Apples, Kids, & Attitude
How?
How could Apple Computer, a once beleaguered, but newly successful manufacturer of PCs, introduce a stellar new product only to induce anger in its loyal customers, have its stock nose-dive, and cause almost all its inventory on store shelves to be depleted only to rebound in one month’s time?
Folks, it’s a story for the record books! With about a month remaining in its fiscal year, Apple’s iCEO, Steve Jobs, introduced a new line of high-performance PCs to an enthusiastic audience of publishing professionals. A few weeks later, Apple announced that it could not deliver many of the new PCs to eager customers until after the new fiscal year began. This caused Apple to revise its earnings estimates for the quarter and the fiscal year. As a result, Apple’s stock lost about 25% of its total value.
Soon after the new fiscal year began, Apple announced it wouldn’t be able to meet demand for its new computers as they were originally configured. The only recourse Apple had was to offer slightly slower computers at the same prices as the original ones. This action infuriated long-term customers who wanted what Apple offered, but was unable to deliver. Wall Street responded favorably to the news that Apple had found a way to solve its product shortage problems and at press time the stock had recovered almost all of its recent losses.
Timing the release of the new computers so close to the end of the calendar quarter and Apple’s fiscal year may have been the company’s biggest mistake. Releasing new products at the end of calendar quarters has helped Apple’s end-of-quarter inventory levels because supplies on new products are initially constrained. It has also benefited earnings because there are higher margins on new models than older ones. This time events didn’t work in Apple’s favor. The quarterly period that ended in September was also the end of Apple’s fiscal year, which only compounded the problem. What’s recorded for financial posterity are only cold, hard numbers, not several pages of explanations. Apple’s earnings for the fiscal fourth quarter and fiscal year fell below analysts’ expectations because of the delays in shipping G4s.
It has taken Wall Street several weeks to realize that the G4s that weren’t sold in the last fiscal year will be sold in the new fiscal year. Apple Computer finished the fiscal year with $500 million more in unfilled orders than normal. The orders haven’t gone away; the sales will be booked in October rather than September. Many of the orders will be filled with computers that have a slightly lower clock speed than originally planned. All in all it has been much ado about nothing.
Apple finished the fiscal year with more than $3 billion in cash and cash equivalents and has one of the strongest balance sheets in the PC industry. With $500 million in additional unfilled orders, the first quarter of the new fiscal year should set company records for unit shipments and profit growth.
If you think the recent G4 snafu means that Steve & Co. have lost their marketing edge, please remember that this team recently changed the name of Motorola’s chip sub-architecture from AltiVec to Velocity Engine. Which name do you think will sell more computers to the masses?
In ATPM 5.01 I provided readers with a list of predictions for 1999. In ATPM 6.02 I will list my new predictions for the year 2000. I’d like to close this column by reviewing a few of my favorite 1999 predictions.
Apple’s soon-to-be-released consumer portable will be positioned as an entry-level consumer machine. While attractive to students and others who would like the convenience of mobile computing, many of the features desired by PowerBook users will be absent. However, it will compete very well with low-priced notebooks and contribute to Apple’s renewed presence in the consumer marketplace.
No one can argue with me on this one!
Gaming will be an important part of Apple’s focus in the consumer market. Apple’s hardware will continue to receive game-friendly enhancements. High-end G3 chips and other hardware enhancements, along with the forthcoming release of the G4 processor and Mac OS X, will entice developers to write games specifically for the Mac platform. By the end of 1999, the Mac platform will have the best gaming machines available to the general consumer.
Game developers have been embracing the Mac platform in droves. While the platform lags behind Windows in terms of total titles available, the better games are being ported to (or written for) the Mac. Watch for a renewed focus on games at the upcoming Macworld Expo.
The Imatec suit will either be dismissed by the courts or settled out of court with little or no impact on Apple’s financials. Imatec’s PR machine is far more impressive than its legal claims.
I continue to believe this suit will either be settled out of court for a nominal sum or be adjudicated in Apple’s favor. I’ve heard nothing about Imatec outside of its case against Apple. Imatec appears to me to be nothing more than a little company with too few clients and too much time to waste on what I consider to be frivolous litigation. The question might be how much Apple is willing to pay them for the patents they claim Apple has infringed. So far it doesn’t look like much.
No matter the formal outcome of the Justice Department’s case against Microsoft, the trial will change the way that company does business. Its hold on the OS market will begin to loosen and PC manufacturers will be emboldened to negotiate better licensing terms and rates. Java, Linux, and Mac OS X (among other technologies) will begin to erode Microsoft’s OS clout. Fears of a “Pandora’s Box” being opened by the decline of Microsoft’s influence on the OS market will prove to be unfounded. The fallout from the Justice Department’s suit will force Microsoft to “play ball” with other software and technology companies or run the risk of being “side-stepped” by the institutional customers that it covets. The days of Microsoft’s stranglehold on its customers will come to an unceremonious end.
In my view Microsoft is moving fast to break its own dependence on Windows revenue. Either by court decree or market forces, Microsoft will morph itself into a much different company.
Now that Apple has stabilized its revenue base and simplified its product line, the company will begin using its substantial cash resources to acquire needed technology. Apple’s R&D efforts will focus on Mac OS X, QuickTime, and revolutionary hardware designs. Other technologies needed to bring new products to market will either be licensed from other sources or gained through acquisition.
Apple acquired much of the technology needed to produce Final Cut Pro, and recently made a large investment in the company that manufacturers its TFT screens. Watch for more acquisitions and investments in 2000.
The first quarter of 1999 will see a significant slow down in consumer spending. By the end of 1999, U.S. economic growth will come to a halt. The change in economic times will precipitate a dramatic restructuring of the PC retail market. Manufacturers of brand name PC products will move aggressively to establish direct-to-consumer relationships. With the exception of its consumer line of products that will be available through a variety of retail chains, Apple will market most of its products through “value added” re-sellers, as well as over the Internet. The Apple Web site and Apple Store will become primary sources for product sales and consumer information. The added margin from direct-to-consumer sales will be an important part of Apple’s future earning growth.
I was off by 365 days on the economy. The rest of this prediction is already coming true.
For the current fiscal year (period ending September 1999), Apple will achieve $8 billion in gross sales. Net profits for the fiscal year will meet or exceed $600 million. The company will continue to increase its consumer PC market share and regain sales and sales momentum in the higher education market.
I was off by $1 million on profits (pretty cool, huh!) and $1.9 billion on sales. Apple’s gross margins were higher than I expected, and product prices were lower than I ever dared dream. Apple also moved aggressively to eliminate ancillary products that contributed to sales, but nothing to the company’s bottom line. A spectacular year despite the company’s September difficulties.
Based on my sales and earnings projections, I predict that Apple’s share price will end the fiscal year above $70 per share.
Immediately prior to the mid-September profit warning Apple shares closed just above $80 per share—an excellent performance for the fiscal year.
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I’ll be back in February. Until then, Happy Thanksgiving, Merry Christmas, and Happy Chanukah from my family to yours!
“Apples, Kids, & Attitude” is copyright © 1999 Robert Paul Leitao,
rleitao@atpm.com.
Also in This Series
- Good Morning America, How Are You? · October 2003
- Martians in the Manholes · February 2001
- The Golden Touch · May 2000
- Three Kids and an iMac · February 2000
- How? · November 1999
- Apples, Kids, & Attitude · August 1999
- Play Ball! · May 1999
- A Time For Change · February 1999
- New Year, New Times · January 1999
- Complete Archive
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