• The Apple Financials Report: Stock Tanks Over Record Profits

    October 15th, 2005

    In the Wall Street universe things don’t always operate in a logical fashion. Take Apple’s latest quarterly report. The company reported record earnings of $430 million, or $.50 per diluted share. Revenue reached $3.68 million, and Apple shipped 1,236,000 Macs and 6,451,000 iPods. Compare this to revenue of $2.35 billion, and $106 billion, or $.13 per diluted share, for the same quarter last year.

    Overall, Apple has achieved record earnings for its fiscal 2005 year, with total revenue of $13.93 billion and a net profit of $1.33 billion. Sales of Macs are growing faster than the industry at large, which means market share is expected to continue to rise. For this quarter, sales are predicted to reach $4.7 billion. This would seem to demonstrate the company is at the top of its game. Considering where Apple was just a few years ago, it’s a stunning turnaround.

    Get the picture? This should be sufficient to keep Wall Street utterly delirious, but it’s not enough. Even though revenue and income bettered Apple’s own guidance for the quarter, Wall Street analysts decreed that Apple should have earned $3.74 billion instead, and when that didn’t happen, the stock tanked more than 10% in after-hours trading. The trend will probably continue for a while, although one hopes traders will come to their senses eventually.

    So why didn’t Apple earn more money? Is the iPods popularity hitting the skids? Is that iPod halo effect not delivering as many new Mac sales as the so-called experts expect? Well as far as the iPod nano is concerned, Apple sold a million of them within the first 17 days, but apparently couldn’t keep up with the “staggering” demand. If it could overcome what it described as an “enormous backlog,” perhaps quarterly revenue would have been sufficient to satisfy Wall Street’s inflated expectations.

    In its conference call with analysts, Apple had a lot more good news to offer, by the way. Higher education sales have grown 38% over last year and the total education arena has seen the best sales in 10 years. Maybe the school systems that have settled on Dell are beginning to come to their senses now that they have entered the world of malware.

    Right now, the iPod continues to hold 75% of the U.S. market, and iTunes occupies 80%. But this isn’t terribly different than what Steve Jobs told us all a few weeks back when the iPod nano was first introduced. And, apparently, claims that the nano is more prone to scratching than other iPods aren’t being taken seriously. Apple calls the issue “very, very minor.” Of course, the technology press has been somewhat divided over the issue. Some report it is more scratch sensitive, others say it isn’t. My experience is closer to the latter, at least so far.

    Over the next year, there will be between 35 and 40 new branches of the Apple Store, which indicates accelerating growth for the chain. It may be great news for the company, but not so great for third party dealers that are feeling more and more threatened by Apple’s presence in their back yards.

    Inventory of new Macs is below the usual four- to five-week target, meaning that more Macs were sold than the company expected. Portable sales amounted to 634,000 and desktops came in at 602,000. Apple, however, doesn’t provide model breakdowns anymore, so let the guessing games begin. During that conference call, one analyst tried to pin down Apple’s people on Mac mini sales, but failed.

    In any case, it also appears that fears that the switch to Intel processors would hurt sales haven’t been borne out, at least so far. But I suppose you could argue that situation could change next year, as the expected mid-year introduction of Macintels approaches.

    That covers the essence of Apple’s performance, for now at least. But we’ll all convene three months from now for more financial fun and games. So get ready to break out those tea leaves, Wall Street, and tell us all how Apple should perform next time.

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