Apple''s encore: Revenue growth

Apple Computer (Nasdaq: AAPL), the comeback story, is long gone; now Wall Street wants to see the sequel: Apple, the growth story.

Citing the familiar "what have you done for me lately" mantra on Wall Street, analysts are looking to Apple to show them how the company will post strong sales growth over the next two years.

"Apple has transformed itself from a comeback company to a growth company," said David Bailey, an analyst at Gerard Klauer Mattison.

Gone are the days where Apple was written off for dead. CEO Steve Jobs pared Apple's product line, refocused the company, killed its clone makers and led Apple back to its glory days with the iMac. Apple has also delivered quarter after quarter of eye-popping sales and earnings totals. The stock has responded accordingly as the company issued a 2-for-1 stock split in April, its first split since June 1987.

When the company reports its fiscal third quarter earnings on Tuesday, there'll be a ho-hum feeling to them. Apple will report good sales, solid unit shipments and a nice profit of 44 cents a share, according to earnings tracking firm First Call Corp.

In fact, Apple's success is so taken for granted these days that earnings are taking a back seat to the MacWorld tradeshow. Steven Fortuna, an analyst with Merrill Lynch, sees "a short-term trading opportunity" around MacWorld as shares move in tune with Jobs' keynote speech. Earnings are almost an afterthought.

Revenue growth key

It's rare that a tradeshow upstages earnings on Wall Street, but analysts are looking for a peek at what Apple will do for an iMac encore. Apple's secretive nature about product plans -- CFO Fred Anderson has habitually said the company doesn't preannounce products -- creates a nice buzz around MacWorld, but leaves Wall Street prognosticators in the dark.

"Their biggest challenge is what to do for an encore product," said Walter Winnitski, an analyst for Chase H&Q. "New products drive revenue growth."

And revenue growth is the next phase. Despite hefty profits, Apple's annual sales haven't topped the $10 billion mark since 1995. Winnitski said the company will need to refresh its current products and launch new ones to "find new users in new areas."

Apple currently has four key hardware products -- the iMac, the PowerMac G4, the iBook and the PowerBook -- and has been crafty about adding a fifth, such as a personal digital assistant offering. Bailey said a Net appliance would be logical for Apple.

Analysts also said they wonder how Apple will reach that psychologically important $10 billion sales mark by relying mostly on the consumer market. The company fares well in its core verticals -- consumer, education and graphics design -- but hasn't been a player in the corporate space. The company is looking to boost sales to small- and mid-sized businesses, or "places where they've been in the past," said Bailey.

Software-focused second half

Given that Apple's hardware house is in order and set for the latest updates, Bailey said the next six to nine months will highlight the company's software strategy.

"Apple has done an excellent job of launching one product at a time, but the next six months will be focused on software," said Bailey. "Software is the key message."

The long-awaited Mac OS X is scheduled for a January launch and will update the user interface and add key features. Apple also has strong database, graphics and Web software products, analysts said. Bailey added that Web Objects and QuickTime are two promising products that distinguish Apple from the Wintel juggernaut.

Analysts said momentum in software sales would be a welcome shift because Apple's profit margins, and bottom line, will be better.

Attainable growth targets

Aside from the three analysts that don't consider Apple a "buy," most analysts are confident Apple can rev up its revenue growth.

Bailey said Apple should be able to grow revenue 30 percent in the second calendar half (Apple's fiscal fourth and first quarters).

According to Bailey, the September quarter should show strong growth because of an easy comparison to year-ago totals. Apple was hamstrung by component shortages last year. The December quarter has a tough comparison because Apple showed stellar results.

Bailey added that Apple should be able to maintain a strong growth clip with an overall PC market share of 4 percent to 5 percent, in line with its current standing.

If Apple manages to boost market share to hit the 6 percent to 8 percent mark, the company would show dramatic growth.

"You don't have to incorporate huge market share gains to see the growth," said Bailey. "These numbers are pretty attainable.">