A handful of influential investment banks rushed this morning to lower their ratings for Apple. Bear Stearns lowered its outlook to "neutral" from "buy," Banc of America Securities dropped it to "market perform" from "strong buy," SG Cowen Securities shifted it to "buy" from "strong buy," and Morgan Stanley Dean Witter cut it to "neutral" from "outperform."
"Hard times appear to have hit Apple a little sooner than we had expected," wrote Merrill Lynch analyst Steve Fortuna in a report this morning, dropping his intermediate-term outlook to "neutral" from "accumulate" while maintaining an "accumulate" long-term rating. "We do not see this as a one-quarter phenomenon for Apple but rather as the beginning of many tough quarters ahead."
The company also said in a statement that it plans to lower growth estimates for the coming quarter and full fiscal year.
Apple said revenue for the quarter ending Sep. 30 should be between $1.85 billion and $1.90 billion, with earnings per share in the range of 30 cents to 33 cents, excluding gains from investments. Analysts had been expecting Apple to earn 45 cents per share, according to First Call/Thomson Financial.
"Three factors contributed to our revenues and earnings coming in below expectations," Apple chief financial officer Fred Anderson said in a statement. "First, we experienced lower-than-expected September sales due to a business slowdown in all geographies. Second, our education sales, which normally peak during September, were lower than expected. And third, our Power Mac G4 Cube is off to a slower-than-expected start, resulting in revenues below expectations."
Apple representatives declined to comment beyond the release, saying the company will have more to say when it reports earnings Oct. 18.
Apple's warning casts further doubt on the overall health of the PC industry. Intel warned last week that its third-quarter sales would fall short of expectations because of weaker European sales.
At the time, there was much debate as to whether there was a more systemic problem, although several PC makers chimed in to say their business remained on track.
In a statement, Apple CEO Steve Jobs remained upbeat.
"We've clearly hit a speed bump, which will result in our earning, before investment gains, approximately $110 million rather than the expected $165 million for the September quarter," Jobs said. "Though this slowdown is disappointing, we have so many wonderful new products and programs in the pipeline, including Mac OS X early next year, and remain positive about our future."
PC Data analyst Stephen Baker said Apple sales at stores were off sharply in July, accounting for just 5.8 percent of the U.S. retail market. Apple's share of the retail market improved some in August, following the introduction of new models, but still was below Apple's recent performance, Baker said.
"In August, they jumped back up to 7.5 percent, but they had been running 9 to 10 percent," Baker said. Baker added that he has heard no reports of supply problems, meaning Apple is likely suffering from low demand.
Sales of Apple's higher-end systems aimed at graphic designers also showed signs of sluggishness.
In a Sept. 21 research note, Morgan Stanley Dean Witter analyst Gillian Munson noted that a surplus of older Power Macs in the retail channel appeared to be hurting sales of the new machines.
At the time, Munson said she thought Apple would be able to hit her target of 45 cents a share, but she said she was less confident Apple would meet her revenue estimate of $2.03 billion.
Deutsche Banc Alex Brown analyst Phil Rueppel said that Apple may have been bitten particularly hard because it, more than other PC makers, relies on sales from Europe and the education market, two areas that have been particularly sluggish.
"Demand has not picked up to the extent that some people expected," Rueppel said.
The current problems come following a dramatic turnaround at Apple led by the return of Steve Jobs four years ago, at a time when Apple was losing money and market share. Since Jobs' return, the company has returned to profitability and gained back much of that lost share.
Much of that gain has been on the strength of the iMac, but some are questioning whether the novelty of the colorful systems may be wearing off.
"The first thing you want to say: Is this because people aren't responding to the iMac design?" Baker said, noting that many people were hoping for a larger screen or CD-RW drive and instead got faster processors and new colors.
"It may be that has run its course, and they need to be focused on some of those other feature sets," Baker said.