Updated from April 19Apple Computer ( AAPL) topped the Street's second-quarter earnings expectations on Wednesday, but offered more bad news than good in its latest financial update. The company missed analysts' revenue expectations and offered disappointing guidance for the coming third quarter. Perhaps more disturbingly, the company's iPod shipments fell far below analysts' targets, which had already been revised downward in recent weeks. But investors seemed to see only positives in the report. In early Thursday trading, Apple's stock was up $3.52, or 5.4%, to $69.17. "Basically, the market was looking at
On a conference call, company CFO Peter Oppenheimer touted Apple's "solid performance." But he did say that the ongoing transition in the company's computer lineup from machines based on Power PC chips to those based on Intel's ( INTC) standard processors depressed sales in the just-completed quarter and likely will again in the current one. Still, "We are extremely happy with how the transition is going," Oppenheimer said, adding that "We are very excited about the products in our pipeline." As for the company's most ubiquitous product, Apple shipped 8.5 million iPods during the quarter, up 61% from 5.3 million in the year-ago quarter. But that total was down a sharp 39% from the 14 million the company shipped in the previous holiday quarter. And it fell shy of the more than 9 million that many on Wall Street had been predicting the company would ship. The annual growth rate also was the slowest posted by the company for its iPod shipments in any quarter in about two-and-a-half years. Analysts had predicted a slowdown in shipments due to seasonal factors; the first calendar quarter is typically a slower buying season. And unlike the year-ago period, when Apple unveiled its low-end iPod shuffle, the company did not unveil any major updates to its iPod lineup in the quarter. On the call, Oppenheimer noted that Apple upped its channel inventory by 550,000 units in the previous quarter. Additionally, that quarter had an extra 14th week that included significant sales. Taking out those two factors, the iPod business wouldn't have shown as much decline and would have been less than the typical decline in the consumer electronics sales from the holiday season to the first calendar quarter, he said. "In terms of the state of the iPod, we're very, very happy with it," he said.
But the iPod business wasn't the only disappointing segment of Apple's operations. The company also posted a continued slowdown in the growth of its computer sales. Apple sold 1.1 million units of its Macintosh, garnering $1.57 billion. Those numbers were up 4% and 5%, respectively, over the comparable shipment and sales numbers Apple posted in the year-ago quarter. In terms of shipments, that was the slowest growth that Apple had posted in nearly three years. The shipments were held down by a number of factors, said both Oppenheimer and Chief Operating Officer Tim Cook. Apple didn't start shipping its new high-end Intel-based laptop computer until midway through the quarter, they noted. Likewise, the company didn't start selling the Intel-based version of its Mac mini computer until near the end of the quarter, they said. Additionally, Apple announced in January that it will complete its transition to Intel chips by the end of this year, a year ahead of schedule. However, some of its leading software partners, notably Adobe ( ADBE) and Microsoft ( MSFT), haven't updated their software to run natively on the new Intel-based Macs. With those factors in mind, some of Apple's professional customers are likely delaying new computer purchases, Cook said. Apple and its partners have made "enormous progress" on making their way through the transition, said Cook. But, he said, "I'm not going to predict when we get through all of it." Despite the disappointing sales, Apple was able to beat the Street's bottom-line expectations because of lower-than-expected costs during the quarter. In particular, the company posted a gross margin of 29.75% of sales, which was nearly 2 percentage points better than the 27.8% gross margin it had predicted for the quarter. Gross margin represents the difference, as a portion of sales, between the amount the company charges customers for its goods and services and its direct costs of producing them.
The better-than-expected margin was the result of a number of factors, Oppenheimer said. Prices for LCD screens and NAND flash memory, which the company uses in its iPods, were lower than expected, he said. Additionally, the company had expected it would have to use significant price cuts to clear inventory of its older Power PC-based computers, but ended up not having to do so. Finally, Apple sold more copies of its high-margin software titles, particularly its iLife and iWork suites, than it expected, he said. Apple also reported gross margin of 29.8% in last year's quarter, but the figure didn't reflect the now-adopted stock-based compensation expense. Shares of Apple closed regular trading off 57 cents, or about 1%, to $65.65 on Wednesday.