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Apple's Profits Plunge, But Beat Expectations

The computer maker reported a $14 million profit for its second quarter, down 65% from the year-ago quarter but better than Wall Street's projections
SAN JOSE, Calif. (AP) -- Quarterly profits at Apple Computer Inc. fell 65 percent, but strong sales of pricey laptops helped the company beat Wall Street expectations.

The Cupertino, Calif.-based PC maker announced net income Wednesday of $14 million, or 4 cents a share, for the three months ending March 29. In the comparable quarter a year ago, Apple reported net income of $40 million, or 11 cents a share.

The results were 2 cents per share better than the forecast of analysts surveyed by Thomson First Call.

Executives blamed the profit drop on a $3 million restructuring charge, increased spending on its retail strategy, and higher research and development costs. Executives also lamented a decline in the amount of interest and other income.

Sales in the first three months of this year, the second quarter in the company's fiscal calendar, were flat and on target with executives' estimates earlier this year.

Revenue was $1.48 billion, down 1 percent from the year-ago quarter. Analysts were expecting revenue of $1.46 billion.

"Our performance was solid in a very difficult environment," said Apple's chief financial officer, Fred Anderson. "We remain very cautious about the upcoming environment, both economic and geopolitical."

On a conference call, Apple executives refused to address reports the company was in discussions to buy Universal Music Group, the world's largest record company. Universal is owned by debt-ridden French media and entertainment conglomerate Vivendi Universal SA.

The Los Angeles Times reported last Friday that executives from the two companies were discussing an acquisition, and news reports this week quoted a Vivendi executive saying Apple could offer up to $6 billion for the music unit by the end of the month.

Apple issued a statement from CEO Steve Jobs early Wednesday saying it "has never made any offer to invest in or acquire a major music company."

A subscription service would allow Apple users to buy and download digital music for Macintosh computers and iPod portable music players-a growing niche for Apple, which sold 78,000 iPods in the second quarter.

Such a service could also balance mounting expenses.

Total operating expenses in the second quarter jumped to $422 million, up from $381 in the same quarter of 2002.

The company boosted research and development spending to $119 million, up from $110 million a year ago.

Besides a $3 million restructuring charge in the second quarter, Apple continued to spend heavily to expand its retail strategy.

Meanwhile, income has declined. Lower interest rates and the depressed stock market stung Apple, which made $23 million from interest and other investments in the second quarter of 2003. It earned $27 million in the same quarter of 2002.

Sales of the once-popular iMac desktop computer dropped more than 30 percent from the year-ago quarter. Apple sold 256,000 iMacs and eMacs in the most recent quarter, down from 372,000 computers a year ago.

Sales of computers in the education market--traditionally a stronghold for Apple--dropped 14 percent. Cash-strapped school districts are tightening purse strings, while rival computer makers erode Apple's market share with discounted Windows PCs.

But laptop computers helped Apple beat analyst expectations, and executives said the portable machines would remain a lucrative niche.

The company sold 711,000 Macintosh computers in its second quarter, and 42 percent of them were laptops, which have higher profit margins than desktop computers.

The average Apple computer last quarter sold for more than $2,000--far higher than the average price of machines from most other personal computer makers.

"The strongest performance was in 12-inch and 17-inch PowerBooks," Anderson said. "Steve (Jobs) said in January this would be the year of the notebook,