The e in eMac Means Earnings

by , 8:00 AM EDT, April 30th, 2002

Apple announced the eMac on Monday with the company's usual panache and fanfare. Within minutes of its release, the electronic in boxes of educators and school purchasing agents were filled with notices about the new desktop Macintosh. It's no wonder. The G4-based, 17" CRT desktop Mac is attractively priced starting at $999 and will only be available in the education market.

In the April conference call with analysts, Fred Anderson, Apple's CFO, mentioned that margins would be pressured during the quarter due to the costs of air freighting iMacs and soft margins in the education market.

The 17" G4 eMac at $999 does pose challenges for Apple in terms of maintaining its historically high gross margins on products sold. In a well-written story in The Street.com, Tish Williams looks at margins and the new eMac. In the story she quotes A.G. Edwards analyst Brett Miller and his contention that Apple's lowball estimate on 3rd and 4rth fiscal quarter margins had less to do with issues relating to the new iMac, but much to do with the unannounced eMac.

Apple is incurring the costs of ramping up production on a new desktop computer while at the same time offering the product at an extraordinary price. Two years ago Apple momentarily lost its footing in the education market when it chose to move to an in-house education sales staff at the same time the education buying season began. This logistical miscalculation temporarily gave the education sales crown to Apple's archrival Dell Computer.

In April of last year Apple acquired PowerSchool and its Student Information System software. To date, more than 3,000 schools have adopted PowerSchool solutions. The governor of North Dakota is so impressed with PowerSchool that his office has established an initiative to migrate every school in the state to a PowerSchool system.

This year Apple now offers educators the G3 iMac for budget-minded schools and districts, the new G4 eMac for schools interested in G4 power in a traditional iMac-like design and the new iMac sporting the swing arm and LCD display. The combination of a full slate of hardware products and superb software services such as PowerSchool, positions Apple with its strongest education line-up in years.

Margins will indeed be pressured on the eMac and throughout the education-buying season that extends through the summer. But Apple's aggressive pricing and impressive products makes it hard for even PC market leader Dell to compete with Apple on price in the education market.

In Monday trading Apple bucked the market and moved higher by $.95 to close at $23.96. Investors viewed the announcement of the eMac as good news for Apple and its leadership in the education market.

One of the indirect benefits of Apple's dominance in the education market is increased sales to parents who choose to use the same computer at home their children use at school. While the eMac may indeed pressure Apple's gross margins in the short-term, the new G4 CRT will help Apple increase revenues. As the cost of manufacturing the new desktop comes down, the eMac will also help Apple significantly increase its earnings.

The aggressively priced eMac may pressure Apple's margins in fiscal quarter three and the early part of fiscal quarter four. But the "e" in eMac means higher earnings for Apple six to twelve months from now.

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