2005.

The outlook helped spark a sell-off in Apple shares, however, which were down 4 percent by midday Thursday to $79.19. The stock had soared to a 52-week high in the days after CEO Steve Jobs previewed the new Intel-powered Mac computers at MacWorld in San Francisco last week.

Apple acknowledged a modest dip in expected demand for Macs — it sold 597,000 laptops and 667,000 desktops in the quarter, a jump of 20 percent — that it attributed to the pending shift to Intel chips. Fears that buyers will wait may also be driving Apple to speed up its timeframe for introducing chips. Jobs said Wednesday that the rollout of new Macs is “five to six months ahead of expectations.”

Apple should have no trouble clearing out existing Macs to make room for the new family of Intel-powered machines, Enderle Group Principal Analyst Rob Enderle said.

“The new wave of products could really knock consumers’ socks off,” Enderle told the E-Commerce Times. Given Apple’s history of successful product design, he added, the shift to Intel will not pass without some products that shake up the marketplace.

Tech Doldrums?

The face of Apple has changed dramatically into more of a consumer-electronics company, with more than 14 million iPods sold in the quarter, a three-fold increase over a year ago.

Still, more than 40 percent of its revenue came from computer sales in the fourth quarter, suggesting that part of Apple’s business must remain healthy in order for the company to meet or exceed its own forecasts or the expectations of analysts and investors.

Even if Intel-based Macs ship next month, Apple would only see a few weeks’ worth of sales in the current quarter, and some would-be buyers may take a wait-and-see approach, given the magnitude of the shift to Intel chips.

“It’s very difficult to predict how customers will react this quarter, which is why we’re factoring that into our guidance,” Chief Operating Officer Tim Cook said in the conference call.

The Intel-related slowdown in computer sales in the holiday quarter “was a reality but muted,” Piper Jaffray analyst Gene Munster said in a research note.

“We believe this is a legitimate reason for a conservative outlook, but we would also note that Apple has exceeded its stated revenue guidance by an average of 12 percent for the last 3 quarters,” he added. “While 2005 was the year of iPod growth, we believe 2006 is poised to be the year of both iPod growth and, more importantly, Mac market share gains.”

Meanwhile, Apple’s strong results were not enough to reverse the slump in technology stocks, which took it on the chin starting Tuesday when Yahoo and Intel reported earnings.

Despite strong results from AMD — which won market share from rival Intel in the fourth quarter — and IBM, which had an upbeat forecast, the results remain mixed to date. Even record results from eBay were overshadowed by a forecast that was slightly below what analysts expected for the full year.

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