|by Wes George
Apple's Business Operations: It's a Beautiful Thing
July 31st, 2000
For Apple shareholders the recent MACWORLD convention must have been the most reassuring one since the introduction of the iMac in 1998, or perhaps even better than that. It may have been the best MACWORLD ever. There certainly were more people there than ever before and more developers planning new Mac products too. But it was what Apple's leaders said about the company's operational strengths and strategies which revealed that Apple is still in the early stages of perhaps a decade long expansion.
If I were a financial analyst, the recent MACWORLD would have inspired me to place a strong buy recommendation on the company's stock for a slew of reasons.
But first a bit of recent history.
The iBook was released to a roar of approval in July of 1999, about 13 months after the iMac was announced. During Steve Jobs keynote address at MACWORLD that summer he confirmed that Apple was proceeding with a "four quarter" strategy -- a consumer desktop (iMac), a professional desktop (Power Mac G3), a consumer portable (iBook) and a professional portable (Power Book). Apple was going to limit itself to the production of four families of computers, thus implying that Apple's gold-medallist design team had completed its magnum opus and all that was left for the Apple faithful to look forward to was an endless string quartet of upgrades directed by Moore's law.
But no one complained, after all, the day when Apple, under Gil Amelio's direction, had twenty-something different models and months worth of backed up inventory rotting in warehouses were still recent memories. A four cornered strategy at the moment seemed a refreshingly different tune.
By December of 1999, there was evidence that the PC vendors had begun to realize the price war at the low end of the desktop PC market was really the beginning of the end for their hallowed hardware business models. The concept of beyond-the-box strategies began to gain currency within the PC industry and the financial analysts.
Furthermore, the concept of "information appliance" began to take hold with the pundits. Apple fans must have been perplexed to hear visionary PC futurologists musing about a world where easy-to-use devices would log seamlessly on the Internet, requiring none of the savvy it takes to maintain Windows and (gasp!) some devices might even be wirelessly portable. It was as if the info device pundits had just stepped from a parallel universe where Jobs had never met Wozniak.
Few outside the Mac faithful would admit that Apple already had hugely successful information appliances on the market. The iMac was introduced on May 6 1998, and iMac sales were driven largely by the "killer app" of the World Wide Web. In reality, Apple had a beyond-the-box strategy before the info device buzzcept was even coined!
By MACWORLD San Francisco in January of 2000, the financial analysts were restless. A tsunami of change was looming on the horizon for the PC manufacturing industry. Gateway, Compaq, HP and Dell all realized that in fundamental ways their business models would have to change to avoid decelerating growth rates. Everyone was expecting that Apple would have to see things in a similar light. But instead, Jobs' keynote address in January of 2000 was all about the distant and vague Mac OS X and the iTools Internet strategy that was notable only for its gradualistic approach. For the moment the insanely great Apple appeared to be exhausted and resting on its laurels, a precarious position in an industry were product cycles are measured in days.
Then came the great silence of January to July. Not a peep slipped out of Cupertino as to what the company was up to, unless you were developer interested in the evolutionary details of OS X. Although Phil Schiller did take it upon himself to tell us what Apple wasn't up to: No handheld devices are in the works, he claimed. Perhaps, a year ago this anti-product announcement wouldn't have been of concern for investors, but the PC industry was no longer in a steady state.
The PC industry's lifelong desktop strange attractor was -- and still is -- breaking down. PC vendors were flying off on various strategic phase shifts towards something, anything, but more beige boxes. Apple was unique among the PC vendors for its apparent lack of concern over the swirl of change engulfing the industry. Meanwhile, the iMac was finally entering a late stage in its product life cycle, or so it seemed.
In June, Microsoft unveiled its grandiose vaporware scheme to enforce a Pax Redmond over the entire Internet. The arrogant company even appropriated the very name of the Net itself for its own! But what is relevant to this article is that Microsoft's bet-the-company scheme paints a rather detailed picture of the software giant's plans for the rest of the decade. The contrast to Apple's stubborn muteness on its future was nerve racking.
In fact, going into this MACWORLD the most solid information shareholders had on Apple's strategy was pretty ancient and a bit grim. We knew Apple had a four quarters' strategy and that all the quarters were filled. We knew that Apple said no handheld device was on the way. We knew that Apple had completed deep cuts in its research and development departments, which jived with the completed hardware strategy and apparent lack of major new initiatives. We knew OS X was coming, someday in the distant future, but too far away to be more than a wisp of a hope. We knew the Internet strategy was too safe to be anything more than a foundation for something greater later. We also knew the company was financially healthy with huge cash reserves but the future could only be as big as Apple's imagination.
Of course, the Mac Faithful never lost faith, however about 70% of Apple's outstanding stock is held by institutions who, in general, can't afford to be so sanguinely self-assured as the Mac Faithful. Apple's silence has not made it easy to defend the stock in debate with those who would be skeptical.
Saved by MACWORLD
MACWORLD NYC July 2000 has rendered all the above ancient history. The advent of the G4 Cube has revealed the four quartered hardware strategy as merely an elegant ploy to obscure Apple true intentions from her rivals. Surely, the new product visualization process is always an ongoing cycle at 1 Infinite Loop. Even Shiller's emphatic claim that Apple has no handheld device in the works seems to be a diversionary tactic.
Indeed, all of Apple's chief architects 'fessed up at MACWORLD that many new products -- hardware, software, and online services, are in the works at Apple. Apple's world-class design team will never go lacking for a concept to exercise its magic upon.
Just as importantly Apple's leaders held a series of interviews with analysts now posted in the QuickTime format at apple.com, which explained in healthy detail just what Apple's goals are and how the company is executing its business. I can't say enough about how grateful Apple's shareholders are to the company for deciding to release these thorough explanations of Apple's financial reality. What a change from the dead silence of the recent months!
I transcribed much of what Steve Jobs said in a Q&A session after the keynote address. But the level headed and extremely professional presentations by Tim Cook and Mitch Mandich are perhaps even more reassuring than Mr. Jobs' visionary ramblings. Mr. Cook and Mr. Mandich revealed in no uncertain terms that Apple is absolutely the best-positioned PC manufacturer in the world for continued strong growth. Apple has turned its business around and is now the industry leader in manufacturing productivity and operational efficiencies. That in itself is big news to many investors who still remember when Apple was trailing the PC pack in execution.
For instance, Tim Cook, Apple's VP of Operations, revealed that Apple is the first PC vendor in the world to seriously target zero inventory levels. He mapped out Apple's increasingly tight-as-a-drum operations in his presentation to analysts on July 19th.
In 1998 Apple began to measure inventory in days instead of dollars. At the time, Apple averaged about 30 days of inventory stacked in warehouses. By 1999 Apple had reduced that to 2 days, then 1 day, and for the last two quarters Apple has shaved inventory down to 10 hours.
The benefits to Apple's bottom line are immense and prescient of the phase shift going on the PC industry. Large inventories in a deflationary PC market kill the profit margin. Like fruit on your grocer's shelves, the half-life of a PC is measured in days. Inventories also delay product introductions.
Apple rules the PC industry in inventory efficiencies. Compaq has 30 days of inventory rotting in storage, much of it the company will eventually have to eat. Gateway has 12 days. Dell, the company that once knew how "e" works, has a lame 7 days of inventory.
Mr. Cook pointed out that Apple's current 10 hours of inventory translates to $5 million tied up in stock. But if you look at what that number would be if -- like Compaq -- Apple had 30 days of inventory on hand, it would mushroom by 80 times to $400 million, thus consuming a big hunk of Apple's annual profits. One can only imagine how many billions of dollars the Goliath Compaq is hemorrhaging because of their inability to control inventories.
Apple is also way on top of something called "velocity" or the speed at which Apple delivers products to the customers. Two years ago, Apple shipped 5% of its non-customized orders on the same or next day the order was given. Not bad by PC vendor standards, but dismal according to the goal Steve Jobs and Tim Cook were aiming for. By the fourth quarter of last year, Apple had increased that number to 20% shipped on the same day. By last quarter, the company was shipping 75% of standard orders the same day or next. Mr. Cook's ultimate goal is nothing less than 100% shipped worldwide same or next day.
Custom configuration orders obviously take more time to fill, but Apple's increase in efficiency here has paralleled that of the standard orders. Apple now ships 75% of custom-built computers in 10 days or less. Mr. Cook's ambitious goal is to reduce that to 2 days.
Mitch Mandich's (VP of Sales) presentation on Apple's marketing strategy revealed similarly massive efficiency increases achieved by Apple in all of its sales channels. He demonstrated an excellent understanding of the problems which have plagued Apple's retail strategy for years.
Mr. Mandich has been on a crusade to scale back the breathe of Apple's sales channel, eliminating those who show a "lack of advocacy" and those who placed Macs in the back of the shop, dead on the shelf, with "no sense of value." Apple sales channel was, by last year, reduced 75% from levels of a few years back. Apple's new strategy seems to be working. The company's shipment levels have doubled with a channel that is 40 to 50% smaller today than in 1997.
Today Apple can be selective about who is allowed to represent its wares. Mr. Mandich told the analysts at MACWORLD, "Just so you know, Apple could sell its stuff anywhere. We have a clear goal not to over distribute."
He said much more about in-store design to encourage a user friendly sales experience and announced 4,000 demo days planned with channel partners to be delivered by Apple badged employees. He unveiled a "mystery shopper program" to send spies into retail outlets and hit up sales clerks with a battery of questions. Stores that pass the surreptitious test will receive awards. Mr. Mandich didn't say what would become of those that don't. But given Mr. Jobs' penchant for the punitive it would be a wise VAR indeed that never finds out!
The bottom line is that Apple's business is the healthiest it has ever been in the history of the company.
Apple is not only the design innovation leader of the PC industry. Apple now leads the PC industry in terms of business efficiencies, guaranteeing the company will maintain strong margins, which are already the highest in the biz. This PC company will not squander increased revenues generated by growing sales. Steve Jobs and the executive team he has assembled are not just good; they are the best in the world at what they do, years ahead of any other PC manufacturers. And I don't say that as a member of the Mac faithful but as a diligent shareholder who wants to see a return on my investment!
This is really something new under the sun. An Apple Computer Inc. operating as one of the tightest corporate ships on the Nasdaq! Of course it's been building for awhile, but it's becoming too obvious for even the most conservative of investors to ignore. That's good for the stock price going forward. I don't have the words to express my appreciation to the hard-core business leaders at Apple who have made this transition a reality. It's a beautiful thing.
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Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!
Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.