September 18, 1997 2:10 PM PDT

Apple prospects hold steady

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Despite a quarter that's been jam-packed with management changes and competitor cloners slashing their prices, Apple Computer (AAPL) analysts are holding their ratings and earnings expectations steady for the current quarter that ends this month.

The quarter has had no shortage of activity.

The company signed a licensing agreement with Microsoft (MSFT) in which Internet Explorer will be bundled with Macintosh computers, netting it a $150 million booty. Apple also overhauled its board of directors and did a 180-degree turn on its licensing agreement with cloners. Then Apple cofounder Steve Jobs officially took the reins of the beleaguered company as interim chief executive while the search for a permanent replacement for former CEO Gilbert Amelio continues.

In the aftermath of these events, Power Computing yesterday announced immediate price cuts and memory upgrades for midrange and high-end desktops, a move that potentially could spell trouble for Apple.

Power already had cut prices on low-end systems by up to $300, and now will reduce prices by as much as $400 and upgrade RAM by up to 64MB on PowerTower Pro and PowerCenter Pro systems. Six models will be affected. Since the company will be manufacturing Intel-based PCs from now on, it must sell its Mac clone inventory by December 31, 1997.

In tandem with last week's news that Motorola (MOT) also will exit the Mac market, Power's departure is expected to spur clone sales. Subsequently, Apple sales are likely to droop.

But analysts are not concerned enough by the news of competitors trimming prices, or the host of other changes taking place within Apple, to revise their expectations for the September or December quarters.

"That isn't the kind of thing to make you change earnings numbers," said Chuck Hill, research director at First Call.

Daniel Kunstler, an analyst with J.P. Morgan, said sales really should not shift away from Apple in lieu of the cloners' price cuts.

"People can still go out and buy [their products] with impunity because Apple will continue to support the products. As a result, this quarter won't be shifting," Kunstler said.

He noted that there may be a small shift due to the fact that Power is going out of the clone business, but not enough to warrant revised estimates.

Andrew Neff, an analyst with Bear Stearns, said in a recent report that he expects a "sequential gain in the seasonally strong September quarter, but at a modest rate in view of market-share erosion in education and back-to-school markets from competition from the Wintel camp [Intel, Microsoft, Compaq, and Dell]."

Analysts say Apple owns about 68 percent of the elementary school base, 64 percent of the middle school base, and 39 percent of the high school base. Meanwhile, Apple's college market has shrunk to 15.6 percent, according to a Salomon Brothers report.

The report noted that in the K-12 installed base, almost one-third of the base is either Apple II or DOS-based, creating "tremendous upgrade opportunities," and that there is strong growth potential.

For the fourth fiscal quarter ending this month, Kunstler expects Apple to report a loss of 17 cents a share and a break-even quarter in December. The analyst consensus, compiled by First Call, is a loss of 14 cents a share for the fourth quarter, and the full-year expectation is a loss of $2.96.

In the fourth quarter last year, Apple reported revenue of $2.32 billion, and net profits of $25 million, or 20 cents a share.

Some analysts expect the licensing decision to aid Apple in the near term, as cloners' customers move to Apple.

But long-term, some analysts say, the move away from cloners will hurt Apple.

"It likely will accelerate software developers' and customer base's exit from an architecture that is once again single sources," James Poyner, an analyst at Oppenheimer & Company, said in a recent report.

Another analyst agreed that the picture was not so rosy. "When they did the Power acquisition, they tried to take their largest competitor out because they were looking for a short-term pop [in sales]."

The same analyst noted that Apple will not get that short-term pop because cloners will sell systems so cheap. "Apple will have to respond with price cuts as well," he said. "Otherwise they will lose sales."

While unit sales might be higher, the analyst added, the price cuts likely will offset any upside benefits. "Apple shot itself in the foot. The acquisition of Power was for short-term gain, instead of long-term growth of the Mac platform."

Apple could not be reached for comment on whether it planned to cut its prices to keep up with the clone makers.

 

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