Apple Says R&D Is Key To Raising Market Share

by , 10:00 AM EST, March 10th, 2003

Apple Computer Chief Financial Officer Fred Anderson said last week at an investor's conference that the company's investment in research and development together with being more successful in selling direct to consumers will be key in expanding the companies' share of the computer market from 3.5% to a goal of 5%.

Speaking at the Morgan Stanley Semiconductor & Systems Conference last Tuesday, Anderson said the company is poised to increase market share through a variety of strategies focused on R&D and retail sales. "I'd much rather have (our) money being spent on R&D that is going to enable us to come out with even a greater flow of innovative products, and on our Apple retail stores, which enables us to gain greater control, then spending it on other infrastructure areas," he said.

For the trend to continue, Anderson believes its efforts in opening 53 retail stores in the US and training sales people at other retailers such as CompUSA will be key to selling more Macs. "Apple is now firing on all cylinders in the consumer market," he said. "The strategy in the consumer market is working...We are gaining more and more control of the point of sale for the consumer market, not only through the Apple retail stores, but also through our Apple sales consultants," Anderson said.

In addition to a stronger retail sales strategy, Anderson said R&D would drive product innovation and sales in the future. "We are now at a level that I believe can provide us with hardware and software products to drive sustainable growth going forward," he said.

Anderson said R&D spending increased 42% from US$314 million in 1999 to US$446 million in 2002. Having spent US$121 million on R&D in the fiscal first quarter of this year, he believes Apple is on track to spend US$500 million on R&D this fiscal year. Broken down R&D costs through the fiscal first quarter, Anderson said Apple spent 49% for hardware, 30% for software and 21% for applications.

Reiterating comments he made two weeks ago at the Goldman Sachs Technology Investment Symposium, Anderson said a "good intermediate" goal would be to reach 5% market share from 3% today.

Anderson said he believes, "Apple has tremendous operating margin leverage opportunities because it still has in place the infrastructure that supported US$8 billion in revenues back in fiscal 2000." Anderson feels that if Apple can gain market share and grow revenues back towards the US$8 billion level, each one percent of market share is worth about US$2 billion in revenues. "If we could drive the company back up from 3% to 5% market share, that would drive the company's revenue from about US$6 billion to US$10 billion. You can have significant operating margin leverage driving it back, hopefully closer, to where it was in fiscal 2000."

For fiscal year 2000, Apple generated revenues of US$7.98 billion and net earnings of US$786 million. In 2002, Apple reported net earnings of US$65 million on revenues of US$5.74 billion.

On other fronts, Anderson said Apple is making progress in the education market, despite losing market share to Dell. A number of initiatives make Apple hopeful they can stabilize education market share and "perhaps begin to regain market share in the next few years," Anderson said.

In the past two years, Apple has initiated a number of programs to spur educational sales, ranging from an aggressive inside sales program focused on medium to small school districts, to larger programs to get laptops in the hands of teachers and students in Maine."

In the graphic professional - or 'creative market' - Anderson said that despite Apple's dominance, sales are substantially off. For things to improve, Apple believes the economy must fist rebound, "significant increases in performance" of the Power Mac line must happen, and QuarkXpress for OS X must be released. "In our Power Mac line, we're also committed to more aggressive pricing as evidence of what we did late in January, so we can have even stronger price performance in our Power Mac line going forward. We're very focused as a company in taking the actions necessary to re-build the sales volume on our Power Mac line," he said.

Anderson gave further details on the success of its online sales, saying the online Apple store makes up a "little less than 10%" of all sales worldwide.

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