Apples, Kids, & Attitude
Last month Apple Computer released financial results for its third fiscal quarter (the three-month period ending June 26, 1999). A brief review of the results is as follows:
- Net profits from operations were $114 million, or 69 cents per share.
- Sales for the quarter were $1.56 billion, an 11% over the same quarter last year.
- Gross margins increased to 27.4% from 25.7% one year ago.
- Unit shipments increased an industry-topping 40% from 1998 levels while average revenue per unit dropped from $2,019 to $1,683.
- iMacs represented almost 54% of total unit sales of 905,000.
- Apple ended the quarter with $3.1 billion in cash and has announced that it will buy-back up to $500,000,000 of the company’s stock.
This writer finds it astounding that Apple Computer has been able to increase profits while realizing a sharp decline in revenue per unit sold. The only explanations for this feat are excellent product planning and near perfect execution of the company’s hardware strategy. Apple is faced with significant manufacturing constraints. The company cannot quickly add manufacturing capacity in an inexpensive way. For this reason Apple has wisely chosen to maintain gross margins at the expense of market share. Sales spikes and short-term gains in market share do little for the company’s bottom line if it can not maintain its gross margin per unit sold.
Although the iMac has been available in the US for about a year, there are many overseas markets where the fruit-flavored machines became available in ample quantities during the June quarter. This is a healthy indicator of Apple’s ability to maintain steady unit growth by effectively timing the introduction of products into different markets. Foreign sales accounted for 45% of Apple’s revenue for the quarter. While unit sales in North America increased only 12%, sales in Japan almost doubled from the prior year period. Unit sales in the rest of Asia and Europe increased 42% and 52%, respectively. Apple’s revenue for the quarter was slightly lower than what most analysts expected. This is due in large part to the high percentage of iMacs sold. iMacs will most likely outsell Apple’s minitowers until new, pro-level machines debut in the fall.
All Market Share Is Not Created Equal
Like the market for automobiles, the personal computer market has many kinds of buyers. Historically, Mac buyers have tended to be better educated and more affluent than the average personal computer buyer. Similar to buyers of luxury automobiles or better-equipped SUVs, Mac buyers will spend more for the equipment they prefer.
Reports indicate that Apple’s retail/catalog market share exceeded 11% for the month of June. This is a very healthy sign. If one were to ignore the deeply discounted PCs (computers sold with little or no margin) from the retail/catalog sales numbers, one would see that Apple has a significantly higher share of the profitable PC business. Apple Computer has no desire to be the #1 personal computer maker (at least not a realistic desire). Becoming embroiled in a bare-knuckled fight for low-margin market share will do little for the company’s bottom line. In order to maintain earnings momentum, Apple’s products must appeal to a select group of consumers. Apple’s goal has been to make inroads into the segment of the PC market that actually makes money. Since the release of the iMac, Apple has been very successful in achieving this goal.
Apple’s rise in market share has come at the expense of Compaq and other name-brand manufacturers. Adding to Compaq’s woes is the continuing success of Dell Computer. Without naming names, Michael Dell has intimated that Compaq will not survive as a consumer PC manufacturer. Compaq’s loss of high-margin sales to Dell and Apple has meant huge losses for the nation’s #1 computer maker. Compaq cannot make money competing with manufacturers of commodity-grade PCs. Compaq’s antiquated distribution system and high cost structure have placed the company at a competitive disadvantage. Apple and Dell will continue to gain quality market share at Compaq’s expense unless Compaq’s new CEO begins to turn things around.
You Get What You Pay For
Forget the free PC craze...for now. It’s a fool’s deal. It’s akin to the “free” cell phone offers that litter Sunday papers. Anyone who has tried to seriously do business from a “free” cell phone knows what I mean. The free PC craze indicates that the conventional desktop computer market has matured. There is a significant shift in PC computing habits to mobile computers and computer-like Internet devices. Without volume, low-margin PCs makers are out of business. Retailers such as CompUSA are moving away from desktop PCs in favor of computing appliances. The only way to maintain the sales volume of discount PCs is to offer them for “free” as part of a Internet service package.
While the sub $700 PC market continues to gain market share, it poses little threat to Apple’s continued growth in its core markets. Today’s discount PCs will have a very short useful life and lack the features and quality components desired by experienced users. AMD (Advanced Micro Devices) and Intel will continue to sucker punch each other for low-end market share. Intel would like nothing more than to put AMD out of business, and the folks at AMD relish the fact that they keep Intel executives from getting a good night’s sleep. It’s a loser’s game of diminishing returns for both companies.
Gateway continues to diversify its offerings into other computer-related products and services. Dell Computer has announced its own Internet service strategy. In the coming months, Apple Computer will follow suit. Look for a major announcement from Apple about its Internet strategy soon after the iBook hits store shelves. What has hampered Apple’s Internet service plans have been its single-minded focus on survival and its efforts to re-engineer its hardware products and manufacturing processes. This will change in the coming months as Apple’s turnaround becomes complete and the company’s executives explore new areas of revenue growth.
The Beginning Of The End
The three-month period ending June 26, 1999 marked Apple’s seventh consecutive profitable quarter. The current quarter will mark the completion of Apple’s turnaround. By the end of the September period, virtually all components of Apple’s hardware strategy will be in place. Last month’s Macworld Expo provided a preview of new products to come. For an overview of the exciting announcements from Macworld Expo, please read Michael Tsai’s Personal Computing Paradigm in this month’s issue.
Despite Apple’s recent success, enthusiasm on Wall Street has been tempered by concerns for the company’s future net earnings growth. This is in light of the inevitable increase in the company’s income tax rates. Apple’s net earnings have benefited from reduced tax rates due to the huge losses incurred prior to the company’s change in fortunes. Apple’s reduced tax rates are gradually coming to an end. The company’s pre-tax earnings will need to rise significantly if Apple is to maintain its current level of post-tax earnings growth. This will not be an easy task. However, I believe the company’s management has excellent product plans in place, and net earnings should continue to grow at a healthy pace if Apple’s executives do not get side-tracked by the temptation to increase market share at the expense of gross margins.
A Few Of My Favorite Things
There’s an old adage that it’s not the cost of a high-end item that kills you, it’s the stuff that goes with it! And so it goes...I recently took delivery of a Lombard PowerBook. Like most mobile Mac professionals I soon learned that there are additional items that are necessary to make the most of one’s PowerBook purchase. On a price/performance basis, the Lombard PowerBooks are the least expensive pro-level mobile computers Apple has ever introduced. A few more dollars spent smartly will enhance a PowerBook owner’s mobile computing experience.
Carrying Case
I scoured the Internet and my local computer stores in search of the best carrying case for my PowerBook. After examining dozens of models from many different manufacturers I settled on the “Lap Dog” from Shaun Jackson Design. I’m very happy with my purchase.
The Lap Dog is not just attractive; its specially designed series of straps and Velcro-secured wraps keep the PowerBook protected and securely in place as one travels from office to office and from office to home. It also functions as a convenient lap-based work surface for those times when a table or desk might not be available. The Lap Dog features zippered pouches that fold over the top of the PowerBook when you are in transit. The pouches are large enough to hold the PowerBook’s AC adapter, CD-ROMs, or a DVD movie. I highly recommend this product.
Screen Cleaners
When it comes to cleaning a PowerBook’s LCD screen with an unknown product I can only advise “when in doubt, don’t!” The Lombard PowerBook is arguably the best mobile computer available in the market today. Its high-quality components require high-quality care. My Apple reseller advised me not to use any ammonia-based cleaners on my PowerBook’s LCD screen and recommended a product called Klear Screen. Unfortunately they didn’t have any Klear Screen products in stock. Neither did my local Fry’s Electronics store. Not willing to wait a few days for a phone-order parcel, I grabbed another product off the shelf. It was a mistake. Immediately after “cleaning” the LCD screen with the other product, I packed it away in my car’s trunk, called the maker of Klear Screen and ordered a “Power Klean Kit.” It’s an excellent product, and I’m happy with its results.
External Keyboard and Mouse
The PowerBook’s keyboard and touch pad are easy to use. That said, there are times when I prefer an extended keyboard and a conventional mouse. Macally’s USB iKey keyboard and iMouse are the perfect home/office accessories for your PowerBook. The keyboard is lightweight and stows in a regular-sized backpack. Macally products are available through major catalog resellers and most other places where Macs are sold.
That’s It For Today
In ATPM 5.11 I will revisit the predictions I made earlier this year and provide readers with an in-depth evaluation of Apple’s financial standing, following the close of the current fiscal year. I look forwarding to visiting with you in November.
“Apples, Kids, & Attitude” is copyright © 1999 Robert Paul Leitao,
rleitao@atpm.com.
Also in This Series
- Good Morning America, How Are You? · October 2003
- Martians in the Manholes · February 2001
- The Golden Touch · May 2000
- Three Kids and an iMac · February 2000
- How? · November 1999
- Apples, Kids, & Attitude · August 1999
- Play Ball! · May 1999
- A Time For Change · February 1999
- New Year, New Times · January 1999
- Complete Archive
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