Continued strong sales of the iPod portable music player lifted Apple (Nasdaq: AAPL) 
to another strong quarter and helped it exceed profit forecasts. Revenue levels, however, and the forecast going forward were not quite up to Wall Street's expectations.
Apple said profit was up 41 percent in its second quarter to US$410 million compared with $290 million in earnings a year ago.
Music Paves the Way
Revenue rose 35 percent to $4.36 billion, below the consensus estimate of $4.54 billion. Driving sales was the iPod, with some 8.5 million units moved in the quarter. Sales of the device made up some 39 percent of Apple revenue for the quarter, with sales at the iTunes Music Store making up another 11 percent.
The quarter was notable for the lack of new product releases and upgrades out of the Cupertino, Calif., company, meaning sales came from existing product lines and that some consumers may be cooling their shopping heels in anticipation of a new line of Apple Macintosh computers due later this year -- the first batch to run on the Intel (Nasdaq: INTC) platform.
CEO Steve Jobs noted that Apple topped $10 billion in revenue and generated nearly $1 billion in earnings during the first six months of the current fiscal year. "Our transition to Intel processors is going very well, and our music business just experienced another quarter of outstanding growth," he added.
Despite a conservative forecast and the revenue miss, Apple shares moved higher. In midday trading Thursday, the stock was up more than 4 percent to $68.34.
Bright Spots
The quarter goes down as the second-best in company history in terms of sales at Apple, CFO Peter Oppenheimer said in a conference call. He forecasted sales of $4.2 billion to $4.4 billion for the third quarter, slightly below what analysts have been calling for in advance of the release.
Apple expects the average selling price for iPods to decline in the current quarter -- it stood at $201 in the second quarter -- as recent price reductions take hold.
The quarter saw Apple ship 1.11 million Macintosh machines, up 4 percent from the same time last year. The machines had an average price tag of $1,414.
The closely watched transition to Intel chips is on track for completion before the end of 2006, Oppenheimer said, which could give Apple a boost if it is able to get a number of the new machines into the marketplace during the busy fourth quarter.
One reason investors may have been backing Apple -- despite the lower forecast and sales miss -- is that it held the line of profitability, with gross margins for the quarter significantly above many forecasts.
No Waiting?
Apple's sales trends are being closely watched for signs that would-be buyers are holding off on purchases until Intel-based Macs are available or until their performance is proven. That risk of "time-shifted demand" will remain until later this year, according to Needham & Co. analyst Charles Wolf.
"Once the transition is complete by the first quarter of fiscal 2007, we believe Mac shipments have the potential to surge on the strength of the Mac's newfound ability to run Windows applications alongside Mac applications," Wolf said.
Wolf predicted a new iBook would be released before the end of the summer and give Apple a back-to-school boost. Even when new Macs do roll out, he said, sales could take a while to ramp up as users -- especially those in the creative professional market where Apple thrives -- await a critical mass of compatible software before making the switch.
The recently acknowledged delay of the Windows Vista upgrade may help boost Mac sales as well.
Given the success of the iPod, new additions to Apple's consumer electronics line could be as significant. Apple could drive impressive sales with a strong mobile phone offering, said UBS analyst Ben Reitzes, especially if it is built to easily interface with PCs so that music, video and other data can easily be shared.
A cell phone would help Apple "leverage its market leading innovations and creative designs that have made the iPod such a tremendous hit with customers," he predicted.
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