Taking Back the Market

Poor First Quarter, but Prospects Look Better

Tim Nash - 2002.01.18

Apple hit the expected $0.11 earnings per share (EPS) due to strong margins of 30.7% but narrowly failed to reach the guidance sales figure ($1.4bn) for the second quarter in a row. As usual, cash and short term investments rose and are now nearly $4.4bn. Online sales rose to 43% of the total. When combined with retail (4%) Apple does nearly half of its business direct.

Compared to Q4, sales of iMacs (-21%), Power Macs (-15%) and, surprisingly, iBooks (-26%) were all lower. Only PowerBooks, spurred by lower prices and the combo drive, beat the trend with a 104% increase.

Education buyers are said to be deferring purchases because of funding worries. This is likely to continue until the economy rebounds. (Even the large sale of iBooks to Maine has a get out clause if funding is not approved in future years.) Although this has not led to contracts being canceled, 26% of sales last year were into education, so there could be problems in future quarters.

Lower sales were also attributed to the economy and to speculation about the iMac replacement, which is finally with us.

When the year-on-year figures are compared they look more promising, at first glance. $38m profit against a $195m loss, which ended up dooming the whole year to loss. However last year's Q1 unit sales of 659k didn't include the 300k units (source: Apple's 10K) which were sold after being stuck in the channel from the end of the previous fiscal year. Once these are added back in, unit sales have slid from 959k to 746k.

Q2

This is looking considerably more promising. Apple's guidance for revenue is $1.5bn but expects EPS to stay flat at $0.11 - both of new iMacthese are higher than the previous First Call consensus. New iMac orders over the last week were stronger than any product launch since the iMac was first introduced. The new models are expected to be over half of iMac sales, with the production ramp-up determining how much more than half and the size of the backlog at quarter end.

The only real negative: Margins will be impacted from higher component prices for memory and the LCD screens, and from Apple flying in the new iMacs.

Again the robust pipeline of new products was mentioned. Providing this includes launching the new Power Macs in Q2, sales of the other product lines should be strong too.

Apple Retail Stores

The division lost $8m on sales of $48m once full costs are taken into account. Factoring in the loss of interest on the $100m+ investment, this must have reduced profits by over $9m.

With 19 stores opening during the quarter there was, according to Fred Anderson, an average of 18 stores operating. This would lead to an annualized sales figure per store of over $10m. Against this simple projection is the fact that the December quarter is easily the busiest in retailing. For the projection: All the stores and the division should be more efficient with more experience, and the product line will be more compelling for the next few quarters.

Over 800,000 visited the stores in December, but only 14,000 systems were sold during the quarter. The conversion rate was low, and this is being addressed by "strengthening the sales culture." However, Fred does not expect the conversion rate to reach that of CompUSA, as many of those wanting to move from Windows will want repeat visits to look at compatibility issues, etc. As it was, 40% of those system sales were to people without a Mac system, and most of those were converts from Windows.

No hard number for new store openings was given for the rest of the FY. However, Apple is currently advertising for staff for eight new outlets; Costa Mesa and LA Farmers Market (CA), Wellington (FL), Atlanta (GA), Durham (NC), Manhattan and Syracuse (NY), and Short Hills (NJ). These will raise the total to 35.

Apple remains very bullish about the retail stores and, in my opinion, rightly so. Once the initial problems have been worked out, the stores should move towards break even and help to grow market share. To this end, quarter-on-quarter improvement is expected for the rest of this year.

Store within a Store

The CompUSA initiative with Apple sales people is working well and adding to "beyond the box" sales of software, etc. So Apple is looking to increase the number of locations and to replicate it with other partners, particularly in Europe. It appears the UK pre-Christmas initiative with PC World must have shown promise.

Futures

The goal for the next few years is to return to the $8bn revenue of FY2000. Even then Apple won't be back to an operating margin of 8-9% because of heavier expenditure on R&D. Nevertheless, it should be making considerably more than the $92m profit just announced by Compaq on revenue of $8.5bn. LEM

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Tim Nash is a Director of WattWenn which has a new approach to scheduling the production of TV and movies to make the most of budgets. The views in this article are his own and are prejudiced from spending more years working for computer companies than he cares to remember.

Tim lives with his wife, her website on the area ariege.com, two daughters, a cat, and a dog in the French Pyrenees. He lapsed for a while after the Apple II, but became a Mac fan when his wife introduced him to the Macintosh IIsi. If you find his articles helpful, please consider making a donation to his tip jar.

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