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Demand for IPods Prompts Surge in Apple

Posted on: Thursday, 15 April 2004, 06:00 CDT

SAN JOSE, Calif. - Boosted by the popularity of mobile tunes, Apple Computer Inc. translated strong demand for its iPod portable digital music players into quarterly profits that more than tripled.

Apple handily beat Wall Street expectations with its report Wednesday. Net income was $46 million, or 12 cents a share, for the three months ended March 27, up from $14 million, or 4 cents per share, in the year-ago quarter.

Sales were $1.91 billion, up 29 percent from $1.48 billion reported in the year-ago period.

Excluding a one-time after-tax restructuring charge of $7 million, the company's net profit for the quarter would have been $53 million, or 14 cents per share.

Analysts polled by Thomson First Call were expecting earnings of 10 cents per share on revenue of $1.8 billion.

The Cupertino, Calif.-based company reported record sales of 807,000 iPods for the quarter, up more than 900 percent from the prior year. It accounted for about half of the quarter's revenue growth, bringing the total to about 2.8 million since the gadget was first introduced in 2001, Fred Anderson, Apple's chief financial officer, said in an interview.

Extremely high demand for the iPod Mini, introduced in the United States in January, led Apple to delay the smaller model's international release to the end of July.

Sales of iPods gained momentum after Apple introduced its pay-per-download iTunes online music store, first for Mac computers a year ago and then for Windows-based PCs in October. Songs purchased from the online store can be burned onto CDs and played on up to three computers, but are transferable only to the iPod.

The iPod sales "blew my numbers out of the water," said Michelle Gutierrez, analyst with Schwab Soundview Capital Markets in San Francisco. She had expected a seasonal decline of 20 percent instead of the 10 percent surge from the December quarter.

Computer sales, which represented about 60 percent of overall revenues, also continued to boost Apple's profits. For the quarter, sales of its iBook laptops jumped 48 percent to $223 million from the comparable period the year before, while revenue from Power Mac computers rose 19 percent to $349 million.

In all, the company said it shipped 749,000 Macintosh computers, up 5 percent from the year-ago quarter.

But Apple's worldwide share of the PC market has declined in recent years as it competed with other computer makers offering cheaper machines for the average consumer. Gutierrez, who estimates Apple's share has dropped to 2.3 percent from 5 percent in 2000, said it remains to be seen whether the company's campaign to get people to switch from Microsoft Corp. Windows-based computers to Macintosh machines will help Apple expand its PC business.

"The kids have iPods now, and they're telling parents they want an Apple. Hopefully, Apple could use that strategy to leverage it for more PC sales," Gutierrez said.

Anderson declined to discuss during an analyst conference call the limited data Apple has on whether iPod sales have helped it gain new computer buyers outside its loyal customer base.

But he noted that since Apple doesn't sell low-end computers, boosting revenue - and not gaining worldwide market share - is Apple's focus.

Anderson said the company expects revenues for the third quarter to reach $1.93 billion, and earnings per share of 12 cents or 13 cents that will include 2 cents of restructuring charges due to its closure of manufacturing operations in Sacramento. Apple plans to move most of its California-based manufacturing activities to a supplier in Southern California.

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On the Net:

Apple Computer: http://www.apple.com

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