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7/19/2006
05:43 PM
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Apple Beats Earnings Expectations, But Expects To Take A Hit This Quarter

Quick adoption of its Intel-based Macintosh computers drove Apple to beat Wall Street expectations, but the company said gross margins will decline this quarter due to aggressive back-to-school promotions.

Buoyed by a quick adoption of Intel-based Macintosh systems, Apple Computer on Wednesday reported third-quarter earnings that outpaced Wall Street's expectations, but the company ratcheted down its forecast for the fourth quarter.

For the quarter ended July 1, Cupertino, Calif.-based Apple reported a 12 percent year-over-year increase in Macintosh computer sales, shipping more than 1.3 million units during the period.

Overall, the company saw earnings of 54 cents per share, compared with a Thomson Financial Network average of Wall Street analyst prediction of 44 cents per share, and revenue of $4.37 billion, compared with a prediction of $4.4 billion.

Apple executives also told Wall Street analysts that they expected their gross margin to decline during the fourth quarter because of the cost of aggressive back-to-school promotions. They also said they expected fourth-quarter sales to come in at $4.5 billion to $4.6 billion, compared with analysts' average estimate of $4.94 billion. The company forecast fourth-quarter earnings of 46 cents to 48 cents per share, compared with the analysts' expectations of 52 cents.

Apple CEO Steve Jobs said in a statement that 75 percent of all Mac systems that shipped during the third quarter were Intel-based. Jobs called it "the smoothest and most successful transition that any of us have ever experienced." After years of shipping Macs based on PowerPC processors, Apple began shifting its computers to Intel-based processors in January.

Apple CFO Peter Oppenheimer attributed the robust Intel Mac sales to "a very favorable component environment," as well as the growing competitiveness of Mac products in the marketplace. He indicated that some power and professional Mac users continued to delay new system purchases as they waited for software, including a new Adobe suite--including Photoshop--that's due out next year.

Current versions of the Adobe software, for example, reportedly run much slower on Intel-based Macs than on PowerPC systems. The next version of the Adobe software suite is expected to run better on Intel-based Macs.

"We expect that over 70 percent of applications we consider most critical to our customers will be available [on all Macintosh platforms] by the end of September," Oppenheimer said.

Apple executives also said they were struggling to fill a backlog of orders for MacBooks laptops.

Although Apple's iPod music player and iTunes Music Store have been growing at a faster pace, Mac computers still make up 55 percent of the company's revenue, Oppenheimer said.

Addressing other developments during the third quarter, Oppenheimer said Apple's 146 retail stores averaged $4.9 million in revenue per store. The company's newest store, opened in May on Fifth Avenue in Manhattan, has become its busiest, he added.

"The store has quickly become our highest-volume store," Oppenheimer said, noting that the Fifth Avenue location has seen 500,000 visitors since May and that all of its stores saw 17 million customers during the third quarter.

Overall, Apple reported a four-week backlog of channel inventory during the third quarter, which company executives said was in-line with their expectations.

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