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Apple earnings way ahead
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April 15, 1998: 7:23 p.m. ET
Profits beat expectations, but Apple expects revenues to be flat in 3Q
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NEW YORK (CNNfn) - Apple Computer Inc. reported better-than-expected second quarter profits Wednesday, marking the first time the computer maker posted back-to-back profitable quarters in two-and-a-half years.
Powered by surging sales of its G3 line of computers, Apple earned $55 million or 38 cents a diluted share in the three months ended in March, more than twice as much as Wall Street had expected.
And even though revenues continued to decline in the quarter -- falling 12.5 percent to $1.4 billion -- shipments of Apple computers rose for the first time in two years.
"Apple had a great quarter, no question about it," Steve Jobs, Apple's interim chief executive officer said in a statement. "We are very pleased with the strong demand for our Power Macintosh G3 computers, which accounted for 51 percent of all units sold."
Apple's results marked the first time the PC maker reported consecutive quarterly profits since the third and fourth quarters of fiscal 1995 and the second time this year Apple has surprised analysts with better-than-expected profits.
According to First Call, analysts predicted Apple would earn 17 cents per share in the quarter. In the year-ago period, Apple posted a loss of $708 million or $5.64 a share.
Apple, which has been trying to regain momentum after years of bad management, wrenching layoffs and billions of dollars in red ink, shipped 650,000 PC's in the second quarter, up 8 percent.
Apple's Power Macintosh G3 computers accounted for 51 percent of all units sold, boosting gross margins -- the difference between sales and the cost of production -- to 25 percent from 19 percent.
The company also said international sales accounted for 50 percent of its revenues.
Analysts said they were impressed with the quality of Apple's earnings.
"It's just good old-fashioned profitability," said Daniel Kunstler, senior equity analyst at J.P. Morgan Securities. "No smoke, no mirrors. And they have a chief financial officer who has his thumb on every nickel, which is the way to go."
Apple's Chief Financial Officer Fred Anderson said the company's reorganization of its Claris software unit and the discontinuation of its Newton handheld computer enabled Apple to reduce costs and increase liquidity.
Anderson warned, however, that the company expects revenues to remain relatively flat until it ships a new line of portable computers and a consumer-level desktop product. He said those lines should be available by the first fiscal quarter 1999.
Apple's PowerBook line of notebook computers accounted for 13 percent of revenue, compared with 26 percent from the year-ago period.
Anderson also said pricing pressures throughout the computer industry helped account for Apple's decline in revenues and will have an effect on Apple's gross margins down the line.
"There's a continuing price erosion in the marketplace," he said. "When Apple comes out with a consumer unit in the December quarter, obviously it won't yield as good a margin as the G3. What impact that will have is to be determined, but we expect to maintain gross margins at or above 23 percent."
Anderson said while the company expects third-quarter margins to remain flat, fourth-quarter margins should be sequentially higher.
Ellen Hancock, who last year resigned her post as Apple executive vice president and chief technology officer and is currently president of Internet start-up Exodus Communications Inc., told CNNfn Apple's resurgence may end up as a costly victory if the company doesn't boost its sagging market share.
"They've done some very nice things," she said. "My concern for the company is that they are overall losing [market] share, and they have to do something to address that issue so that people feel comfortable about them in the long term." (259K WAV) or (259K AIFF)
J.P. Morgan's Kunstler said Apple needs to regain much of the market share it lost in the educational market, and that it needs to inspire software developers to develop more applications for Apple computers.
"They have to come out with a good product for the education market, which I believe they will," he said. "They also need to see some tangible evidence of enthusiasm on the part of software developers. They need more quarters like this one [to gain their confidence]."
Shares of Apple (AAPL) closed Wednesday at 27-7/16, up 1/2. However, in after-hours trade, Apple traded as high as 30. 
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Apple Computer
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