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
these 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. 
