Apple Profits Soar On Mac, iPod Sales

In light of an alleged stock-option backdating scheme, members of Apple's board released a statement expressing "complete confidence" in Chief Executive Steve Jobs.
Apple on Wednesday reported that profits in its fiscal second quarter soared 88% on strong sales of the iPod media player and Intel-based Macintosh computers.

Separately, members of Apple's board released a statement expressing "complete confidence" in CEO Steve Jobs, who an ex-finance officer on Tuesday claimed misled him in an alleged stock-option backdating scheme.

The company said net income in the quarter ended March 31 was $770 million, or 87 cents a share, compared with $410 million, or 47 cents a share, in the same period a year ago. Revenue rose to $5.26 billion from $4.36 billion a year ago. Gross margin was up 29.8% from a year ago to 35.1%.

During the quarter, Apple shipped 1.52 million Macs, and 10.55 million iPods, representing year-to-year growth of 36% and 24%, respectively. The strong iPod sales were an indication that the device introduced in 2001 remained popular, and showed little sign of losing its dominant market position.

The Mac, on the other hand, continued to benefit from Apple's decision last year to switch to the Intel platform that dominates the Windows PC market. "The Mac is clearly gaining market share, with sales growing 36% -- more than three times the industry growth rate," Apple Chief Executive Steve Jobs said in a statement.

Along with the success of the Mac and iPod, Apple had suffered some setbacks in the quarter, including delays in shipping the Apple TV and Leopard, the next major release of the Mac operating system. In the June quarter, Apple plans to ship what it believes will be its next big success, a combination cellular phone and media player called the iPhone.

"We're very excited about the upcoming launch of iPhone in late June, and are also hard at work on some other amazing new products in our pipeline," Jobs said.

Chief Financial Officer Peter Oppenheimer said it was Apple's most profitable March quarter. For the fiscal third quarter, however, the company predicted a revenue drop to $5.1 billion, and a decline in earnings to 66 cents a share.

During a conference call with financial analyst, Oppenheimer said the decline was seasonal. The June quarter for the Mac is dominated by education sales to high school and junior high school students, who normally buy or receive lower-end machines that carry a lower average selling price. IPod sales are usually slower in the fiscal third quarter. "We see this as a market seasonality issue, and not an iPod specific issue," he said.

While Mac sales were multiples stronger than the market average in most regions of the world, Japan remained the one holdout. Sales growth there was in the low single digits, and Apple was working with its channel partners to develop a better marketing strategy. Japan "is literally the only major market in the world that we're not doing well in, and we are very frustrated," Timothy Cook, Apple's chief operating officer, told analysts.

On the topic of Apple's alleged stock-option trouble, a group of board members, including Google Chief Executive Eric Schmidt, and former Vice President Al Gore, issued a statement taking issue with former CFO Fred Anderson, who claimed to have warned Jobs about the accounting implications to the backdating of stock-option grants to the company's executive team. Jobs, according to Anderson, had assured him that the grants had been approved by the board.

Anderson resigned from the company last year and was charged this week with failing to ensure that Apple's financial records accounted for the stock-option grants. Anderson settled with the SEC by agreeing to pay $3.5 million. Charges are still pending against former Apple General Counsel Nancy R. Heinen, who is accused of fraudulently backdating options, and then altering company records to conceal the misdeed.

Jobs was cleared of any wrongdoing in Apple's internal investigation, and wasn't named in SEC charges filed against Anderson and Heinen. "We have complete confidence in the conclusions of Apple's independent investigation, and in Steve's integrity and his ability to lead Apple," board members said in the statement.

Editor's Choice
Brian T. Horowitz, Contributing Reporter
Samuel Greengard, Contributing Reporter
Nathan Eddy, Freelance Writer
Brandon Taylor, Digital Editorial Program Manager
Jessica Davis, Senior Editor
Cynthia Harvey, Freelance Journalist, InformationWeek
Sara Peters, Editor-in-Chief, InformationWeek / Network Computing