Profitability is around the corner, say Apple execs

Despite a US$120 million first quarter loss, executives insist Apple Computer will be profitable again by the end of September under a restructuring plan to be developed over the next few months.

Despite a US$120 million first quarter loss, executives insist Apple Computer will be profitable again by the end of September under a restructuring plan to be developed over the next few months.

"Based on the first quarter results, we hope to return to profitability by the fourth fiscal quarter of 1997 rather than the previously expected second quarter," Fred Anderson, chief financial officer, said in a telephone conference call. He said it was too early to say whether the restructuring plan would entail manufacturing outsourcing or a reduction in the firm's approximately 13,300 employees.

The $120 million loss, or 96 cents per share, on revenues of $2.1 billion for the quarter that ended December 27, 1996, compares to a loss of $69 million, or 56 cents per share, on $3.1 billion in revenues in the first quarter a year ago. International sales comprised 56 percent of the company's revenues.

In the fourth quarter of 1996, Apple reported a profit of $25 million, or 20 cents per share. Apple revised its yearly break-even revenue target from $9 billion to $8 billion. Apple said earlier this month that it would likely post a loss as high as $150 million.

Apple executives attributed the huge loss primarily to "sluggish" sales of Performa consumer computers in the United States, as well as an inability to meet the demand for PowerBook laptops. In addition, gross margins were down and operating expenses, which were $124 million, were up. Apple is targeting reducing operating expenses by $100 each quarter once the restructuring plan is in place, Anderson said.

Apple sold 90,000 fewer Performas, or 35 percent less, in the U.S. than it had anticipated and ended up with a $200 million backlog for PowerBooks, Anderson said. The Performa line represented about 30% of Apple's total unit volume for the quarter. In addition, sales to business customers in the U.S. were down 15 percent, he added.

"Maybe we missed on the entry-level channel," at the $1,000 price point, Anderson speculated. "We didn't get the volume at the low end of our Performa product line that we expected."

Market research firm International Data Corp. estimates that Apple sold about 170,000 Performas in the U.S. during the quarter. If Apple had met its target, sales would have been boosted more than 50 percent, said IDC analyst Eric Lewis.

"I think it's a combination of poor pricing moves and late introduction of product," Lewis said of Apple's recent financial woes. "The U.S. market in retail PCs was sluggish, especially at the high end and that hurt them. But this is also a sign that potential customers were worried about the future of the Macintosh and some of them stayed away."

Lewis speculated that some Mac clone makers may have picked up some of Apple's shortfall in sales.

As a result of the poor Performa sales, Apple was forced to cut prices and offer rebates that adversely affected gross margins, the company said. Gross margins were 19 percent during the quarter, compared to 15% for the quarter prior and 22 percent for the same period a year ago. Gross margins should be about 20% in the next quarter, Anderson predicted.

The good news is the company has $1.8 billion in cash and is improving its inventory management, according to Anderson. "Additionally, we saw a 15 percent sequential increase in our high-end Power Macintosh sales," he said.

"Despite the recent quarter's loss, we are confident that our three-year transformation plan is sound and we remain focused on executing that plan," Chairman and CEO Gilbert Amelio said in a statement.

Meanwhile, the planned acquisition of Next Software Inc. should be completed by mid-February, Anderson said. That will involve a cash outlay of $380 million during the second quarter, with about 75 percent of the purchase price written off in that quarter. The impact on earnings won't be seen until fiscal 1998.

Rhapsody, the next-generation MacOS that will incorporate technology from Next, will be released to developers mid-year with a general release at the end of the year that will work on PowerPC and support OpenStep, said Ellen Hancock, Apple's chief technology officer.

In the future, Apple will work to bring to market technology including extensions to multimedia support with the QuickTime media layer, Internet support and advances in the server and mobile device product lines, according to Hancock.

"They need to focus pretty quickly now on a couple of markets to get some momentum," said Scott Miller, a senior industry analyst at Dataquest Inc. "They may have to step away from a couple of businesses ... the problem is they're running out of resources.

"The question is how long can they keep losing money, restructuring, stepping back and reassessing?" he said. "I don't think much longer."

Apple stock was down .625 to 17 1/4 at the close of trading today on the New York Stock Exchange.

Apple, based in Cupertino, California, can be reached on the Web at http://www.apple.com/.

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