Only on TMO - Analysts Expect Rosey 4Q Apple Earnings, But What About Mac?

by , 9:00 AM EDT, October 13th, 2004

Analysts expect Apple Computer (AAPL) to post a better-than-expected fiscal fourth-quarter profit when it reports earnings after the closing bell Wednesday. Continuing very strong sales of its iPod line of portable music players is expected to be the brightest part of its financial picture, but analysts will be looking for more direction from company executives on the health of its Macintosh computer line, which continues to lose ground in the personal computer market.

Analysts polled by Thomson First Call expect Apple to earn 18 cents a share, on US$2.1 billion in revenue, for its just-ending fiscal fourth quarter. During the same period a year ago, Apple earned 8 cents a share on revenue of $1.72 billion.

Some Wall Street analyst believe Apple will easily shatter the 18 cents a share consensus on word that its iPod product line sold better than expected in the quarter.

"I can see Apple reporting 20 cents a share for the (fiscal) fourth quarter," Paul Jackson, principal analyst at Forrester Research told The Mac Observer. "All through the just-ended quarter, you saw analysts re-adjusting upwards their iPod unit sales numbers. I think this is a clear sign things were better than expected and it will show in the earnings results."

Soleil Securities Group analyst Shannon Cross expects 1.1 million iPods were sold in the just-ended quarter. First Albany analyst Joel Wagonfeld is predicting 1.2 million for the quarter, as is Steve Milunovich, Global Technology Strategist at Merrill Lynch. Mr. Milunovich believes some 3.7 million iPods were probably sold in the fiscal year that ended Sept. 30.

"Demand for Apple's new, fourth-generation white iPod has remained strong," said Mr. Wagonfeld. "Constraints on one-inch hard drives (used in the iPod and iPod mini) have improved considerably, so there shouldn't be as much of an issue that product is somewhat readily available."

Mac sales somewhat a concern, analyst say

Analysts will be looking at numbers of Mac sales for the quarter to determine if CPU sales are still strong and if the late launch of the G5 iMac hurt sales.

"Did PowerBook and iBook sales stay strong in the quarter? I'll be looking at that," said Piper Jaffray analyst Gene Munster. "Are professionals still buying G5 Power Mac systems? I'm concerned if that product line sold well. But one of my concerns is if the late-shipping G5 iMac had a negative impact."

Apple's new iMac desktop model didn't launch until September, missing the critical back-to-school selling season. In addition, the company publicly admitted in June a new iMac would be coming soon, but that delays in getting the Power Mac G5 processor from its producer, IBM, was slowing down it's release. As a result, many customers who would have possibly bought an G4 iMac held off, in large part because the older model was not available.

The company told Wall Street the delay wouldn't hurt fourth-quarter profits, but that was little comfort to those already worried about Apple's eroding share of the PC market, which currently stands at under 2% worldwide and under 3% in the U.S.

"We'll see if it hurt sales or not," said Mr. Wagonfeld. "It's one of many questions."

Mr. Milunovich thinks that the success of the iPod and iPod mini is likely to translate into somewhat higher Mac sales. In a report earlier this month, Mr. Milunovich said the 'halo effect' of the iPod could allow Apple to "gain small increments of PC share. Even half a point of market share is about $1 billion in sales."

"Apple's story is no longer predicated solely on the iPod," Mr. Wagonfeld wrote in a report to his clients. "A major reason why we turned more positive on the story was last quarter's evidence that Apple's core computer business was holding up better than expected...The 'halo effect' is having a positive impact on their businesses."

Moving forward

Without even blinking, analysts will quickly forget what appears will be positive news about the previous quarter and look for direction from Apple executives about the crucial holiday quarter. Questions will include:

- What many iPods does Apple expect to sell this quarter?

- Does Apple have a good enough supply of the portable music players?

- How are G5 iMac sales at present?

- Does Apple have enough G5 iMacs to meet the holiday demand?

- Are iTunes Music store sales still as strong as the previous quarter?

- What is Apple expecting in terms of iPod sales to Hewlett-Packard?

"These are all questions we'll be looking for guidance on," said Mr. Munster. "This is a crucial quarter where Apple gets a lot of their consumer business and there's no doubt Apple is largely a consumer business."

Apple will discuss its fourth quarter results and give a picture of its outlook for the holiday first quarter during a conference call that will be broadcast live via QuickTime at 5pm EDT. As always, The Mac Observer will provide in-depth coverage.