by , 6:10 PM EDT, April 13th, 2005

Apple Computer executives told market analysts Wednesday they were "very happy" with fiscal second-quarter results, but are somewhat less optimistic about the current quarter as profit margins get squeezed from increased compeitition.

Apple Chief Financial Officer Peter Oppenheimer said he is predicting gross profit margins of 28.5% in Q3, off by more than 1% from the 29.8% profit margin in the previous quarter. He said reasons for the fall in earnings will include lower margin sales to education, fewer sales of higher priced products like Power Macs, and a full quarter of impact from recent iPod price reductions.

Despite these factors, Mr. Oppenheimer said there will be an "offset by better software sales," in the fiscal third-quarter, including sales of Mac OS X 10.4 'Tiger', which goes on sale April 29.

Mr. Oppenheimer admitted that the company's growth has been "above" its targets, and as a result, Apple can't sustain previous levels.

"The company for the last couple of quarters has been growing at about 70% and our gross margins have been above our targeted 27% to 28%, which has put the operating margin well above 7%," he said.

"I don't think the revenue will continue to grow at these levels forever," Mr. Oppenheimer said. "I would hope we could grow our revenues at 15% or better. The approximate 30% gross margin that we set in the March quarter is above our historical trends and above the target I have provided. I don't believe we can sustain it."

Apple reported Wednesday a Q2 profit of US$290 million, or $.34 per diluted share -- 10 cents better than the street estimate.

Other highlights of the conference call included:

• Apple said its music business generated 38% of Apple's total revenue and was up 280% compared to the year ago quarter.


• Revenue from Apple's retail stores more than doubled in the quarter from a year ago to $571 million. With an average of 102 stores open during the quarter, Apple said average quarterly revenue per store was up $5.6 million, a jump of more than $2 million from a year ago, or a 60% increase. Traffic through the stores continues to grow at 9,800 per store per week, on average. 125 stores will be open by the end of the year, Mr. Oppenheimer said, with 10 locations outside of the U.S.


• Mr. Oppenheimer said the company is currently well within its normal range of four to five weeks worth of inventory on Macintosh CPUs.


• As for the educational market, Apple said U.S. school sales were the highest Q2 revenue in five years. "Overall education revenue increased 25% and CPU unit (sales) increased 21%," Mr. Oppenheimer said. Laptop, iPods and iMacs drove much of the educational sales, he said. "Higher ed continues to be extremely good for us," said Apple Executive Vice President of Worldwide Sales and Operations Tim Cook, much better than K12.


• Mr. Cook said the company was "at or near" a balance between supply and demand in the quarter for all of its iPod digital media devices. Inventory was at between four to six weeks as the quarter ended, he said. Mr. Cook said it is "very difficult" to determine if sales of the iPod shuffle had cannibalized sales of other iPod products, but thought the overall market for iPod products had grown.


• Mr. Oppenheimer said Apple was "very encouraged" by increased sales in Japan. Apple reported 102,000 CPU units sold in the region, on $284 million in sales. The company saw a 59% sequential increase in sales, and a 34% year-over-year improvement.


• Mr. Oppenheimer suggested that the iPod had "a very strong role" in attracting sales of new Macs, but he didn't provide specific numbers that might support the suggestion that the iPod is having a "halo effect" on Mac sales.
• Mr. Cook said the company has "resolved" earlier "isolated issues" of problems with the trackpad on some PowerBook models.


• Mr. Oppenheimer said that with the June quarter, Apple will no longer offer in-depth breakdowns of individual CPU sales, but instead will show only total desktop and laptop unit sales and revenue. The reason: "We want to more closely align the reporting we provide for our Mac and music business," said Mr. Oppenheimer. "We believe this will provide consistancy with a level of detail we provide for our music business as well as the level of detail provided by our major competitors in the personal computer industry."


• Although the new policy on individual CPU numbers has yet to begin, Apple refused to release sales figures and refused to elaborate in-depth on the issue of Mac mini sales when asked by an analyst. Mr. Oppenheimer would only say, "we were very pleased with customer response (to the Mac mini)."


• Mr. Oppenheimer admitted iPod sales to Windows users "played a very strong role" in Apple's Q2 growth rate, year over year, but would not provide break down numbers.


• Mr. Cook confirmed sales of the HP-branded iPod made up "less than 3%" of the total in iPod shipments last quarter.


• Sales of Macs through its retail stores stood at 144,000 units in Q2, up 106%. Mr. Oppenheimer confirmed survey results that showed of those how bought at Mac at the retail stores, a "low to mid 40% range" had never owned a Macintosh before.