Apple earnings sail past expectations

The Mac maker earned $295 million, or 70 cents per share, on revenue of $3.49 billion. That compares with earnings of $63 million, or 17 cents per share, on revenue of $2 billion in the same quarter a year ago.

Analysts predicted that Apple would earn 49 cents per share, with revenue of $3.1 billion, according to the average of analysts polled by Thomson First Call.

"We are thrilled to report the highest quarterly revenue and net income in Apple's history," Apple CEO Steve Jobs said in a statement.

Apple's earnings come a day after the company announced lower-price versions of both of its core products--the iPod and the Macintosh.

During the quarter, Apple sold about 4.5 million iPods, up from 733,000 sold during last year's holiday quarter. Hewlett-Packard-branded iPods accounted for about 7 percent of iPod unit sales, Apple said. The company would not provide details on how sales between the iPod, iPod Mini and iPod Photo were split.

Analysts said the new $499 Mac Mini should help the company convert many of those iPod buyers into Mac users.

"We believe the Mac Mini will increase the percentage of iPod-toting Windows users who purchase a Mac by almost threefold," Needham analyst Charles Wolf said in a research note ahead of Wednesday's earnings report.

Mac sales rose significantly last quarter. The company sold 1,046,000 Macs, up 26 percent from last year. Analysts have been projecting a rise for the computer industry as a whole of about 10 percent, meaning that Apple gained a significant share during the quarter. They have been looking for signs that iPod sales are convincing Windows users to buy Macs.

"This is the first real evidence of the 'halo effect,'" Piper Jaffray analyst Gene Munster said in a telephone interview, adding that the arrival

Sales of the iMac were particularly strong, as Apple redesigned the product around a G5 processor. The product, along with the eMac, accounted for $620 million in revenue, up 187 percent from iMac sales in the prior quarter and up 147 percent from a year ago.

The company took in $177 million in revenue from its iTunes Music Store, along with iPod accessories and services. The store was "slightly profitable" in the quarter, Apple said on its conference call with analysts.

The company's forecast for the coming quarter also was higher than prior analyst predictions. Apple projected revenue of about $2.9 billion and earnings per share of about 40 cents. Analysts had been looking for revenue of $2.75 billion and earnings of 33 cents per share.

The company would not say how many Mac Minis or iPod Shuffle devices it expects to sell, but Executive Vice President Tim Cook did say that both products have profit margins that are lower than is typical for company products.

"Frankly, it is too early to gauge demand," Cook said. Asked whether the company will sell the miniature Mac in more stores than those that carry the current Mac line, Cook said expanded distribution is something the company will look at but added that there is nothing to announce.

Apple shares, which have been on a tear for months, lost ground Tuesday despite Apple's flurry of new products. Shares made up some of that ground in late trading Wednesday, ahead of the earnings report. Apple stock rose 90 cents, or 1.4 percent, to $65.46. Shares surged after the report, changing hands at $73 in after-hours trading, according to Island ECN.

However, Wolf raised his rating on Apple shares to "buy" on Wednesday, saying the increase in Mac switchers gives the stock more room to grow. Wolf set an $83-per-share price target.

The company's retail efforts are also gaining, with Apple stores accounting for $561 million in sales, double the revenue of a year earlier.

The company said it expects to open about two dozen more stores by the end of September, with new stores in the United States, the United Kingdom, Canada and Japan. Apple currently has 101 retail outlets.