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Updated from 5:39 p.m. EDT

Apple Computer

(AAPL) - Get Apple Inc. Report

reported Wednesday that its earnings rose sharply in its second fiscal quarter, surpassing Wall Street's expectations, as the company saw strong sales of its Power Mac G4 desktop computers and PowerBook laptops.

For the quarter ended April 1, the Cupertino, Calif.-based computer company reported net income of $233 million, or $1.28 cents a diluted share. In the comparable quarter a year ago, net income was $135 million, or 84 cents a diluted share.

The latest period included an after-tax gain of $73 million, or 40 cents a share, from the sale of 1.5 million shares of

ARM Holdings

(ARMHY)

, a British chip designer. Without that gain and excluding one-time items in the comparable 1999 quarter, Apple said its earnings rose 72%, to $160 million, and earnings per share rose 47%, to 88 cents.

Wall Street firms had expected the company to report earnings of 81 cents a diluted share, according to a poll of 19 analysts conducted by

First Call/Thomson Financial

.

Apple shares fell 1/8 to 121 in after-hours trading, according to

Instinet

. They had fallen 5 3/4, or 4.5%, to close regular trading at 121 1/8.

Revenues gained 27% to $1.94 billion from the $1.53 billion reported a year ago.

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The company also announced a two-for-one stock split effective June 21.

Apple has regained its stance in the industry during the past few quarters after being viewed as something of a one-trick pony. Since introducing the iMac line and the accompanying iBook portable computers last year, Apple has stumbled, notably in the fall. During that time period, Apple warned analysts that it would miss earnings forecasts because of a shortage of chips for the Power Mac G4 computers. But it has seemingly regained Wall Street's confidence with its diversification strategy, driving its shares to a high of 150 3/8 last month. The stock price has more than tripled in the past year.

The company attributed its earnings growth to sales of professional products, including the Powerbooks portable machines as well as the PowerMacG4s.

Because computer makers' earnings lean heavily on the availability of often highly technical components, analysts closely watch gross margins in the industry. Gross margins, which is the percentage representing net sales less the cost of sales, was 28.2%, compared with 26.3% in the year-ago quarter.

David Bailey, analyst for

Gerard Klauer Mattison

, said gross margins likely beat most analysts' estimates because of a drop in prices for DRAM memory chips to levels unseen since last summer. The cost of the chips had spiked in the fourth quarter last year, contributing to an earnings shortfall.

Bailey rates Apple's stock a buy, and his firm has not done underwriting for the company.

In a conference call with company officials, Kimberly Alexy, an analyst at

Prudential Securities

, asked Fred Anderson, the Apple's chief financial officer, to assess the outlook for availability of components.

"Availability of components and the supply situation was relatively good throughout the quarter and we expect that to continue throughout the second half of the fiscal year," Anderson said.

Andrew Neff, a

Bear Stearns

analyst, pressed the question further: "In the past, you've talked about gross margin guidance trending down," he asked. "Is there a pattern?"

Gross margins should be "slightly better next quarter," Anderson said. "I wouldn't want to make any statement beyond the June quarter."

Apple officials repeatedly brushed aside several analysts' questions about the company's Internet strategy. The company announced a deal in January to make

Earthlink

(ELNK)

the exclusive Internet service provider in software included with Macintosh computers sold in the U.S. At the same time, the company invested $200 million in Earthlink, telling analysts and reporters that the arrangement would add $25 million to $30 million to its profits.

"I'm trying to understand why you did not include Earthlink when you discussed the better than average gross margins," said Walter Winnitzki, an analyst for

Chase H&Q

.

Anderson said the program was not "fully ramped" in the quarter, but that it would likely have an impact on earnings for the quarter that will end in June. He said the company now expects $25 million to $35 million to be added to incremental calendar year gross profit.

Daniel Kunstler, a

J.P. Morgan

analyst, closed the conference call with an unusually pointed remark:

"You're running an $8 billion company on little to no inventories," he said, asking whether company officials knew of any factors that could make the operation crumble.

Anderson said there is aware of nothing that would adversely affect its operations.

In an interview after the call, Kunstler said his question was simply a matter of due diligence.

Apple's quarter was "boring, in a good way," he said. The company's ability to operate with only a one-day inventory period is "astounding. You always want to be careful."

Kunstler rates Apple's stock a buy, and his firm does no underwriting for the company.