Analysts: Apple's first quarter not impressive enough

Cupertino (CA) - One could argue that technology companies these days are held to an unfair standard by financial analysts. Apple’s first quarter fiscal 2006 numbers, which the company reported last night, included earnings per share that beat street estimates by four cents, revenues that beat estimates by $213 million, and sales figures for iPod that continue to make history.

But the fact that Apple’s numbers didn’t beat estimates by the amount they were estimated to beat estimates (you did not read that wrong) was literally the reason for investors’ disappointment this morning. Trading in Apple shares on the NASDAQ exchange fell by more than two points early this morning, or over 2% of value, before rebounding slightly, after a Citigroup analyst cut its price targets for Apple share value going into the company’s fiscal second quarter. One reason, say reports, was AMD, whose own stellar quarterly report just a half-hour later than Apple’s - indicating, as CNBC reported that afternoon, that AMD’s microprocessor business was growing at a rate ten times that of Intel’s - managed to drown out the enthusiasm for Apple. Upstaging Apple is a feat unto itself these days.

But another reason for Citigroup’s target cut, states a Marketwatch report this morning, was apparent conservatism on the part of Apple’s financial chiefs during yesterday afternoon’s regular conference call.

The numbers themselves have nothing conservative about them. Apple’s chief financial officer, Peter Oppenheimer, reported that in his company’s first fiscal quarter of 2006, it reaped $5.75 billion in revenue, up $2 billion from the previous quarter, and up 65% over Q1 FY 2005. He attributed these numbers to "record-shattering iPod sales and solid Mac sales." Quarterly net income for the company nearly doubled year-over-year, up to $565 million, assuming an "unusually strong" net operating margin of 13%.

Here is where the split begins : If you want to know how much of Apple is a computer company, you need to look at its division of revenues. Macintosh now accounts for 41% of the company’s revenue ; music the other 59%. While Mac shipments were up 20% in the quarter just concluded over the Q1 FY 2005, to an impressive 1,254,000 units - the highest quarterly total in six years, Oppenheimer stated - iPod sales more than doubled since just the previous quarter, with up to 14 million sold over the holidays.

Continuing what appears to be a theme of openly downplaying Macintosh’s architectural shift, Oppenheimer referred to Mac’s adoption of Intel as, essentially, not too bad. Apple’s past quarter Mac sales, he said, "exceeded our internal expectations, despite what we believe was a pause in sales associated with the Intel transition...We were pleased with the lower-than-expected impact of the Intel transition on sales, and with the momentum of our Mac business."

There was a slight negative impact on channel inventory - the number of units on hand that the company can ship to meet its orders, measured in weeks - due solely to the Intel announcement at last week’s Macworld Expo. The company’s target was four to five weeks, Oppenheimer said, and inventory is a bit below that target. Too bad things went over so well.

But it’s a very happy new year on the other side of the building. With regard to iPod sales, Oppenheimer said, "we’re particularly proud of our execution, given that we replaced two of our three iPod lines, including the highest-volume iPod Mini line, as we entered the holiday season." End-of-quarter channel inventory levels for iPods, including the "fifth generation" (with video) and the nano, were within the company’s four-to-six week target range, he said, especially since orders tend to slow down after the holidays.

Once the floor was opened to questions yesterday, the Apple Computer company that its executives presented became a clear dichotomy, almost as though two distinct manufacturers were sharing the stage. The first was the overwhelmingly successful consumer products company, boasting meteoric sales of just over 14 million iPods during the holiday quarter alone, and an independently estimated 80% market share for its iTunes service. Act II consisted of a relatively conservative computer manufacturer that chastised analysts - among them, one from Citigroup - for daring to think that Apple would ever disclose detailed sales and market share numbers for Macintosh, referring them back to "guidance" - the company’s aggregate figures of estimated revenues from possible future sales of computers.

It’s no wonder Citigroup noticed Apple’s conservative mood ; it’s the company’s jovial mood in Act I that drew everyone’s attention to it, as though John Kenneth Galbraith were sharing the stage with Rip Taylor.

About twenty minutes into the presentation, some concern from Intel’s disappointing quarterly report the day before, began spilling into the Apple report, as analysts wondered whether Intel’s possible underproduction of future Core Duo processors could affect Apple’s production plans. In response to two questions - one regarding a dip in notebook sales versus desktops, the other regarding Core Duo availability - Apple chief operating officer Tim Cook responded, "The MacBook Pro will begin shipping in February, and therefore has a limited number of weeks to ship during the quarter. Given that, and the very strong response that we saw, we may not be able to meet the demand for the MacBook Pro." That particular index card got some very good use out of it.

Other analysts questioned why Apple would want to continue selling iMacs with both G5 processors and Core Duos, in the same form factor, for the same price. If Core Duo outperforms G5 by two to three times, as CEO Steve Jobs boasted the previous week, why not discount the latter ? From Cook’s and Oppenheimer’s responses, the very nature of the question itself seemed shocking, shocking...even after discussing what happened to the iPod Mini in the wake of the iPod nano, and implicitly entertaining the notion of shuffling the iPod Shuffle’s price point.

"We’re selling the iMac G5 and the PowerBook G4 15" product," CFO Oppenheimer told analyst Richard Chu, "while supplies last. We’ve factored our thinking into our guidance." So Apple sees no need to reduce prices, Chu pressed on, despite the difference in value ? Oppenheimer repeated his previous statement, and referred Chu to Apple’s financial guidance - the bottom line numbers.

Pressed on that question yet again minutes later, COO Tim Cook tried to shut down all discussion on the matter. "We’re producing the best Macintoshes that Apple ever produced, and there are great products that have PowerPC processors in them, and incredible products that have Intel processors in them," Cook pronounced. "We’ll just have to see how the customer votes in terms of the percentages of each." It ended up being a very different statement, in both attitude and content, than the one Steve Jobs displayed the week before. All of a sudden, the "quantum leap" in performance went right out the window, and it became up to consumers to determine whether there’s any differences between the new Macs and old ones.

And it may have been statements like that throughout the afternoon that chilled analysts’ impressions of Apple, "landmark quarter" though it may have been, and what also have made its largest shareholders just about 2% less wealthy in the morning, than they were the previous afternoon.

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