Apple Blows Past Bullish Q2 Expectations

The Cupertino, Calif.-based company also benefited from lower component costs, with a drop in memory chip prices further polishing the bottom line by boosting profit margins.

Apple earned US$770 million, or 87 cents per share, in the second quarter, the company stated. Revenue was $5.26 billion for the quarter, 21 percent higher than the $4.36 billion brought in during the second quarter of 2006.

The company beat its own famously conservative estimates for the quarter, as well as the more bullish forecasts of Wall Street analysts.

Mac 'Gaining Market Share'

The company's two most important product lines posted strong double-digit growth. Apple shipped 1.52 million Macintosh computers, 36 percent more than a year ago, and 10.54 million iPods.

"The Mac is clearly gaining market share," said CEO Steve Jobs. In addition to preparing for the launch of the iPhone, now due to hit stores in late June, Apple is "hard at work on some other amazing new products in our pipeline," he added.

Separately, Apple's board of directors took the unusual step Wednesday of publicly backing Jobs as a probe into stock options backdating accelerated this week with a former counsel and former CFO being charged by the Securities and Exchange Commission (SEC).

Together, the news was enough to drive Apple stock to a record high in after-hours trading Wednesday. On Thursday morning, the shares were up nearly 5 percent to $99.81, which would represent a yearly high.

Inside the Numbers

Apple enjoyed the most profitable March quarter in the company's history, thanks in part to favorable pricing of flash memory chips, which are used in iPod shuffles and nanos, Apple Chief Financial Officer Peter Oppenheimer said.

He cautioned that current profit rates were likely not sustainable long-term, noting that the second quarter typically features more sales to K-12 educational buyers, who typically purchase lower-margin products.

Demand for Apple products was strong across the board, with sales of MacBook and MacBook Pro notebook computers rising 79 percent year-over-year and making up nearly 60 percent of all computer sales, compared to 40 percent for desktop machines.

Helping to drive the sales growth was greater availability of Macs to consumers, with the number of distribution outlets growing to 8,000 compared to 5,800 the year before. In addition to opening more Apple stores, the company is also testing sales programs through Circuit City (NYSE: CC) and Best Buy (NYSE: BBY) stores.

Revenue from the iTunes Music Store and related products was $653 million for the quarter, a 35 percent year-over-year jump.

iPod sales were driven by the lower-end shuffle, Jobs said, which Apple launched in multiple colors earlier this year. Apple is not seeing any negative impact on iPod sales from the pending launch of the iPhone, the company stated, which will feature a built-in music and video player.

Apple did not disclose sales figures for its Apple TV interactive device, which lets users send movies and TV shows bought from iTunes to their television sets. Sales of the device -- which was launched during the quarter -- were "off to a very good start," Oppenheimer said. Apple is also was working on a plan to give buyers of the iPhone and the Apple TV device free software upgrades as developers improve the products, the company stated.

Apple also confirmed an analyst report that said the list of people who have signed up with partner AT&T (NYSE: T) to be the first to have a chance to buy the iPhone has reached 1 million people.

Buzzing Over iPhone

Apple acknowledged having some difficulties growing sales in Japan, where revenue actually fell 8 percent year-over-year.

The company deflected questions about how it would use its now $12.6 billion stockpile of cash, saying only that it had held internal discussions about a stock buyback, but had not yet committed to doing so.

Many investors are looking ahead to the iPhone launch. Jobs is on record as saying Apple could capture up to 1 percent of the mobile handset market in a year, meaning the company could sell as many as 10 million iPhones by next June. With a $500 price tag, that would be a significant revenue boost.

"The iPhone is certainly revolutionary, but other device makers have already shown they're going to answer," said telecom analyst Jeff Kagan, citing recent rollouts from Samsung , who debuted a device with an MP3 player on one side and a phone on the other recently.

In the PC space, meanwhile, Apple appears poised to push its market share beyond already all-time high levels. While all eyes turn to Microsoft (Nasdaq: MSFT) for evidence that Windows Vista is catching on with PC buyers, Apple's delayed launch of its Leopard operating system does not seem to be slowing sales of Macs.

Apple has made the most of the period during which some put off buying Windows-based PCs while awaiting Vista and appears to have benefited from consumers having positive experiences with iPods, Gartner (NYSE: IT) analyst Martin Reynolds told the E-Commerce Times.

"People are using iPods, and when the time comes to buy a computer, they are probably going to give Apple more consideration than they might have otherwise," he said.