After Strong Quarter, Apple Signals Changes in Its Prices

By JOHN MARKOFF

Published: July 22, 2008

Apple, which has become the third-largest personal computer maker in the United States, benefited from the significant market share gains of its Macintosh computer line as well as its continued domination of the digital music player business, in its third quarter.

Enlarge This Image

David Butow/Bloomberg News

Customers at an Apple store in Beijing. The company has become the third-largest personal computer maker in the United States.

Related

Times Topics: Apple Inc.

Apple Earnings Release

But the company’s stock fell about 10 percent on Monday in after-hours trading as Apple executives hinted during a conference call about Apple’s

third-quarter financial statement that they would price products more aggressively in the future. It planned on taking away what Peter Oppenheimer, the company’s chief financial officer, called an “umbrella for our competitors.”

The company also told Wall Street analysts to expect lower gross margins and made a conservative sales estimate for the final quarter of the 2008 fiscal year. Executives sketched out a series of reasons for the profit margin decline, including educational discounts, component price adjustments and a new product line that is widely rumored to include redesigned laptop computers.

“Apple makes state-of-the-art products that our competitors can’t match,” said Timothy D. Cook, Apple’s chief operating officer. “We have some investments ahead of us that I can’t discuss with you today.”

Wall Street analysts speculated that Apple wanted to build on recent gains in market share and expected lower prices.

“This has to mean significant price changes in one of their major products,” said A. M. Sacconaghi Jr., a securities analyst with Sanford C. Bernstein. “Gross margins should be going up as the iPhone kicks in.”

Apple’s stock was at $149.70 on Monday night in after-hours trading; it closed at $166.29 during the regular session.

The company said that it sold 717,000 iPhones for the quarter, compared with 270,000 a year ago, and that it had sold 11.01 million of its iPod digital music players in the quarter. But the explosive sales of the new iPhone 3G will not appear on the company’s books until its fourth quarter, and the iPod product is maturing and showing slower growth.

That has led analysts to increasingly focus on Apple’s computers, which have grown stronger in part because of the disappointment surrounding Microsoft’s Vista operating system and in part because of what is referred to as the halo effect created by the iPod and iPhone.

Those products are intended to operate with either Macintosh computers or PCs as “digital hubs,” but Apple has attracted a growing consumer audience since Steven P. Jobsreturned to the company in 1997.

This month, two market research firms, the International Data Corporation and Gartner, projected that Apple sold more than 1.3 million Macintosh computers in the United States in the second quarter, permitting the company to climb into third place among PC makers, behind Hewlett-Packard and Dell.

Apple said it had sold 2.49 million Macintosh computers around the world during the quarter, a 41 percent increase in unit shipments compared with the same quarter a year ago.

Apple’s net income in its third quarter ended June 30 increased 31 percent, to $1.07 billion, or $1.19 a share, from $818 million, or 92 cents a share, last year. Revenue increased 38 percent, to $7.46 billion, from the $5.41 billion recorded a year ago. Gross margin was 34.8 percent, down from 36.9 percent in the year-ago quarter.

The company said it expected revenue of about $7.8 billion in the fourth quarter. Net income of $1 a share was below analysts’ forecasts.

The fourth quarter has traditionally been slow for Apple’s computer sales, but analysts said that the company recently began an aggressive campaign to offer discounted Macintosh computers bundled with iPods for college students and that the program had led to significant advances in market share.

“It’s a really good deal for college students,” said Charles Wolf, an analyst at Needham & Company. “It has driven just enormous upside for Apple.”

A striking aspect of Apple’s strength is that the company had gained market share even before it refreshed either its Macintosh portable line or its iPod line. Analysts expect new generations of both product lines to be introduced in the next three months. That has triggered new waves of consumer purchases in the past.

In response to a question about the health of Mr. Jobs, Apple’s chief executive, during the analyst call, Mr. Oppenheimer said that it was a private matter. Mr. Jobs’s gaunt appearance this month at the company’s World Wide Developers Conference drew expressions of concern. The company said at the time that he had an infection but that his health was good.

Apple managed to steal 2.1% of the U.S. PC market in the last year with its current prices, ending up with 8.5% of the U.S. market at the end of June, according to Gartner. Imagine what it'd be able to do after knocking a few hundred bucks off its price tags.