Apple 3Q profit jumps 31 percent but stock drops

July 21, 2008 6:01:59 PM PDT
Macintosh and iPod sales helped boost Apple Inc.'s fiscal third-quarter earnings 31 percent, beating Wall Street's expectations Monday, but investors pummeled the stock after Apple issued soft guidance for the current quarter.

Steve Jobs, Apple's chief executive, did not join the conference call with investors. Earlier in the day, the New York Post cited unnamed financial sources expressing ongoing concerns about Jobs' health. Jobs has survived pancreatic cancer.

During the call, an analyst inquired about the CEO's health.

"He has no plan to leave Apple," Chief Financial Officer Peter Oppenheimer responded. "Steve's health is a private matter."

Cupertino, Calif.-based Apple earned $1.07 billion, or $1.19 per share, 11 cents ahead of Wall Street's expectations, according to a Thomson Financial survey of analysts.

Revenue jumped 38 percent to $7.46 billion, ahead of analysts' average view for $7.37 billion in sales.

Apple said it shipped more Macs in the quarter than ever before - 2.5 million, up 41 percent from a year ago, with desktop shipments growing faster than laptops. Apple also said iPod sales jumped 12 percent.

The company shipped 717,000 iPhones, a device launched a year ago that melds smart phone and portable media player features. Oppenheimer said he is confident Apple will meet its goal of selling 10 million iPhones this fiscal year, including the cheaper, faster iPhone 3G that reached stores in 22 countries in early July.

Oppenheimer said sales from its retail stores, most of which are in the U.S., rose faster than revenue overall, despite economic turmoil wrought by the domestic mortgage and credit crises.

He also teased forthcoming "state of the art new products that our competitors just aren't going to be able to match," but told investors he could not give any details.

"The quarter was a home run," Oppenheimer said in an interview earlier Monday, but at first glance, investors disagreed. Apple's shares sank $18.04, or 10.8 percent, to $148.25 in after-hours trading, after gaining $1.34 to close at $166.29.

Investors might have been spooked by Apple's conservative outlook for the current fourth quarter, though the company often shoots low. Apple predicted profit of $1 per share on $7.8 billion in sales, well short of Wall Street's expectations. Analysts had been expecting Apple's fourth-quarter earnings to reach $1.24 per share on $8.32 billion in sales.

"The stock is plagued by high expectations," said Shaw Wu, an analyst for American Technology Research, in an interview. "Looking at the numbers by themselves, they are actually quite strong."

Investors may also have been eyeing a drop in Apple's gross margin, which fell to 34.8 percent from 36.9 percent in the year-ago quarter. During the call, Apple noted that the margin was actually better than expected, helped in part by better commodity prices and stronger sales of higher-margin products.

Apple doesn't disclose margins for specific products, but Wu said Macs, which sold briskly in the quarter, are among the company's higher-margin items.

Looking ahead at the fourth quarter and 2009, Oppenheimer forecast even lower margins, tied in part to the launch of undisclosed new products.

Wu said he didn't know exactly what Apple is planning, but said he expects changes to the Mac laptop lineup.