Detailed Analysis - Apple Warns: Inventories Still Growing, Lops 20% off 2001 Revenue Forecast

by , 12:10 PM EST, December 6th, 2000

"We were simply not prepared to be hit by three major problems simultaneously," said Steve Jobs, noting an unusually weak consumer PC market, a global economic downturn, and "problems of our own making" combined to derail Apple's earlier forecasts for a quick resolution to Apple's falling unit sales.

AAPL opened lower today in early morning trading.

Apple warned shareholders yesterday that it will not meet its already much lowered forecasts for fiscal Q1 2001, resulting in the company's first quarterly loss in 3 years.

On September 28th when Steve Jobs warned that the company had hit a "speed bump" in sales, Apple lowered its revenues forecasts for Q4 2000 to $1.90 billion from $2.1 billion. Apple's chief financial officer, Fred Anderson, blamed poor education sales, a business slowdown in all geographies and a tough start for G4 Cube sales.

When Apple reported 4th quarter earnings in mid-October, management announced the holiday quarter was stuck with 8 weeks of backed-up inventory still in the sales channel, which has to be cleared before Apple can even start to rack up new sales for the December quarter. At that time Apple dramatically lowered revenue forecasts for Q1 2001 to $1.6 billion.

Yesterday, Apple confessed in a conference call with financial analysts that it now expects only $1 billion in sales and a loss of $225 million to $250 million —excluding gains from investments — when the company reports earnings on the current quarter ending December 30.

Fred Anderson now believes, "that the market slowdown is likely to be more than a quarterly phenomenon." In light of continued weak sales going forward, Apple lowered its sales forecast for all of 2001 from around $8 billion to $6-$6.5 billion, but anticipates returning to profitability in the second through fourth quarters of the year.

Inventories increased in November

Apple noted the usual sales increases the company counts on November never materialized this year, pushing inventories even higher from the previous 8 weeks overhang to a whopping 11 weeks — more than twice Apple's target. Nevertheless, Steve Jobs said the company is sticking to its goal of reducing inventories to the standard 5 weeks worth by the end of December, that means selling at least 250,000 Macs already in the channel over the next 25 days.

If Apple does clear the channel by December 30th, then it will effectively have sales of $1.5 billion, although only $1 billion of that will count towards this quarter's ledger.

Even with a 20 percent reduction in revenues for 2001, Apple said it can remain profitable. However, Mr. Anderson warned that their cautious estimates for the year could result in the opposite sort of inventory problem by next holiday season. "We can manage the business effectively at that level and be profitable," Mr. Anderson claimed. "If demand picks up beyond that level, we'll have to respond to order backlogs, but wouldn't that be a nice position to be in."

Part of the earnings shortfall this quarter is due to $115 million in charges for canceling guaranteed orders for PC components. Apple said it will spend an extra $135 million on sale promotions to help liquidate the backed-up inventory. Meanwhile, G4 Cubes sales, while still well below Apple's original goals, "have stabilized at a respectable level, " said Mr. Jobs.

Past errors, future products

Mr. Jobs also said Apple would think differently in the future. For instance, he admitted Apple "missed the boat" by excluding a CD-RW option for Mac sytems and said that the situation will be remedied soon. Mr. Jobs also indicated that faster Macs are only a few months away, although that admission is surely not going to help speed the liquidation of aging inventories.

Perhaps most interesting to shareholders, who are desperately trying to grok what Apple's future product strategy might be, Mr. Jobs said Apple has two new software products in the pipeline and promised more product information at Macworld Expo in January.

As a measure of how starved Apple investors are for some guidance on just how and what Apple plans to do to turn its business around, a Macworld article headlined "Apple Profits Down, but New Products on the Way", attempts to read between the lines of Apple's latest warning for any hint of a coherent product strategy going forward.

The Mac Observer Spin:

If Apple's inventory increased from 8 to 11 weeks in November, it's hard to imagine how Apple is going to liquidate 6 of those inventory weeks in the next 25 days, since Cupertino is obviously working against several negative trends, including a global economic slowdown. This is the third warning in as many months. Apple's management has established a trend of underestimating the difficulties they face. Usually, with such a record, it's a wise investor who assumed that more bad news is in the pipeline. Don't be surprised again when Apple announces earnings on January 17 only to say: Oh yeah, btw, we still have some inventory problems. The second fiscal quarter is never strong anyway, this year it could be downright dismal for shareholders, while being a boon to consumers who find they can pick up a Macs on the cheap.

At this point, investing in Apple is a matter of faith and fundamentals. Faith that Apple really does have some killer new products in the pipeline which will rescue the company by next holiday season. Fundamentally, Apple has about $11 per share in the bank, meaning that at today's price Apple's entire business is being valued almost as a penny stock by the market at about $3.75 per share. Apple's market capitalization is almost less then the $4 billion in cash the company has in the bank and certainly less than the company's projection for $6 billion in revenues this fiscal year.

Apple