Apple Plunges on Sales Warning, Vindicating Newton

Thomas Lepri

Apple (AAPL) reported fiscal third-quarter earnings that exceeded Wall Street's expectations after the bell Tuesday. But the shares fell after the company offered a cautious outlook that will likely leave it shy of its full-year target.

For the period ended June 30, the Cupertino, Calif.-based computer maker said it earned $61 million, or 17 cents a share. That figure surpassed expectations of analysts polled by Thomson Financial/First Call by 3 cents, but plunged 69% from the year-ago period, when Apple posted income of $200 million, or 55 cents a share.

Sales came in about $75 million light, totaling $1.48 billion. Gross profit margins slipped to 29.4% from 29.8% a year ago.

Falling Gravity about to take effect

Then to the outlook. In a press release, CFO Fred Anderson said that the company was forecasting a "slight sequential increase" in both sales and profits in its fiscal fourth quarter, which ends in September. That will make it difficult for the company to meet its already lowered sales guidance. In April, Apple said that it expected revenue of $3.2 billion to $3.4 billion in the second half of its fiscal year. Apple would need sales of more than $1.7 billion in its fourth quarter to make the low end of that range. Apple reported sales of $1.87 billion in the fourth quarter a year ago.

Why the expected shortfall? It seems Apple is writing off the possibility of the seasonal boost in demand the company usually gets in its fiscal fourth quarter. "We prefer to be cautious and keep our guidance cautious until we see an upturn in the economy," Anderson told analysts on the conference call following the release. "We don't see an upturn in the consumer economy, and we're not counting on a seasonal recovery."

Many companies, including Intel (INTC), are still counting on a return to the normal, seasonal pattern of demand. (Apple's fiscal fourth quarter ends in September.)

The tone of the conference call was hardly gloomy. Anderson spoke of the encouraging signs the company was seeing from the two retail stores it's opened so far. He spoke glowingly about education sales, which grew 7% in the quarter despite what he described as difficult comparisons.

But there was nothing to get anyone excited. Only new products will be able to do that. Apple is expected to introduce some new hardware products at its semiannual MacWorld exposition, which kicks off tomorrow in Manhattan with a keynote speech by CEO Steve Jobs.

Anderson said he wasn't prepared to give any idea what product-announcements Jobs may have up his sleeve. But "to the extent that there are any," he said, "those could be significant contributors to next quarter."

Apple will need it. Its stock has staged a stellar comeback since imploding in late 2000, riding a healthy balance sheet and strong demand for its notebook computers to a gain of nearly 70% in 2001. But Apple was getting hit hard Tuesday in after-hours trading. After gaining $1.14, or 4.8%, to $25.10 in regular trading, the stock was lately changing hands at $23 on Instinet.

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