Apple's financial health has a price

It is the basic goal of free market economics that every company must face: how to grow while keeping costs under control.

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But when the company is a former global market leader and the costs run into the hundreds of millions, that goal can quickly turn into a vicious cycle.

To assuage frustrated investors and calm anxious accountants, Apple Computer (AAPL) is laying off 2,700 full-time employees and 1,400 part-time and contract workers. That move, combined with other cutbacks, will help get its costs down, but only enough to break even on the company's much-scrutinized balance sheets.

At the same time, the significant staff reduction will surely hamper its ability to stay competitive, let alone create new products and regain precious market share that it has lost steadily over the last decade. Apple's staff was still recovering from another large round of layoffs last year, a restructuring that cost $130 million.

The company wants to cut $400 million from its operating expenses to turn profitable in the fiscal fourth quarter that ends in September. Annual revenues are expected to come in at least $1 billion less than last year's $9.8 billion.

The second fiscal quarter, which ends March 28, may not be of much help to Apple's goal. Chief financial officer Fred Anderson said today that the company expects revenues of between $1.6 billion and $1.7 billion, significantly less than the $2.1 billion reported in the previous quarter, which resulted in a $120 million loss.

Although the company was pleased with its sales, they have been offset by Apple's difficulty in maintaining a "normalized channel inventory," Anderson said in a conference call with analysts. "This phenomenon, coupled with the traditional seasonal softness of demand in our second quarter, suggests that we will generate lower revenues significantly than those we achieved in our first fiscal quarter."

Apple executives also said they expect to take charges of $155 million for the layoffs and restructuring outlined today. The ability to recoup those costs are key to Apple's chances of meeting its goal of profitability by September.

"It's a critical factor," said Daniel Kunstler, an analyst with J.P. Morgan. "If they take measures that bring down their break-even point fast without incurring a risk to remain liquid, they may be able to weather the expenditures related to that charge."