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Apple hoping Mac attack lifts quarterly earnings

With stagnant iPod shipments, analysts are looking for a Mac revival to keep Apple's financial results on a torrid pace.

A small, handheld music player was responsible for vaulting one of the computer industry's most storied companies back into prominence. But it's the original Mac that has Apple Computer investors looking forward to Wednesday's third-quarter earnings call.

New designs, new features and snarky new commercials have been the highlight of Apple's renewed focus on pushing its personal computers. Analysts and investors are eagerly awaiting word Wednesday from company executives as to whether the new products and marketing strategies have paid off in terms of increased Mac shipments. The average estimate compiled by Thomson First Call points to $4.4 billion in revenue, and earnings per share of 44 cents, slightly ahead of the company's own guidance issued in April, following its sales, financial analysts have been closely studying iPod shipment data as they prepare for Apple's earnings announcement. Some analysts say Apple has finally run into the inevitable law of large numbers: It's really, really hard to sustain eye-popping growth rates as the installed base of any product increases. A few analysts have trimmed their expectations for this year's iPod sales and Apple's overall performance. The company's stock price has also dropped from about $90 earlier this year to $52.90 at the close of trading Tuesday.

But Apple chose to focus on that other franchise, the Mac, during the first part of this year as it weaned itself off PowerPC chips in favor of Intel's new processors. With that transition nearly complete, analysts will be closely watching Apple's guidance for the second half of the year for signs of market share improvements and new directions for the iPod.

Even modest share gains on Apple's part will translate into a healthy addition to the company's financial results. At Apple's shareholder meeting in April, Chief Financial Officer Peter Oppenheimer said each percentage point of market share gained would translate into about $2 billion in revenue.

However, it's still early in the transition to Intel's chips to make a completely informed prediction about Apple's market share, said Shaw Wu, an analyst with American Technology Research. The new Intel-based MacBook, one of Apple's more popular products, didn't start shipping until the middle of May and likely took a little longer to become available in large volumes, he said. Also, Apple acknowledged earlier this year that it felt some pain from purchases that were delayed pending the introduction of the new Intel-based systems.

But iMacs and MacBook Pros have now been available for several months, and the general interest in the new designs and new software needed for the Intel chips is providing a boost for Macs, Wu said. "Technology changes are what drive upgrade cycles, and that's what Apple is enjoying," he said.

Not only does Apple have new Mac designs to market, but it also has partially addressed one of the most frequently cited objections that Windows users brought up when asked if they would buy a Mac: the Mac's lack of compatibility with Windows applications. The beta version of the company's Boot Camp software allows Intel-based Macs to boot either Windows or the Mac OS. Apple plans to make this software a default feature in Mac OS X 10.5, scheduled for release later this year.

Boot Camp isn't a perfect solution, since users have to shut down one operating system to start using the other one. But it does let those who were tied to Windows applications for work or school use Macs, said Roger Kay, an analyst with Endpoint Technologies Associates. "Apple's done a very good job of explaining to people that there isn't a compatibility penalty anymore," he said. But other options are available: Those looking for a more seamless transition between the Mac and Windows computing environments can use products like Parallels' Desktop for Mac to run both operating systems at once.

Apple has also returned to mass-market retailers in its quest to move more Mac units. The company expanded a partnership with Best Buy earlier this year to test out Mac sales in several Southern California Best Buy stores. Apple will be closely watching the results of those tests to determine if the program will go national, said Samir Bhavnani, an analyst with Current Analysis.

It hasn't been the greatest of quarters for the rest of the PC industry, facing component weaknesses and softening demand. But those forces tend to have less of an impact on Apple because of its low market share, Wu said. Apple also has doubled its efforts to win customers in the educational realm, many of whom have to finalize their contracts in May, said Tim Bajarin, an analyst with Creative Strategies.

With the Intel transition almost out of the way, Apple can now focus on updating the iPod for the upcoming holiday season, Wu said. The are pointing to enhanced video for the new iPods, as well as an iPod Nano casing that is more . The company, as usual, has said little, but details about changes to the next-generation of iPods have trickled out, such as the news that longtime iPod supplier will be excluded from the next generation of the Nano.

Even though iPod growth looks like it's slowed this year without a major product refreshment, Apple is one hit away from keeping that train rolling, Bajarin said.

"There are still a lot of people who have not bought iPods. When you look at how many people worldwide own PCs and are digital consumers, I could see Apple having a number of years ahead of them driving demand," Bajarin said.