Apple is set to release its second-quarter earnings on Wednesday, and by coincidence its shares closed on Friday at just over $161 — almost exactly where they stood three months earlier, before Apple’s first-quarter earnings report.

Although the company in January posted the best earnings in its 32-year history, the Q1 report is remembered by investors as a disaster. In the weeks that followed, Apple (AAPL) shares fell more than 40 points — from above $160 to below $120 — knocking $36.5 billion off the company’s market capitalization. Recession fears were a big factor in what turned out to be a three-month bungee jump, but what really spooked the market was Apple’s Q2 earnings guidance: 94 cents per share, nearly 15% below the Street’s average estimate of $1.09. [Reader "Mick" points out that hedge funds dumping Apple to prop up their shaky financial positions played a major role in the sell-off. He notes that institutions held 71% of Apple's shares before the plunge and 68% after.]

So there are two things to watch for on Wednesday: 1) Apple’s sales figures for Q2, which should be stellar, and 2) what kind of guidance it gives for Q3, which is anybody’s guess.

All signs point to an excellent second quarter for Apple. The consensus of analysts surveyed Monday was looking for the company to earn $1.07 a share on $6.95 billion in sales, versus the company’s guidance of $0.94 on $6.8 billion

Strong sales of MacBooks led the quarter. IDC last week reported that, although growth in overall PC sales in the United States slowed last quarter to just 3%, Apple’s computer shipments were up 25.1%. Gartner, using slightly different methodology, reported Mac sales up 32.5%.

If Apple’s worldwide performance is anything like its domestic record, the company should easily beat the Street’s consensus of 1.95 million Macs sold in the quarter. Piper Jaffray’s Gene Munster is looking for Mac sales of 2-2.1 million; JP Morgan’s Mark Moskowitz expects them to come in even higher, at 2.11 million. Either number would represent a near doubling of sales in just two years, as Ars Technica’s handy bar graph shows.

The iPod picture is not quite as rosy. There is sure to be sharp seasonal falloff from the Christmas quarter, when Apple shipped 22.1 million units. JP Morgan’s Moskowitz estimates that Apple sold 9.68 million iPods in Q2; Piper Jaffray’s Munster is calling for somewhere between 10 to 10.5 million, reflecting a sales spurt late in the quarter sparked by a sharp price cut on the low-end iPod shuffle. According to Munster, the Street has already decided that the iPod’s days of growth are behind it, and that the consensus is looking for sales of just under 53 million iPods in 2008 — essentially unchanged from 2007. Munster’s more optimistic; he believes the iPod will evolve over the next 12 months from a stand-alone music player into a mobile Internet device that fits in your pocket, and he’s looking for iPod sales to grow 10% year over year.

iPhone sales are harder to predict, given the spot shortages in the United States, excess inventory in Europe, and a chaotic black market in jailbroken iPhones in Asia and the developing world. Analysts’ estimates are all over the lot. Moskowitz and Munster (to pick on those two one more time) differ by half a million units. Moskowitz expects Apple to report sales of 1.5 million iPhones; Munster is looking for 1.6 to 2 million. Charles Jade at Ars Technica’s Infinite Loop speculates that the release date of the 3G iPhone may hinge on what the actual number turns out to be. He writes:

With a prediction of 10 million iPhones sold in CY 2008 … Apple must sell, on average, 2.5 million iPhones per quarter. … If the iPhone sold less than 2 million units this quarter, expect a 3G iPhone sooner rather than later. Conversely, if the current shortages are a result of insatiable lust for the greatest phone ever made, expect Apple to milk that cow for all it’s worth before introducing a new model. (link)

When it comes to pricing Apple’s shares, however, Wall Street cares less about the past than the future. The guidance Apple gave last October hinting at a blowout Christmas surprised analysts and help drive the stock to a record $200 a share in December. Although Apple beat everybody’s expectations for the quarter, by the time the first quarter results came out, traders were focused on Q2. And when Apple shocked analysts in January with surprisingly pessimistic guidance, it triggered a 40 point fall.

Investors, some of whom lost millions in the debacle, were furious, and Apple was besieged by angry threats and e-mails. (”Straight out, bald face, criminal lying,” was how one described Apple’s Q2 guidance). Few expect the company to respond such complaints by sweetening its numbers; if anything, it is more likely to offer no guidance at all, especially for a quarter that is so hard to call. Although investors can look forward to a new iPhone and software developers kit in June, back-to-school sales in late summer, and Christmas sales before the end of the year, none of those expectations will show up in Q3 earnings.

If Apple does offers Q3 numbers, they are sure to be, as always, conservative. Apple, more than most companies, likes to make only promises it knows it can keep. But despite recent complaints, the fact is that its results do tend to track its guidance. The spreadsheet at left, produced by a member of TMO’s Apple Finance Board who calls himself “awcabot,” shows guidance and results quarter by quarter since 2002. Past performance is no guarantee, but over that time, revenues have exceeded guidance fairly dependably by an average of 5.7% and earnings by an average of 43.8%.

Take all this for what it’s worth. Apple is a volatile stock, and it’s especially volatile before and after earnings reports. We may not be in for another bungee jump, but for the next few days it could be a bumpy ride.

It’s been almost a decade since Steve Jobs drove the last of the licensed Mac clones out of business, but that hasn’t stopped bargain hunting users from trying to get the Mac experience without feeding Apple’s hefty profit margins.

Persuading a generic PC to run OS X isn’t that hard to do. Ever since Apple (AAPL) switched from PowerPC to Intel, hackers in the OSx86 movement have been playing cat-and-mouse with Cupertino, writing a series of patches and emulators to get around the Mac’s Extensible Firmware Interface (EFI) and other built-in barriers to cloning.

But the $399 Mac compatible computer that hit the market this week is another matter. It’s a cease-and-desist order waiting to happen.

The manufacturer is a small, Miami-based reseller of Voice-over-Internet, security and networking systems called Psystar. Its website invites you to order a PC “capable of running unmodified OS X Leopard kernels” with the following specs:

• 2.2GHz Intel Core 2 Duo
• 2GB of DDR2 667 memory
• Integrated Intel GMA 950 Graphics
• 20x DVD+/-R Drive
• 4 USB Ports
• 250GB 7200RPM Drive

Basically, it’s a Mac Mini with twice the memory at half the price. So what’s not to love?

The problem for Psystar — and anyone counting on them to stay in business and provide the support they promise — is the second part of their offer: If you buy a copy of Leopard at the same time, they promise preinstall it for free.

That’s where Apple’s lawyers come in. Leopard’s End User License Agreement (EULA) is pretty clear. Section 2A reads:

This License allows you to install, use and run one (1) copy of the Apple Software on a single Apple-labeled computer at a time.

And that’s what’s wrong with this $399 Mac.

The iPhone gets the most press and the iPod sells in the largest quantities, but it’s the Macintosh that really drives Apple’s growth, says Gene Munster.

In the second installment of a multipart report on Apple’s “3 Cylinder Engine,” Piper Jaffray’s chief Apple (AAPL) analyst looks at the Mac business over the next couple of years and likes what he sees. In particular:

• Growth: After Apple introduced the Intel Macs, Mac sales grew 37% in 2007, more than double the industry-wide rate of 15%. Munster is modeling 2.0 to 2.1 million Macs for the March quarter (vs. the Street’s 1.95 million). He believes Apple will continue to outpace its competitors with upgraded iMacs and Mac minis in the next 3 months and redesigned MacBooks and MacBook Pros in time for the ‘08 education season.
• Market Share: According to IDC, Apple’s worldwide market share grew from 2.4% in 2006 to 2.9% in 2007. (See chart below.) Munster is conservatively modeling global market share to remain flat this year, but he notes that enterprise sales account for 70% of the worldwide market, a segment Apple is not aggressively targeting. In the consumer market, where Apple does compete, he estimates the Mac’s share is now 10% worldwide and an impressive 21% in the U.S.
• Sales Price: While Apple has gained market share over the past three years, it has also been able to resist the industry trend of decreasing sales prices. In fact, it actually increased its average sales price (ASP) by more than $150 from December ‘05 to December ‘07. “The combination of increasing ASPs and rising market share is evidence of a compelling product line,” writes Munster.

One more thing: although consumers and investors tend to believe Macs cost 20% to 30% more than comparable PCs, according to Munster, he did some price comparisons and found that on average, the price difference is closer to 16% for desktop machines and 9% for laptops — essentially unchanged from a similar comparison he made two years ago. Details in the charts below the fold.

With less than two weeks before the end of Apple’s March quarter, Shaw Wu of American Technology Research expects the company to shake off the doldrums that are dragging down the rest of the U.S. economy.

“Our sense is that the Mac business is recession proof,” he writes in a report to clients issued Thursday morning. Based on his supply chain checks, Wu sees good news throughout Apple’s (AAPL) product line:

• Rather than the 38 percent year-to-year growth in Macintosh unit sales he had earlier predicted, he now thinks growth may be closer to 42 percent.
• After a strong start and then a lull, he sees Macbook Air sales picking up rapidly. “Customers are attracted to its super thin form factor and do not seem to mind some of its limitations.”
• He’s seeing a bump in iPod sales following the shuffle price cut, and now expects iPods to come in at the high end of his 9.5-10 million unit range (but lower than the Street’s 10.8 consensus).
• He sees a pause in iPhone sales following the well-regarded SDK announcement as customers wait for the June release of iPhone 2.0. He’s modeling 11 million iPhones for the year, slightly ahead of Apple’s 10 million target.
• Falling prices in component parts should sweeten Apple’s March report, due out April 23, and Wu is raising his estimates accordingly. He writes: “For the March quarter, we are now modeling $7 billion and $1.10 in EPS (from $6.9 billion and $1.02) vs. consensus of $6.92 billion and $1.05 and its guidance of $6.8 billion and $0.94.”

Macintosh sales were up sharply in February, according to a brief report on the latest NPD data posted Monday at flyonthewall.com (registration required).

The report shows growth in Mac unit sales up 60 percent from 2007 and growth in dollar terms up 66 percent. That’s considerably higher than Pacific Crest’s estimate of 10 percent, according to the same report.

AppleInsider’s chart of the NPD data is pasted below the fold. It shows Apple’s share of the U.S. PC market growing from 9 percent in Feb. 2007 to 14 percent in Feb. 2008. In dollar terms, NPD has Apple capturing a full 25 percent of the U.S. computer market last month.

The news may explain why Apple (AAPL) shares jumped several points Monday afternoon, ending the day in positive territory.

Meanwhile, Piper Jaffray’s Gene Munster analyzed NPD’s February report on the iPod line and projected sales between 9.7 and 10.5 million units for the March quarter. The midpoint of those two figures would equal a 4 percent drop from 2007, considerably lower than the 2 percent gain on 10.8 million units that is the Street’s consensus.

Munster adds:

We see this data point as a slight positive, given this range is a slight increase from what NPD data indicated after 1 month of data. We believe the iPod shuffle price cut on 2/19 helped boost sales in the final week of Feb. and will continue to drive iPod sales in March leading to a more back-end-loaded qtr for iPod units.

As promised, the NPD data is pasted below:

After showing impressive gains in December and January, Mac OS X’s slice shrank a bit last month in the latest Net Applications survey of operating system market share. The iPhone’s share growth, meanwhile, continues to outpace every other category except “Other.”

As Net Applications measures it (more on its quirky methodology below), the Mac’s market share dipped to 7.46 percent, 1.45 percent off its January record high. Apple’s (AAPL) iPhone, meanwhile, hit 0.15 percent, a personal best, up 7.69 percent from January.

Microsoft (MSFT) Windows in all its flavors continues to dominate, with a 91.58 percent share, up a hair for the month but still off the 93.3 percent it held a year ago.

Net Applications’ monthly surveys sample data from visitors to some 40,000 websites operated by the firm’s clients. As such, the findings are a snapshot of installed base — with a bias toward machines that spend a lot of time on the Net — rather than a month-to-month measure of computer systems sold. The February results are summarized in the table below. The full report can be viewed here.

As expected, Apple (AAPL) had a very merry Christmas, posting the best quarter in its 32-year history, with earnings up 58% over the same period last year. (link) But the good news fell on deaf ears in a market roiled by the broader meltdown.

And the company’s conservative projections for the next three months seems to have spooked investors attuned for signs of a coming recession. Apple’s shares, having closed at 155.64, down 3.5% for the day, plunged more than 12% in after-hours trading. At one point the stock hit 136.75, a four-month low.

If this were any other company, the market’s reaction would have seemed bizarre. Except for sales of its iPods, which have nearly flattened out at 22.1 million units, the company’s results were strong across the product line, beating both Apple’s and its analysts’ expectation.

The company posted revenue of 9.6 billion and earnings per share of $1.76 (compared with the consensus of 9.46 billion and EPS of $1.61). Apple sold 2.3 million iPhones in the quarter that ended in December and 2.319 million Macs, an increase of 44% year to year. (Desktop sales grew 53%, five times faster than the rest of the PC industry, per IDC.)

“The Macintosh business is on fire,” COO Tim Cook said during a conference call with analysts (transcript), noting that more than half of the sales of Macs in Apple’s 204 stores were to new customers.

But Apple is not any stock. The market has come to expect extraordinary earnings growth, especially in the Christmas quarter. Traders instead seemed obsessed with Apple’s forward-looking guidance. Although the company projected sales for the March quarter of $6.8 billion, up 29% year to year from 2007, its projected earnings per share of 94 cents were considerably below Wall Street’s average $1.09 forecast.

Quizzed by skeptical analysts, who’ve been low-balled by Apple’s guidance more than once in the past, CFO Peter Oppenheimer seemed almost apologetic. “We’ll leave the economic forecasting to others,” he said. “We are focused on managing our busines

Piper Jaffray analyst Gene Munster confessed that in his five years of covering Apple he’s never seen anything like the market’s reaction to these earnings. “I talked to one of our technical analysts before the call and he told me that the stock was going down to 130 no matter what results Apple posted,” Munster said in a phone interview. “Something bigger is going on in people’s minds. There’s a feeling that stocks need to go back to their 200 day averages as the market corrects itself. This is not a bullish sign for other tech stocks going forward.”

Apple (AAPL) by all accounts had a terrific holiday season. The Apple Stores were packed, and Macs, iPods and iPhones were shipping in record numbers. On Christmas day alone, Steve Jobs announced at Macworld last week, the company sold 20 million songs.

Then the market tanked, and Apple’s shares, having more than doubled in 2007, went into free fall. As the Dow dropped 10 percent, Apple dropped more than 20 percent, from a record high of 202.96 to just over 161.36 last Friday.

This will presumably change on Tuesday, when the company reports its quarterly earnings. If nothing else, day traders are likely to load up on the stock and it options, anticipating that Apple will easily beat its projected $1.42 earnings per share on sales of $9.2 billion — guidance that was considered uncharacteristically unconservative when it was offered three months ago. The street consensus is now $1.62 EPS on $9.47 billion. Piper Jaffray’s Gene Munster, always the optimist, is looking for $1.73 on $9.73 billion, and as of Jan. 14 was still calling for a price target of 250.

Even Munster doesn’t expect that kind of bounce when earnings are announced after Tuesday’s market close. What he and the other analysts will be tuning in for is the conference call that starts at 5 p.m. ET. (You can listen to the webcast here.) How Apple’s shares behave in the weeks ahead will depend on a handful of key numbers to be revealed in that call. Here are the ones the traders who hang out at The Mac Observer’s Apple Finance Board will be listening for:

• Earnings per share. Beating guidance and meeting the street consensus is a given. The traders here are whispering about $1.80 per share, and even that wouldn’t equal the 73 percent year-to-year earnings growth Apple has achieved over the past four quarters. To do that, it would need $1.94 EPS.
• Forward guidance. Apple tends to be cautious when projecting future earnings, preferring to under-promise and over-deliver. But traders are abnormally sensitive these days to recession signals, and if the company’s forward guidance is too conservative, it could be read as a sign that even Apple is starting to feel the pinch.
• Gross margins. As the AFB moderator who calls himself DawnTreader puts it: “Volume is nice. But high-margin volume is better.” He’s watching how much of each sales dollar flowed to cover operating costs and to the bottom line after manufacturing costs.
• Mac sales. This is the key to the quarter, according to Piper Jaffray’s Munster. “If Apple sells 2.3 million units, it would be a significant positive,” he wrote in a report to clients issued last week. “2.3 million Macs represents 43% y/y growth compared to 28% y/y in Dec-06 and 20% in Dec-05.”
• Deferred revenue. I don’t pretend to fully understand the significance of the tricky way Apple accounts for its iPhone and Apple TV revenue. But this is what DawnTreader says about it: “One of the most important numbers IMHO is the net pick-up in cash exclusive of deferred revenue liabilities. Net income and EPS is impacted by a number of non-cash expenses including depreciation and amortization. How much net cash exclusive of deferred revenue and other liabilities flowed to the balance sheet?” (link)

Got that? Good luck.

How productive are Apple’s (AAPL) retail outlets?

“Out of this world” according to a report issued this morning by Toni Sacconaghi of Bernstein Research. In fiscal year 2007, he estimates, Apple stores generated an average of nearly $4,500 in sales per square foot — a figure far higher than any other consumer electronics or luxury retailer. That’s nearly five times the productivity of Best Buy, for example, one of the most efficient consumer retail outlets, and nearly 12 times that of Saks. Only Tiffany & Company comes close, with sales of $2,750 per square foot. (see charts at right)

The findings were part of a follow-up to the in-depth report on Apple’s retail strategy that Bernstein Research issued a year ago. Since then, Apple has opened 20 new stores (total: more than 200) and reportedly has plans to expand to China, France, Germany and elsewhere.

Among the report’s other findings:

• Mac sales per store grew 26 percent year-to-year in fiscal 2007. Apple’s brick and mortar stores sold an average of 8,000 Macs in 2007, or a “stunning” 21.4 per day.
• Apple Stores boosted the company’s total revenue by at least $1.35 billion (5.6 percent) during the year, with gross margins of 42 percent (versus 34 percent for Apple overall)
• Despite the high gross margins, the stores have somewhat lower profitability than the company overall because of high operating expenses. The average Apple Store has 40 full-time-equivalent employees, double the number four years earlier. All told, Sacconaghi estimates that the retail segment’s operating margin was 16.9 percent for the year, compared with 18.4 percent for Apple overall.

With 1.83 million square feet of floor space to cover, it’s not easy to gather in one place the 600 media representatives who have flocked to Las Vegas for the orgy of marketing excess that is the 2008 International Consumer Electronics Show. But in the press lounge on Sunday, Valleywag’s Jordon Golson found 129 reporters and bloggers (they wear different badges this year), and he used the opportunity to take a survey of what machines they were using.

His count: 94 Windows PCs and 35 Macs (including his MacBook Pro). That’s a 27% market share for Apple (AAPL) — considerably higher than the 7.3% reported in the latest Net Applications survey. The numbers are sure to be even more skewed Cupertino’s way when a different subset of the tech press gathers in San Francisco for Macworld next week.

No wonder Apple gets more than its share of ink — and pixels — in the technology press.

[Photo courtesy of CES]