Apple Posted Second Best Quarter in History--Q3 Earnings Beat Analysts' Estimate by 23 Percent

Riding a huge increase in sales from notebooks, MacBook and MacBook Pro, Apple posted a $472 million net profit for the third quarter (ending June 30) of its 2006 fiscal year, the second highest in Apple's history. Earnings per share came in at $0.54 on revenue of $4.37 billion, vaulting over the analysts' consensus estimate announced by Thomson First Call of $0.44 by 23 percent. Gross margin was a high 30.3 percent and cash and short term investments now total $9.2 billion.

Compared with last year's third quarter, the 2006 Q3 is up 48 percent in net profit, up 24 percent in revenue, up 46 percent in earnings per share, up 2 percent in gross margin and up 11 percent in cash on hand. Overall, the third quarter was an outstanding result, the second best quarter in Apple's history.

This terrific financial performance was driven largely by increased sales of Apple notebooks, the MacBook and MacBook Pro. Notebook sales were 748,000 out of a total Mac sales of 1,327,000. The notebook sales were up 61 percent from Q3 2005 and 60 percent from the last quarter this year due largely to the introduction of the MacBook. The third quarter ended with some backlog of MacBook orders that will be satisfied during the current Q4 ending with September.

Desktop (iMac, Mac mini, Power Mac and Xserve) sales at 529,000 continue to sag, falling 23 percent from the 2005 Q3 and 14 percent from 2006 Q2. Apple executives attributed this to a postponement of buying by pro users until an Intel-based Power Mac is available but mostly to the increasing popularity of notebooks led by Apple. Executives said that Apple is still on target to deliver intel-based Power Mac and Xserve replacements by the end of the year.

iPod sales at 8.1 million were up 32 percent over last year's Q3 but down 5 percent from last quarter.

Sales revenue was up over the 2005 Q3 in all three geographical areas (Americas, Europe and Japan) by 14 to 26 percent but down sequentially in Europe and Japan from last quarter by 7 and 17 percent respectively. Apple executives said PC sales are down generally in Japan and expected good results from the new Apple retail stores opening there recently. They also said that Phil Schiller, Apple's Senior VP for Worldwide Product Marketing, is filling in for the recent departure of the top marketing executive in Japan. Sales in Latin America have doubled but there is still a tremendous and largely untapped opportunity there.

The Apple retail stores are still doing well. They are up by 14 this year for a total of 155 world wide. Sales revenue increased 29 percent over the 2005 Q3 and 12 percent over the last quarter. Nearly 50 percent of their sales are to non-Mac owners.

With regard to education, that channel saw an 11 percent growth to make it the best third (June) quarter fort Apple's education channel in a decade, according to Apple's executives.

In response to a question about Boot Camp, Apple COO Tim Cook responded by saying that downloads of Boot Camp software were "significant" in the third quarter. He was certain that Windows users are finding Boot Camp to be an aid to switching to Apple's Macs. Apple's Boot Camp allows an Intel-based Mac to boot and run Windows XP.

Apple expects the next (fourth) quarter to yield some $4.5 to 4.6 billion in revenue and some $0.46-0.48 earnings per share. The decreased earnings result from the back to school promotional discount offering a free iPod nano with a Mac purchase and other promotions.

The financial results and projections were revealed in an Apple press release and a webcast conference call that we attended. [Bill Fox]