Apple posts nice Q1, but pessimistic on Q2

Updated at 3:45 p.m. PST following the conference call, with changes throughout.

Apple's first quarter hit on all cylinders, as the company continued its financial run on the strength of its Mac business. But anyone looking for reassurance about the overall health of the economy later this year didn't get it from Apple.

The company posted revenue Tuesday of $9.6 billion for its first fiscal quarter, which ended December 29. That's better than the $9.5 billion expected by financial analysts, and Apple also gave them good news with its earnings-per-share number of $1.76, better than expectations of $1.62 per share. That translates to net income of $1.6 billion, up 58 percent from last year.

Mac sales were up 44 percent compared with last year, as Apple continued its resurgence in personal computers. But investors will wonder if the iPod gravy train is coming to an end, as Apple's iPod sales of 22.1 million iPods was well below Wall Street expectations of 24.7 million. That's just 5 percent unit growth compared with last year, but iPod revenue was up 17 percent, so perhaps Apple sold more high-end iPod Touches than iPod Nanos or Shuffles as a percentage of its mix during the quarter.

Apple executives supported that argument during a conference call with financial analysts after the release of the company's earnings. Apple gained iPod share internationally, but iPod units sales in the U.S. were flat, said Tim Cook, Apple's chief operating officer.

While not specifically addressing the missed Wall Street target for iPod unit sales, Cook did say that iPod unit sales met the company's own expectations. And the iPod Touch is off to a good start, he said, which accounted for overall iPod revenue growth that matched last year's first-quarter revenue growth.

"This was the most expensive iPod we've introduced in some time," said Peter Oppenheimer, Apple's CFO. The company thinks the iPod Touch really belongs in a different category than the broader music player market, saying the iPod Touch has a chance to "become the first mainstream mobile Wi-Fi platform." Nintendo and Sony might have minor quibbles with that statement, but Oppenheimer's point was that you can't necessarily use years of iPod sales to chart the progress of the iPod Touch.

On the Mac front, Apple enjoyed another spectacular quarter, with Mac unit growth of 44 percent and revenue growth of 47 percent compared with last year. "The Mac business is on fire," Cook said, and the increases were led primarily by the new iMac desktops Apple introduced last August. Apple estimates that 19 percent of the Mac installed base is running Leopard, Mac OS X 10.5, and Leopard generated $170 million in revenue for Apple during the first quarter it went on sale, compared with the $100 million that Tiger, Mac OS X 10.4, generated for Apple in 2005.

CEO Steve Jobs already tipped the company's hand on iPhone shipments at Macworld, noting that Apple had sold 4 million iPhones as of his keynote speech. Apple sold 2.3 million iPhones during its first quarter, and Cook reiterated Apple's goal of shipping 10 million units during 2008.

In other business, Apple plans to double the number of Best Buy stores that are selling Macs within the next six months, going past an analyst prediction earlier this month that it would pull that off by early 2009. Apple sold 504,000 Macs through its own retail stores, up 64 percent from last year's first quarter, and just like last quarter, 50 percent of those buyers were new to the Mac, Cook said.

All in all, it adds up to a very solid first quarter for Apple. Even the disappointing iPod sales sold had a silver lining, since Apple took in 17 percent more revenue on only 5 percent unit growth. But the guidance will not help assuage a shaky stock market.

Apple is notorious for providing conservative guidance below Wall Street's expectations, but it guided well below expectations with predictions of $6.8 billion and 94 cents a share. Lots of companies would kill for that kind of performance, but Wall Street wanted more of Apple, with expectations of $7 billion in revenue and earnings per share of $1.09.

Analysts asked several times whether Apple foresaw a slower second quarter based on the economic environment, and perhaps wisely, Oppenheimer declined to attach his name to a negative forecast that could send stocks plunging Wednesday.

"We'll leave the economic forecasting to others. I am confident in our business, our strategy, and our products," Oppenheimer said. He may be right to be confident, but if average consumers pull back substantially on their spending, we're all going to feel it. Apple shares fell 11 percent in after-hours trading.