Thursday, October 19, 2006, 11:00 am

Apple's full financial disclosure exudes confidence

By Katie Marsal

Though surprising, Apple Computer's decision Wednesday to disclose full financial results of its fiscal fourth quarter, despite ongoing options issues, should be seen as an indicator of the company's overall confidence surrounding the matter, one Wall Street analyst says.

In a research note to clients Thursday, American Technology Research analyst Shaw Wu noted that Apple reported "a nearly flawless September quarter" with revenue, earnings-per-share (EPS), margins, Mac and iPod units all coming in above consensus expectations.

"We believe the biggest surprise in the quarter was Apple disclosing full financials despite the ongoing options investigation while most other companies with options issues have reported only limited financials," the analyst wrote. "We view this as a vote of confidence that the current management team is not likely liable of wrongdoing (if any)."

The one exception to the stellar quarter was a one-time tax benefit that added 6 cents, he said.

Sales of the company's Intel Macs continued to show strong momentum, Wu noted, up 21 percent quarter-over-quarter to 1.6 million units despite a difficult sequential comparison, while iPods rebounded strongly, up 8 percent quarter-to-quarter to 8.7 million units. 

"The gross margin came in at 29.2 percent (vs. guidance of 28.5 percent and our 28.7 percent view) helped by favorable component pricing as well as a favorable product mix," the analyst wrote. "We find the gross margin expansion impressive in light of Apple's aggressive iPod pricing further demonstrating its supply chain strength."

As Wu had predicted in previous notes to clients, Apple provided conservative guidance for its current (December) quarter of $6.0 - $6.2 billion in revenue and $0.70 - $0.73 EPS, below consensus estimates of $6.44 billion and $.077. However, the conservative guidance figures were still above the analyst's expectation that the company would guide in the range of $5.7 - $6.1 billion.

"As a result, we are modestly raising our estimates," Wu wrote. "For the December quarter, we are now modeling $6.1 billion in revenue and $0.72 in EPS assuming 14 million iPods and 1.8 million Macs (from $6 billion, $0.68, 1.24 million iPods and 1.54 million Macs)".

For the fiscal 2007 year, the analyst expects revenues of $22.5 billion and EPS of $2.70 (up from $22.2 billion and $2.60). 

"We are raising our price target to $92 from $91 based on a 29x multiple on our [calendar year 2007] EPS of $2.79 plus $11.50 in net cash," he wrote.

The analyst reiterates that investors buy shares of Apple.