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ATPM 6.11
November 2000



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Segments: Slices from the Macintosh Life

by H. M. Fog,

Apple’s Results Revisited

I’ve reviewed the numbers for Apple’s fourth quarter and the fiscal year. Aside from how clean the balance sheet appears (it really is impressive) the problem is revealed within the sales data.

The iMac continues to be Apple’s unit sales engine. It accounted for roughly 50% of unit sales, but only a third of revenue; and it continues to make impressive sales gains both sequentially (compared to the previous quarter) and year-over-year.

There was, however, a dramatic drop in G4 and PowerBook sales compared with the third quarter. I’m assuming the drop in G4 sales is due, in part, to poor product transition. In the case of the PowerBook, its drop makes a lot of sense as a serious refresh is needed.

However, the Cube is the real disappointment for Apple. The numbers tell me Apple was counting on it to make a real margin difference, compared to the iMac, and to drive revenue gains. In all I believe Apple jumped off the iMac too soon in terms of advertising and marketing support. Those summer-release iMacs were really cool, after all.

The question in my mind is whether Apple can get through the first fiscal quarter without seeing a reduction in cash and equivalents. In the short-term I’m not concerned about the size of net profits, but about the company burning cash. I suspect if Apple does things right, it can finish the quarter without spending more than it takes in. This may be the reason behind the hiring freeze and the talk of eliminating a few non-essential projects.

A break-even quarter will not muddle the balance sheet. I think the stock is currently grossly undervalued, partly because the market still doesn’t understand what Apple is doing. If I were Apple, I would target 24% gross margins as the goal for the quarter and pursue market share gains ahead of the release of OS X. I’d focus advertising and marketing dollars on the iMac, do what can be done to sell through the Cube inventory, prepare to release a new PowerBook in the second quarter, and get OS X ready for release as soon as possible. Dual-processor G4s are nice, but practically useless while OS X isn’t ready for shrink-wrap.

Right now there is roughly net $11 cash/equivalents and investments behind every share. That means all of Apple’s operations, patents, brand name, products, etc. are being valued at roughly $8 per share or approximately $2.7 billion, which is absurd! Further, looking at the equity accounts, Microsoft’s original $150+ million investment is being valued at $75 million. I assume this means that half the investment in convertible, non-voting stock has been converted to common shares or been re-purchased by Apple.

Still, Apple is in much better shape than the share price suggests. Only time (and a coherent strategy) will improve the price. There is so much value behind each share I’m surprised new shareholders aren’t arrested for stealing shares at the current price. Wall Street is betting against Steve Jobs and Apple. Personally, I’d rather wager on the side of innovation and technology leadership than stock charts and hearsay.

There are few PC companies in this world that can engineer a change in market approach without layoffs and extraordinary charges. If Apple can accomplish all that it’s stated it will do—without incurring a quarterly loss—I’ll be impressed.

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