Apple's $US55m Q2 earnings are double estimates

Apple Computer has reported second-quarter earnings of $US55 million - more than double what analysts had anticipated - and cited strong sales of its Power Macintosh G3 computers. The result compares to a loss of $178 million for the same period last year. While revenues are expected to be flat in the third quarter, they should rise in the fourth quarter as Apple brings out a new PowerBook portable and a new 'low-priced' consumer desktop system, according to CFO Fred Anderson.

Apple Computer has reported second-quarter earnings of $US55 million, or 38 cents per diluted share -- more than double what analysts had anticipated -- and cited strong sales of its Power Macintosh G3 computers.

A year ago Apple lost $708 million, or $5.64 per share. Not including non-recurring charges related to restructuring and the acquisition of Next, Apple's loss for the second-quarter last year was $178 million. It returned to profitability in the first quarter of 1998, reporting earnings of $47 million.

And while revenues are expected to be flat in the third quarter, they should rise in the fourth quarter as Apple brings out a new PowerBook portable computer and a new "low-priced" consumer desktop system, said Chief Financial Officer Fred Anderson in a conference call.

"We will have a lineup in place to show meaningful (revenue) growth by December," he said, adding that operating expenses will continue to be trimmed and gross margins will be about 23% during the next few quarters. Gross margins for the second-quarter were 25%, up from 19% a year ago. Anderson said keeping channel inventories down contributed to the gross margin increase.

Meanwhile, Apple has put its search for a new chief executive officer on the "back burner," according to Anderson. Interim CEO "Steve (Jobs) is our leader. He's recognised as really turning the situation around here over the last nine months," Anderson said. "He's making a difference, and for us it doesn't matter whether he has 'interim' in front of his CEO title or not."

Apple board member Larry Ellison, chairman and CEO of Oracle, said today that he has not interviewed a CEO candidate for some time. But Ellison also said Jobs has indicated he does not want to stay permanently as Apple's CEO.

"Steve is torn," Ellison said. "He doesn't want to stay, but he loves Apple," Ellison said during a question and answer session at Oracle's headquarters today.

Jobs was not on the conference call, but was quoted in the company's statement announcing the earnings report. "Apple had a great quarter, no question about it," Jobs said. "We are very pleased with the strong demand for our Power Macintosh G3 computers, which accounted for 51% of all units sold."

The conference call had a congratulatory tone as analysts appeared somewhat stunned by Apple's strong profit. A median estimate of analysts polled by First Call projected Apple earnings for the second quarter to be 16 cents per share.

Revenues for the most recent quarter, which ended March 27, were $1.4 billion, down from $1.6 billion in the prior year's second quarter. Revenues declined $196 million partly because computer prices in general are dropping and partly because Apple curtailed production of many of its imaging and printing products, according to Anderson.

While revenues were down, unit sales were actually up, which an analyst said is more significant. "Usually this is their weakest quarter of the year from a unit sales perspective," Kevin Hause, senior analyst at IDC, pointed out.

"They've stabilised themselves both financially, as well as from a demand standpoint. I think this is a very good sign for their long-term health," Hause said. "I would caveat that by saying that this shows that they've stopped the bleeding, but they've still got to mend their wounds."

Apple's first priority will be to entice existing customers to upgrade to new Apple products before the company attempts to increase its marketshare by snaring new customers, Anderson said. The company's installed base has grown to 28 million Macintosh systems since 1984, with 5.6 million in consumers' houses alone, he said.

Apple will use "good advertising and promotion and great products" to get its "ripe" install base to make upgrade and replacement purchases, Anderson said. "I don't think we have to drive a lot of new customer business to return to growth because of the large installed base."

But Hause disagreed.

"Long term, the biggest obstacle for Apple is maintaining and growing the Macintosh community," Hause said. "That takes more than just selling into the installed base."

Apple didn't see much of its sales eroded by cloners, Anderson said. Apple's licensing agreement with the only remaining cloner, Umax, expires in July. He refused to discuss whether Apple and Umax are negotiating a new contract.

Online sales, through Apple's web site, accounted for 1% to 2% of total revenues, or $16 million. The company currently offers G3 products built-to-order, but plans to offer that service for products geared for higher education, and eventually to the kindergarten through 12th-grade market, according to Anderson. Just over 3,000 systems were built-to-order last quarter, he said.

International sales accounted for 50% of total revenues. Revenue increased in all regions except Asia-Pacific, where an economic crisis is hitting vendors across all industries. Revenues for units that shipped in Asia-Pacific declined 22% to $76 million; but rose 19 percent in Europe to $343 million; 9% in the Americas to $751 million; and 6% in Japan to $191 million.

Meanwhile, Apple shipped 650,000 units in the quarter, up 8% from a year ago.

During the quarter, Apple reduced its workforce by 200 to 300 employees, ending with 9,049, Anderson said. Of those remaining, 170 have received lay off notices. A year ago, Apple employed 13,116.

Apple has earmarked $133 million for future severance payments and other costs related to cutting projects and contract workers, Anderson said.

Apple stock closed at $27.43, up 50 cents on the Nasdaq stock market.

The company's next shareholder meeting is scheduled for April 22.

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