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Apple’s earnings: An armchair analysis

By Tony Leggett (pocwactso@macedition.com), April 30, 2002

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“Okay, so who’s covering Apple’s latest earnings announcement?”

Besides all the other Mac sites, that is. Sure, we’ve done regular analysis, FUD debunking and even a bit of straight-up reporting. We’ve even had guests drop by to give an informed opinion. This time, though, it was a lowly POCWACTSO’s turn to rotate on the financial spit.

iMac life raft

When the second quarter earnings were announced, Apple stated that it had sold 220,000 of the new LCD iMacs. That’s an impressive achievement considering the earlier figure, quoted at Macworld Tokyo, of only 125,000. This quarter, the only factor that realistically inhibited how many Apple would sell was how many it could build. The company could’ve sold 440,000 of them if it could get them out the door.

Oddly enough, it almost did. All told, Apple sold 372,000 iMacs for the quarter, the other 152,000 being the older gumdrop model. Given the relatively modest discounting to what are essentially obsolete systems, this is quite a surprise. Anecdotal reports had suggested that the gumdrops were turning into retail doorstops. Most probably it’s a mixture of education orders, people who perhaps landed a good deal or were simply frustrated with the delays on the new machines.

Languishing laptops

Both the iBook and the TiBook suffered this quarter. Most surprising is the 24 percent fall in sales of the iBook from 185,000 units to 141,000. This is despite a reshuffle of the product lineup, a price cut and the introduction of the 14-inch model. Perhaps consumers have decided that regardless of price, they are no longer happy with an “obsolete” G3 chip and mediocre graphics when they suspect better consumer offerings are further down the line. Who can blame them?

The TiBook suffered a similar fate with a 23 percent drop (from 116,000 to 89,000) in units sold. To be blunt, it needs to be overhauled as soon as possible. This is Apple’s top-of-the-line professional laptop. For the price tag it commands, it needs better graphics (some PC laptops are packing 32MB of nVidia DDR goodness), a SuperDrive option and a reasonable processor speed bump pronto.

[Ed note: Apple has indeed upgraded the TiBook on 4/29. Additionally, the education segment now has the eMac, a 17" flat-CRT all-in-one iMac.]

The soft, crumbly high end

Apple’s high-end offerings, in comparison to the consumer models and portables, had an absolute shocker. Despite the mid-quarter speed bump, sales of G4 towers did not budge an inch – in fact, units sold were a thousand less than the previous quarter. High-end customers are telling Apple with their wallets that they are not going to be caught up in buying another “Yikes!” architecture when there are many subsystem improvements readily available, just not yet implemented.

Adopting DDR RAM system-wide could be a possible first step, and there will always be the chorus for faster processors. However, there’s not much point to the faster processors if Apple keeps producing hardware with subsystem components that are a generation behind the cutting edge. I/O bottlenecks -- in hard drives, RAM, data buses, cache and graphics – all need to be eliminated before Apple will sell a cutting edge machine at cutting edge prices.

Apples and lemons

A lot of people like to compare Apple to Dell when they want a brand-name PC vendor as a benchmark. Myself, I think Gateway is a better example. After all, it’s the vendor with the boutique stores Apple is trying to mimic. Gateway has even assumed Apple’s old mantle of “struggling computer maker.” And it’s doing it tough:

POWAY, Calif. (April 18, 2002 10:19 p.m. EDT) – Struggling computer maker Gateway Inc. reported a quarterly loss of $123 million on revenues Thursday, less than half of what it earned a year earlier.

Now, this is a brand name boxmaker with access to all the whizz-bang 2.2GHz Pentium 4 jobbies it can get its hands on. Perhaps this is evidence that “microprocessor megahertz marketing” is not the panacea it’s made out to be. But there’s more:

Gateway, the nation’s fourth-largest computer maker, surpassed expected revenues of $978 million as it sold 645,000 units in the quarter.

Compare that to Apple’s $1.5 billion and 813,000 units – and that’s including Apple’s manufacturing woes this quarter. Had Apple had its manufacturing up to speed shortly after the iMac’s debut, rather than just before the end of the quarter, one could expect Apple to have recorded unit sales north of 900,000. Not too shabby in comparison, as most Gateway shareholders may grudgingly agree.

Extraordinary items and other miscellany

Middle management accountant types love this kind of terminology as they can bung just about anything into it providing they’ve a plausible excuse. The first thing a little unusual with this earnings announcement was the absence of any discernable extraordinary items this earnings report. There was no selling of third-party stock (in ARM, Akamai, etc.) this quarter, the first time in what seems like years.

This means that there’s no “Apple today announced a second quarter profit of $X million dollars” – X being a figure ridiculously above analysts’ expectations – only to be followed by a qualification “after realising one-time gains on the sale of investments, leaving Apple with a profit of $Y.” This tedious practice (no doubt a legal requirement) of announcing “pretend profits“ can leave you with the false hope that you’ve just cracked AtAT’s Beat the Analysts competition, only to realise the “real” profit is a few sentences further into the PR blurb and much lower. The practice is annoying and it’s nice to see Apple avoiding it for a change.

The Apple Stores continue to improve, having sold 24,000 units, up 70 percent from 14,000 in the previous quarter. That’s quite a respectable sell-through rate of over 9 units per store, per day. These numbers are mostly meaningless as figures for the stores will continue to be a “moving target” until the number of stores stabilise. Regardless, despite revenue of $70 million, Apple still lost money (albeit just $4 million). This “small loss” was artificially propped up by the disproportionate number of new iMacs the Apple Stores received. A small consolation for third-party resellers, who may be feeling a little unloved at the moment, is that the Apple Stores at least only received 10 percent of the new iMacs as claimed.

iPod sales dropped substantially to 57,000 (a drop of over 50 percent) but the entire MP3 player market has tanked; according to CFO Fred Anderson, MP3 player sales have fallen by 71 percent from the previous quarter. The iPod was probably a very popular Christmas stocking stuffer, so a fall in sales is not altogether surprising. Don’t expect any drastic price cuts; however, that’s not Apple’s style. Apple might try special bundled promotions like, ooh! This one.

One worrying trend is the small but steady decline in overseas sales, down to 45 percent this quarter. Traditionally this has been around the 50 percent mark. While it could be argued that domestic sales have been stronger (due to the extra retail presence of the Apple Stores), this may not be the complete story. Despite Fred Anderson’s claims that European sales “did well,” they’ve stayed rather flat (units sold actually dropped to 211,000 from 215,000 the previous quarter). While not wishing to sound overly critical, Apple’s snubbing of events and mismanagement surely doesn’t help the international bottom line.

Maintaining a good international presence is important for Apple. Gateway chose to withdraw completely from international sales, and look at the sorry state it’s in. Dell, on the other hand continues to pick up international market share. Apple should be paying close attention to rapidly accelerating consumer markets in developing countries, such as India and China. Such markets are safety buffers for a saturated and flat US PC market.

Bottom line?

This is historically Apple’s weakest quarter and it’s done fairly well, all things considered. Considering the bloodbath the commodity boxmakers are in (how is OS X on Intel a good idea again?) Apple may be one of the few manufacturers to beat analyst expectations this quarter (even if it was only one cent per share). The iMac delays prevented them from doing a whole lot better, but the Gateway example shows it could be a whole lot worse.

iMac sales should fuel the company for at least another quarter, and providing Apple promptly addresses some of the issues with its other products, the estimate of $1.6 billion in revenues for next quarter may hopefully turn out quite conservative.

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