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January 20th, 2000

[Analysis] The Forecast is for Days of Wine and Roses: Apple's 1st Quarter Analyzed
by Wes George

We hope Steve Jobs, Apple's new CEO, likes his new airplane. ; )

Yesterday's conference call was packed so solid with blockbuster data that one analyst had to ask Apple's Chief Financial Officer, Fred Anderson, if he could think of any downside for Apple going forward in 2000. Mr. Anderson responded by noting the biggest challenge to Apple is to meet the strong demand for Mac products and to find enough good employees to grow the company as planned.

CEO Jobs gushed, "We are delighted that Apple is delivering strong growth on every front–revenues, profits and units–and in particular that our unit growth last quarter was 2.5 times higher than the industry average, which leads directly to market share growth. Apple also continues to deliver the best asset management in the industry, ending the quarter with less than one day of inventory."

Ta-Da, the number is…

Fred Anderson announced Apple's net profits were $183 million or $1.03 per diluted share for the fiscal 1st quarter of 2000, which ended January 1st.

Compared to the earnings of $152 million or $0.95 per diluted share a year ago, this quarter's numbers represent a 46% yearly rate of growth. That's the fastest growth pace in Apple's history, according to Mr. Anderson, and the fastest in the PC industry. IDC is forecasting total worldwide PC unit growth of only 17% for the December quarter.

Apple's revenues for the quarter were $2.34 billion, up 37% from the year-ago quarter.

The only fly in the ointment was the decline of gross margins by 2.2% to 25.9% from 28.2% a year ago. Mr. Anderson said he expects gross margins to be higher in the 2nd quarter, which is free of the high cost of rush Christmas shipping and the soaring DRAM prices after the Taiwan earthquake in the autumn.

"Strong earnings combined with superb operational efficiency resulted in positive cash flow from operations of $373 million," said Mr. Anderson. "Apple finished the quarter with over $3.6 billion in cash and short-term investments, and over $5 billion if the Company's investments in ARM and Akamai Technologies, Inc. are included."

92,000 PowerBooks and hordes of new Mac users worldwide.

Apple reported total unit sales of 1,377,000 million Macs. That breaks down to 700,000 iMacs, 235,000 iBooks, and later Mr. Anderson revealed 350,000 G4s, allowing us to calculate that Apple sold 92,000 PowerBooks in the quarter.

Mr. Anderson assured the analysts that Apple's secret to its successful quarter was a swift resolution of the company's looming backlog. Apple's channel inventory is slightly less than 5 weeks, right on target, according to Mr. Anderson.

International sales accounted for 51% of the quarter’s revenues. Unit sales growth was strongest overseas and especially in Japan where sales nearly doubled, soaring 97% above last year. European sales were up 54%, while in the Americas sales advanced 35%.

Mr. Anderson pointed out that "our market research makes it clear that Apple products are reaching well beyond the installed based." He pointed out that up to 44% of all iMac and 28% of iBook purchasers were new converts to the Mac platform. Apple's juicy new products are also driving a significant percentage of upgrades from longtime Mac users.

More details…

Apple is taking a $90 million one time charge in the quarter for a special executive bonus as compensation for CEO Jobs, including stock options on 10 million shares and a Gulfstream V jet.

During the quarter Apple purchased 500,000 shares of AAPL at about $83 per share as part of the stock repurchase plan announced last year. $384 million is left in the repurchase fund.

Mr. Anderson explained Apple's $200 million investment in Earthlink in terms of immediate gratification. "Apple will profit from each new Mac customer that subscribes to Earthlink's ISP service. The Earthlink relationship could add 25 to 35 million dollars of gross profit over the next 12 months. Additionally, we expect our new iTools service to stimulate incremental sales of Mac OS 9 upgrade." However, Mr. Anderson didn't add this new profit stream into his earnings per share forecast for 2000.

Apple sold more of the high end iMacDV Specials at $1495 than the company expected, resulting in a product mix which showed no price erosion from the average selling price of the original iMacs last year at this time.

The Apple employee workforce declined to 9,500 from 9,736 with most of the cut backs coming from the seasonal nature of manufacturing cycle.

The Apple Store is the fastest growing of Apple's distribution channels.

Beyond the box.

That's Applespeak for Mac non-hardware initiatives, such as FileMaker, QuickTime, iTools, etc. and the relationship with Earthlink. Beyond the box revenues, Mr. Anderson thinks, "will become increasingly important part of Apple's business going forward."

OS X client, to be released next summer, should, over the next 12 months, generate a major revenue stream. Mac OS 9 upgrade contributed about 1.0% to Apple's over all blended gross margin.

Mr. Anderson wouldn't be more specific about software revenue other than saying that software sales are significant and growing, "it's part of our strategy to focus beyond the box."

Blue Skies Ahead:

Fred delivered the Apple financial weather forecast for 2000:

"Consistent with the typical seasonal pattern we expect a normal sequential decline in units and revenues in the second fiscal quarter but strong year over year growth in both units and revenues. We expect gross margins to be up slightly from the first quarter. We also expect operating expenses to decrease sequentially by about $40 million as we cut back from seasonal advertising and sales program spending. The tax rate is expected to remain close to 25%. For the balance of fiscal 2000 we continue to target strong year over year unit and revenue growth and hope to achieve gross margins above 25%. Our objective is to keep operating expense at about 19% of revenue for the year."

Mr. Anderson said the March quarter, historically the weakest season in the PC industry, should cool Apple's sales down by 10% to 15% from the robust Christmas season.

For more of our coverage on Apple's financial performance, check out our Apple Stock Watch Special Report.

The Mac Observer Spin: Mr. Anderson declined to answer many of the analysts' probing questions, and as a result, the conference call was both short, though sweet, and to the point. Kind of like the length of time it will take Steve to get to his next out-of-state business pow wow in his new Gulfstream jet.


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