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Interest pinch could bruise Apple

Much of the company's income derives from declining interest on cash holdings. That could make it tough for the company to meet earnings estimates, Morgan Stanley says.

Apple Computer's checkbook may be earning lower interest, which could put a squeeze on the company's income.

Apple warned in a December regulatory filing that its interest income will "decline substantially" in the current fiscal year as compared with the preceding year. That could make it tough for the company to meet current earnings estimates, particularly if the computer business remains tough, according to a report Wednesday from Wall Street brokerage Morgan Stanley.

That's because while computers account for most of Apple's sales, much of the company's income these days comes from interest it earns on its substantial cash holdings.

Morgan Stanley concluded that Apple's interest income in the current fiscal year could be as much as 5 cents per share below the brokerage's projections.

A nickel per share less in interest income could make a big difference in Apple's overall results. Morgan Stanley's model had called for the company to earn 22 cents per share for this fiscal year, of which 19 cents per share would come from interest income. In its Wednesday report, the brokerage said it believes that interest income may amount to as little as 14 cents per share, although it is waiting until after Apple reports earnings later Wednesday to adjust its estimates.

The language in Apple's regulatory filing was similar to wording made in its 2001 annual report, when the company cautioned that interest income for fiscal year 2002 could decline substantially from that earned in 2001. Interest income in fiscal 2002 ended up dropping to $118 million from $218 million a year earlier. Declining interest rates are among the factors that put a pinch on the return Apple is getting from its cash holdings.

An Apple representative declined to comment further on the company's expectations for fiscal 2003, which began in October.

Morgan Stanley also warned that although Apple does have $11 per share in cash, the Cupertino, Calif.-based computer maker has half of its cash overseas and would face significant charges if it needed to move that money back to the United States.

Despite its cautious comments on Apple's cash position, the brokerage had positive things to say about the company's business in the December quarter, saying it believes that Apple met or slightly exceeded the brokerage's forecast. For the quarter, Morgan Stanley is expecting per-share earnings of 3 cents on revenue of $1.5 billion. The consensus estimate also calls for Apple to earn 3 cents per share, according to tracking firm First Call.

In October, Apple forecast that it would post "a slight profit for the quarter before nonrecurring items," with revenue "up slightly" from the $1.44 billion in sales in the preceding quarter.

Apple will report its earnings after the close of regular trading Wednesday.