Apple earnings skyrocket

NEW YORK (CNNMoney.com) -- Apple's profit soared in the latest quarter thanks to strong holiday sales of its iPod music and video player.

Apple reported profits of $1.14 per share for the first quarter, beating the 78 cents per share expected by analysts. The company earned 65 cents per share in the year-earlier period, which included a stock-option expense of three cents per share.

The company reported net quarterly income of $1.0 billion, up 77 percent from $565 million in the year-ago quarter.

Apple reported quarterly revenue of $7.1 billion. Analysts had expected revenue of $6.42 billion, up from $5.75 billion in the first quarter last year.

Both the earnings and revenue figures were quarterly records for the company.

Apple shipped 21.1 million iPods this quarter, up 50 percent from the year-ago quarter. The company shipped 1.6 million Macintosh computers, up 28 percent from the fiscal 2006 first quarter.

But even with the strong results shares of Apple fell 1.2 percent in after-hours trade, after earlier climbing 4 percent. Apple stock has risen 12 percent in the past two weeks.

"Investors are disappointed by the number of Macs shipped last quarter," said Piper Jaffray analyst Gene Munster. "People were hoping for 1.75 million Macs and we got 1.6 million. But we see it differently - it's the first time Mac shipments haven't declined from the quarter ending in September."

The fiscal fourth quarter, which ends in September, is usually the company's biggest computer sales quarter because of educational sales.

"But we think the Street is focusing on wrong metric this quarter. Apple sold 21 million iPods - they're sowing the market for future computer sales." He believes that iPod users are more likely to become first time Mac buyers.

Munster said that Apple's new TV product, Apple TV, was the fastest-selling product on its Web site, the first time in months that it's been a product other than the iPod.

Apple TV wirelessly brings content like movies, television shows and photos from the computer to the television set.

"I think Apple TV is going to be a catalyst for margins and I think 2007 is going to be an acceleration in revenue growth," said Munster.

The Apple TV is poised to become a surprise hit, says analyst Shaw Wu of American Technology Research.

"If you're an iTunes or iPod fan - and the company has already shipped around 100 million iPods - this is a way to take all that media on your computer and move it into the living room," he said. "People are looking for ways to share this content. If Apple were to convert 1 percent of those iPod owners to Apple TV owners, it would be a success. That would be a million units."

He said that current set-top boxes from Sony and Sling had comparable features, but did not work with the popular iTunes software.

Investors reacted positively several weeks ago to the announcement of Apple's iPhone, expected to be released in June, because the phone could give the company a new arena for sales growth.

Munster said he believes the iPhone would sell more than Apple's calendar 2008 goal of 10 million once it is available through the U.S., Europe and Asia.

"We see the iPhone strategy being very similar to the was they introduced the iPod," said Wu. "They'll start with a high-end product and then eventually move down in price points. The iPod started as a $400-$500 product and now you can buy an iPod Shuffle for $79. Can you imagine how many iPhones they'd sell at a lower price point?"

Gross margins rose to 31.2 percent from 27.2 in the year-ago quarter.

The company offered fiscal second-quarter guidance below what analysts expected, saying it expected revenue of $4.8 to $4.9 billion and earnings per share of 54 to 56 cents.

Analysts had expected profits of 60 cents per share on revenue of $5.2 billion.

Despite this, Wu believes growth looks strong for future quarters.

"If you looked at the company before [January's] Macworld, it was a two-product company: iPods and Macs," he said. "Now they've become a four-product company, entering set-top box business and the cell phone market. They're turning into a four-headed monster. Given their product momentum, they're going to be a real threat in these new markets."

Shares of Apple (Charts) closed Wednesday at $94.95 on the Nasdaq, down 2 percent for the day.

Apple's CEO faces a federal investigation into allegations that the company backdated stock options to dates when the stock was lower. An internal Apple investigation cleared him of wrongdoing, but has no bearing on the federal probe.

Apple said in the earnings call that it is actively cooperating in the investigation.

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