Apple Beats Expectations, but Shares Dive

SAN JOSE, Calif. (Jan. 23) - As investors pummeled Apple Inc.'s stock over a disappointing financial outlook, a key question remained about the results: just how badly will the company be hurt by slowing economic activity in the United States and fears of a recession?

Wall Street interpreted the Cupertino-based company's guidance for the current quarter, released after the market closed Tuesday, as a sign that weakening consumer spending will hurt Apple in 2008 and that even a hot company like Apple isn't immune from the broader economic pressures weighing on the stock market.

Apple executives noted, however, that its forecast for the fiscal second quarter calls for sales growth of 29 percent, which is faster than in previous years, even if it is slower than Wall Street was expecting. The company said that because of booming holiday sales, Apple notched the highest quarterly revenue and earnings in its history.

"Our business performed very well in the December quarter, and we remain very confident in our products and our strategy," said Apple Chief Financial Officer Peter Oppenheimer.

At the open of trading Wednesday, Apple shares tumbled nearly 12 percent, or $18.30, to $137.34.

Apple's stock, seen as a refuge from the market's turmoil during the second half of 2007, has declined sharply, wiping out more than $40 billion in shareholder wealth since the end of December, when shares hit their 52-week high of $202.96.

Shareholders had hoped Apple's first-quarter results, which cover the last three months of the year, would be a high point in a market otherwise marred by bad news. Instead, the company became emblematic of Tuesday's broader market tumble, which saw the tech-laden Nasdaq composite index fall 2 percent.

Some analysts said fear about slowing consumer spending was overblown in response to Apple's results and the company may have been a victim of its own past successes.

"I think it's more of the whisper numbers on Apple just got incredibly high," said Jane Snorek, senior analyst of technology stocks for First American Funds. "(There were rumors) of $10 billion in sales and $2 per share in earnings and that they might raise their guidance. And when they kind of report in line and guide down like they're supposed to, like they should be doing, it's a big letdown."

Apple forecast profit in the second fiscal quarter of 94 cents per share, far short of the $1.09 per share that analysts were expecting. Revenue is also expected to be lower, coming in around $6.8 billion, compared with the $6.99 billion forecast by analysts.

Apple's guidance has historically been conservative, but such a divergence from Wall Street's estimate rattled investors already skittish about the economy.

Tuesday's stock plunge was likely worsened, Snorek said, by the exodus of a large number of investors who had hoped Apple's stock would be a refuge from the economic pressures hurting the overall stock market.

"There was a lot of money hiding in this stock," she said.

Still, Apple blew past Wall Street's bullish expectations in the first fiscal quarter, aided by soaring sales of Macintosh computers and continued rising sales of iPod digital music players.

Its net profit was $1.58 billion, or $1.76 per share, for the three months ended Dec. 29. That was 14 cents higher than the average estimate of analysts polled by Thomson Financial and a 57 percent improvement over last year.

Net income during the same period a year earlier was $1 billion, or $1.14 per share.

At $9.61 billion, sales in the first quarter also beat Wall Street's expectation of $9.47 billion, and they were 35 percent higher than the $7.1 billion of the year-ago period.

Apple is profiting from sharply accelerating gains in the personal computer market in the U.S., where the company's market share had hovered for years in the range of 2 percent to 3 percent. By the end of 2007, Apple had scooped out a share of more than 6 percent, according to market researcher Gartner Inc.

Those gains were reflected in the latest quarter with a 59 percent jump in sales of desktop Macintosh computers to $1.51 billion, and a 40 percent jump in laptop sales to $2.04 billion.

Still, iPod sales eclipsed both of those categories, underscoring Apple's expansion from purely a personal computer maker and into a delivery vehicle for all forms of digital entertainment, from music to television shows to movies.

Earlier this month, the company dove into online movie rentals through its iTunes service and upgraded its Apple TV device to allow consumers to download and play movies without involving a computer.

In the first quarter, iPod sales jumped 17 percent over last year to $3.99 billion. Total personal computer sales were $3.55 billion.

Apple executives declined to comment on economic factors such as sluggish consumer spending that may have weighed on second-quarter guidance.

Instead, the company pointed to bustling Apple retail stores, which saw more than 10 million more people come through their doors in the first quarter than during the same period last year.

The iPhone, Apple's combination iPod-cell phone-wireless Internet browser, also remains a closely watched indicator of Apple's success. More than 2.3 million of the devices and accessories were sold during the latest quarter.

Jobs said during the Macworld Conference & Expo this month that Apple has sold 4 million iPhones since they went on sale June 29 in the United States. Subsequent launches in Britain, Germany and France have boosted sales while sparking legal fights over Apple's strategy of striking exclusive deals with mobile operators in each region. Apple is also in talks to bring the device to China and Japan.

Company executives said Tuesday that Apple remains on track to sell 10 million iPhones by the end of 2008, which would give the device roughly 1 percent of the worldwide market for new cell phones.