Apple Reports Profit Strong, No Consumer Recovery

Apple on Tuesday reported profits that rose in its fiscal third quarter from the previous period, continuing a turnaround on strong sales of the new iBook notebook computer, but the company sees no sign of a recovery in the anemic consumer PC market.

The results were in line with Wall Street expectations, but Apple is cautious about the current quarter, which analysts took as a warning, sending its shares down in after-hours trade to their lowest level in a week.

Cupertino, Calif.-based Apple reported net profits of $61 million, or 17 cents a diluted share, compared with $40 million, or 11 cents a share, on an adjusted basis in the prior second quarter.

However, net profits fell 70 percent from the $200 million, or 55 cents a share, recorded a year earlier. Apple is still rebounding from a fiscal first-quarter loss.

Sales rose, to $1.475 billion from the previous quarter's $1.43 billion, but fell from the $1.83 billion reported in the third quarter a year ago.

Analysts polled by research firm Thomson Financial/First Call had on average expected Apple to earn 15 cents a share, on sales of $1.6 billion.

"They seemed to hit a sweet spot in the market with that iBook," says UBS Warburg analyst Don Young, who says the company was light on revenues in its third quarter but had managed the bottom-line well.

Apple shares, up 69 percent this year, have been among the best performing in the computer industry and have outperformed number one PC maker Dell.

The stock fell in after-hours trade on Instinet in reaction to the earnings report, dropping to $22.75 from a Nasdaq close Tuesday of $25.10.

Apple is fighting off the effects of economic weakness with new product introductions, beginning with its Titanium PowerBook high-end notebook and a souped-up desktop early this year and introducing the new iBook on May 1.

Many expect CEO Steve Jobs to unveil a new iMac low-end desktop model at Macworld, the twice yearly trade show that opens in New York on Wednesday.

"That is probably the biggest challenge facing Apple going forward--because of the narrowness of their customer segments, they are more dependent on product introductions than other PC manufacturers," says David Bailey, an analyst at Gerard Klauer Mattison & Co.

Bailey says the news from Apple was mixed.

"The quarter was as good as can be expected in this environment, but the the outlook is still challenging, not only for Apple," he says.

In the past scholastic year, Apple dominated in PC sales to schools, kindergarten to grade 12, CFO Fred Anderson said, quoting a study by International Data Corp.

"Education is humming," Anderson told a conference call, a clear indication of success in the battle for education with Dell. But he was conservative in his outlook.

"We haven't seen any signs of an upturn in the consumer PC market," he says. "As far as a seasonal recovery, we aren't counting on one."

The company previously forecast second-half sales of $3.2 billion to $3.4 billion, putting revenue for the year at $5.6 billion to $5.8 billion.

But in an interview with Reuters, Anderson forecast a "number north of around $3 billion plus" for the second half, citing tough economic conditions.

Apple's third quarter results included a $7 million after-tax gain from equity investment gains, which was offset by a $7 million charge related to its acquisition of PowerSchool, a Web-based student information system.

The company also has a cash hoard of more than $4.2 billion, Anderson says.

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