Apple Turns Profit In 1QApple Turns Profit In 1Q

Apple Computer reported a first-quarter profit of $38 million, reversing a year-ago loss. But net income fell sequentially, sales came in a bit below expectations, and the company signaled profits won't increase next quarter, as the cost of shipping new iMacs drains gross margins.

Apple's profit of 11 cents per share for the quarter ended Dec. 29 matched analysts' consensus estimate, according to a Thomson Financial/First Call survey. During the first quarter of the last fiscal year, Apple lost $195 million. Sales for the quarter increased 37% from a year ago, to $1.38 billion. Apple had forecast $1.4 billion in revenue.

During the most recent quarter, Apple shipped 746,000 computers--46% of them iBook portables. The company also sold 125,000 iPod MP3 music players. Going into the new quarter, dealers hold four weeks of inventory, and Apple is cutting prices on older machines.

But the hot product to watch in the second quarter is the new flat-panel iMac home computer. The company begins shipping high-end models, priced at $1,799, at the end of this month, and will introduce additional models through March. Apple CFO Fred Anderson indicated the costs of making and delivering new iMacs to dealers could hurt gross margins--which were 30.7% of sales during the first quarter--and hold earnings unchanged for the current period. That will be due to aggressive pricing of the new machines, air freight and manufacturing costs, and higher prices of LCDs and DRAM chips.

"We believe there's a tremendous opportunity for an upgrade cycle from that 6 million installed base of iMacs," Anderson said during a conference call with analysts Wednesday. "If we have to accept slightly lower gross margins to do that, that's part of our game plan."

Initial orders for new iMacs have exceeded Apple's expectations, Anderson said. But "it will take most of the quarter to ramp up manufacturing," he added, "and it is unlikely we'll be able to meet demand."

Apple also reported an $8 million first-quarter loss from operations of its 27 retail stores, on sales of $48 million. The company also took a $24 million restructuring charge during the quarter to cover an undisclosed layoff of operations, IT, and administrative staff.

Shares of Apple closed Wednesday down 92 cents, at $20.78.