Mac Musings

Up, Up, and Beleaguered?

Nov. 16, 2000 - Daniel Knight

Apple has US$4 billion in the bank, increased unit sales by 32% over last fiscal year, and may have the highest profit margin among computer makers - yet their stock has totally tanked because they built a few too many computers.

Okay, more than a few. According to Apple, their surplus was about 11 weeks worth. Looking at their 10-K filing, which shows sales of 4.558 million Macs last year, that means Apple had somewhere around 950,000 Macs on hand when they made the announcement. No wonder they're offering rebates on almost everything - with Macworld Expo just three weeks away, they probably need to make room for some new models.

Looking Back at FY 2000

During fiscal 2000, Apple increased sales in every product line and also launched two new product lines.

Power Macintosh

The Power Mac G4 saw the least sales improvement, growing just 3% during the fiscal year (from 1.296 million to 1.329 million). Since people usually buy a computer of this calibre because they need more power than their older computer, being stuck at 500 MHz has made it harder to justify upgrading from a two-year-old 300-400 MHz G3 Yosemite, especially since G4 CPU upgrades could reach the same level of performance at a far lower cost than a new computer.

iMac

Apple could just about change their name to iMac Computer - the iMac line accounted for 48% of unit sales at 2.2 million iMacs. That was a 22% improvement over 1.8 million iMacs sold in fiscal 1999. I would not be surprised to learn that the iMac remains the #1 consumer computer, especially now that the entry level model sells for just $799 - the lowest retail price ever for any Mac.

The Cube

To see the Cube is to want the Cube. It may not have sold as well as Apple wanted, and most of us may thing it's a bit overpriced, but 107,000 units is nothing to sneeze at.

Between the Power Mac G4, the iMacs, and the Cube, Apple sold 3.63 million desktop systems, up 17% from 3.098 million in fiscal 1999.

The iBook

In addition to the Cube, I consider the iBook new for fiscal 2000 - Apple only sold 6,000 of them in FY1999. Over the past year Apple has moved 545,000 iBooks, outpacing the PowerBook by 42%.

The PowerBook

Despite competition from the iBook, which outsold it, the business class PowerBook held its own and actually increased sales by 11%, from 344,000 to 383,000 units.

Between them, the iBook and PowerBook accounted for 928,000 units, a 165% improvement in laptop sales over 350,000 in fiscal 1999.

Overall, laptops accounted for 20% of Macintosh sales; analysts project the industry will see laptops selling at the 25% level in the coming year.

Beleaguered?

It certainly seems Apple has done everything right. Sales are up, the gross margin is a high 28%, and the installed base is growing.

The problem is, it's not growing fast enough. Whether it's due to the general economic slowdown, recession fears, or the lack of a compelling reason to replace that old computer, Apple entered the current quarter with several more weeks of inventory than they should have.

(Except when introducing new models, they try to keep a few weeks worth of computers in the channel, so maybe 7 of the 11 weeks are above and beyond the normal level. That's still something on the order of 500-700,000 excess units, but it's better than the nearly one million 11 weeks would imply.)

It's not a terrible situation; neither is it a good situation. With rebates on just about everything right now, Apple sales are probably at a decent holiday clip. At the very least, Apple is probably doing better than the scads of Wintel brands thanks to a unique product line, a good reputation for quality, and incredible buyer loyalty.

Still, it's the final 10% or so of sales that make all the difference between a profit and a loss for the quarter. (Do the math: Apple lost $250 million and has about 500,000 excess computers. If they sell for an average of $1,500, that's $750 million. If they had all sold, Apple would be reporting a half-billion dollar profit, not a quarter-billion dollar loss.)

The cause of Apple's problem: overestimating demand by maybe 10% and building accordingly. If Apple had reduced production even 5% for the year, that might have meant a profit during the last quarter and only a few extra weeks inventory today. That's how close things are. If not for the soft U.S. economy, Apple would probably be showing a profit today.

AAPL

Apple will rebound, even if they have to give away the farm during the holiday quarter. Not only will Apple rebound, they will undoubtedly bound higher with new models, a new OS, faster processors, and slowly declining prices. The econoCube is bound to be a bigger hit whatever the price and feature set.

The good is the enemy of the better. In this case, Macs are built well and rarely need to be replaced due to hardware failure. There is also a solid market for CPU, memory, and drive upgrades, which postpone our need to purchase a new Mac. Finally, with the Mac still stuck at 500 MHz (since August 1999!), those near the top end see no compelling reason to upgrade.

Another factor for the Mac savvy - that is, those who frequent the Mac Web - is that November and December are generally a good time not to buy a new Mac. We know Macworld Expo is coming; we anticipate new models and price reductions on old inventory then.

But drop some prices, introduce some new models (PowerBook Pro and PowerBook Lite, please), and finally break past the 500 MHz ceiling, and then you'll see the pent-up demand turn into hardware sales. I'm just waiting for a PowerBook with a 1280 x 1024 screen. When Apple makes it, I'll be the first to place an order, retiring my clone desktop as a network backup server and a print server for my Epson printer.

By the end of Apple's second quarter (Jan-Mar), I suspect they may well have even more than $4 billion in the bank, along with a rejuvenated product line and a lot less inventory stuck in the channel. I also expect my shares of AAPL will finally rise above what they cost me a couple months back.