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No Shine on Apple

Yet another tech heavyweight guides lower for the current quarter.

Updated from 5:09 p.m. EST

It turns out

Apple Computer

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was saving the bad news for later.

A week after announcing that it had posted better-than-expected sales in its holiday period, the company forecast results for its current quarter that were much lower than analysts' forecasts.

A number of factors contributed to that near-term outlook, CFO Peter Oppenheimer explained during Wednesday's conference call, including: an expected seasonal decline in sales of the company's iPod digital music players, the fact that the company's new


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-based notebook computer won't ship until next month, and the fact that the current second quarter will have one less week in it than did the holiday period.

Still, Oppenheimer stressed that the company expects its current period to be the second-best quarter in its history trailing, only its just completed one.

"We remain very enthusiastic about our product pipeline," he said. "We are confident about our strategy."

Despite Oppenheimer's optimism, investors' immediate reaction was negative: In after-hours trading, Apple's shares traded off as much as 6.4% before rebounding somewhat. In recent after-the-bell activity, the company's stock was off $2.99, or 3.6%, to $79.50.

Setting aside its outlook, the company had a lot to cheer about from the holiday period.

In its quarter ended Dec. 31, Apple earned $565 million, or 65 cents a share. That was up from the year-ago period, in which the company earned $295 million, or 35 cents a share.

Sales jumped 65% year over year to $5.75 billion.

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Excluding options costs, the iPod maker would have earned $595 million, or 68 cents a share.

On this basis, analysts had predicted the company would earn 61 cents a share in the quarter, according to Thomson First Call. The company predicted in October that it would earn 46 cents a share -- or 49 cents a share excluding stock options costs.

At the Macworld conference last week, Apple CEO Steve Jobs

preannounced the company's sales total as well as the number of iPods and computers the company shipped. The total revenue and iPod sales figures were far higher than analysts had generally predicted.

But while the just-completed quarter was a good one for Apple, the company offered a disappointing outlook for its current period. The company expects to earn 38 cents a share -- or 42 cents a share excluding options costs -- on sales of $4.3 billion.

Wall Street had previously predicted that the company would earn 48 cents a share before costs in the current quarter, on $4.62 billion in sales. In the same period last year, Apple posted a profit of 34 cents a share -- also not including stock options costs -- on $3.24 billion in sales.

Shares of Apple closed regular trading off $2.22, or 2.6%, to $82.49 on Wednesday.

Apple's results benefited in part from having the company's quarter having one more week -- 14 in all -- than did the year-ago period. That week encompassed the period between Christmas and New Year's Day, which Oppenheimer said was -- and has been in the past -- a "strong week" for Apple. Oppenheimer declined to quantify Apple's results in any way for the week.

Aside from the extra week, Apple's results in the holiday period were driven by primarily by iPod sales. The company sold 14 million iPods in the quarter, garnering $2.91 billion in revenue. Sales on a unit basis were up 207% and dollar sales were up 140% from the 2004 holiday quarter.

While the iPod line has been central to Apple's resurrection over the last several years, that result marked the first quarter in which sales of the digital music players made up a majority of Apple's overall sales or topped the revenue brought in by its Macintosh computer line.

Even with burgeoning iPod sales, company officials indicated that they could have sold even more of the digital music players in the quarter. What stopped them from doing so were supply constraints, particularly on the 4GB iPod nano, company officials said. Relative to its expected holiday quarter sales, the company began and ended the period with iPod channel inventory below its targeted range of four to six weeks worth of units, Oppenheimer said.

iPod inventory was "lower than we would have liked," he said.

However, given that the company expects sales to sell fewer iPods in the current quarter, inventory for the music players is now within the company's ideal range, Oppenheimer said.

On a unit basis, Mac sales cooled off somewhat, but remained strong, growing 20% over the same period a year earlier to 1.25 million units. But dollar sales grew just 7% year over year to $1.72 billion, due to a slump in desktop sales, indicating that the company was having more success selling low-end models than its higher-end ones.

Despite the slowdown in Mac shipments -- unit sales grew 48% in the company's fourth fiscal quarter -- company officials said sales were above their internal projections. The company expected -- and saw -- a "pause" in sales last quarter due to customer anticipation of what it would announce at last week's Macworld conference. The company ended up

unveiling two Intel-based computers five months earlier than company officials had previously projected.

On the call, company officials warned that the relatively soft Macintosh sales could continue in the current quarter due to supply issues. Apple won't begin shipping its new Intel-based notebook, the MacBook Pro, until sometime next month, meaning that it might not be able to meet demand for it in the quarter, officials said. While the company is "hopeful" that it will meet demand for its new Intel-based iMac desktop computer, it has seen strong demand for it thus far.

The relative success of the company's iPod line vs. the Macintosh line apparently had an impact on its gross profit margin. Although the company does not break out the profitability of individual products, analysts generally believe Apple makes more money on its computer sales than its iPods. Apple's gross margin -- the difference between what it charges customers for its products and its direct costs of making and distributing them -- fell to 27.2% of sales in the quarter from 28.5% a year earlier.

Part of that decline had to do with the effect of stock options, which Apple just began expensing this fiscal year. That issue aside, the company expects gross margin to improve to about 27.8% of sales in its fiscal second quarter, with fewer iPod sales and lower component costs, Oppenheimer said.

Still, the narrowing of gross margin in the holiday quarter had little effect on the company's bottom line, as Apple controlled costs elsewhere. The company's operating income swelled to 13% in the quarter from 11.5% in the year-earlier period.

Another success story for Apple was with its retail stores. As previously announced by Jobs at Macworld, sales through its stores topped $1 billion in the quarter, up from $571 million in the year-ago period.

And Apple is apparently bullish on the future of its retail initiative. The company expects to open a total of 40 new stores this fiscal year, which would bring its total to about 164 stores. That would be nearly double the 86 stores it had at the end of fiscal 2004.