October 15, 1997 5:30 PM PDT

Apple reports $161 million loss

Apple (AAPL) today missed analysts estimates for its fourth quarter loss, citing sluggish demand overseas, especially in Japan.

The company reported a net loss of $161 million, or $1.26 a share, Apple at a glance compared with a profit of $25 million, or 20 cents a share, last year. However, Apple took a $62 million restructuring charge for its reserves, and a $75 million write off for acquiring Power Computing?s Mac business.

Without the charge and write-off, the company posted a loss of $24 million, or 19 cents a share. That?s still more than the loss of 14 cents a share that analysts expected, according to First Call.

However, the company narrowed its loss from the previous two quarters, in which it posted a loss of 44 cents in the third quarter and a loss of $5.64 in the second quarter.

Revenues, meanwhile, fell to $1.6 billion in the quarter ending September 26, down 30 percent from a year ago. Revenue fell 7 percent from the previous quarter fell as well.

Despite missing earnings estimates and the sequential decline in revenues, Apple chief financial officer Fred Anderson said the company remains focused on returning Apple to sustainable profitability and reducing its break-even point in fiscal 1998.

"Our goal for 1998 is expense reduction and gross margin improvement, via new products, our new channel policy, and an improved distribution policy. I feel optimistic for next year," Anderson said. "I?m pleased that, when you pull out the special charges, we continued to make good progress toward break-even, and cut the loss by more than half from $58 million last quarter to $24 million before the special charges. So I think we?re making good progress there."

Anderson cited a drop in overseas sales as the company's main problem, especially in Japan and to a lesser extent in Europe.

Sales in Japan fell 48 percent over the previous quarter, as the country?s economy and the computing sector there remains weak, Anderson said. He added that the company believes the situation overseas is temporary and will improve in future quarters.

European sales dropped in the third quarter as well, by 12 percent compared with the previous period.

During the fourth quarter, Apple shipped 652,000 units, down 8 percent from its previous-quarter results. The fourth quarter is usually the second strongest of the year for Apple, as a result of sales to the education market. The company?s first fiscal quarter typically gets a boost during the holiday season from the consumer market.

Apple?s volume of shipments to the educational market has stablized over the last several years, while the market has grown about 20 percent. Anderson said the company is looking to grow its share of the educational market by way of such measures as broadening the platform's software and services.

Apple, meanwhile, reported that its fiscal 1997 net loss reached $1 billion, or $8.29 a share, compared with a loss of $816 million, or $6.59 a share, in the previous year.

The company took a $217 million restructuring charge during the year, and a $450 million in writeoffs for the acquisition of Next Software, formerly owned by Apple co-founder Steve Jobs, and for Power Computing?s Mac business.

Although the range of estimates for the recent fourth quarter fell between


Apple CFO Fred Anderson on sluggish sales
a low of a loss of 33 cents a share and a high of a profit of 1 cent, half of the 23 analysts that follow the company estimated Apple would report a loss of 6 to 10 cents a share, said Rob Gowen, a First Call spokesman.

Apple surprised Wall Street last quarter when it posted a loss of $56 million, or 44 cents a share. Analysts had expected the company to report a loss of 61 cents, following concerns that the computer maker would post worse results than earlier anticipated after the ouster of former chief executive Gilbert Amelio.

Barry Bosak, an analyst with Smith Barney, "They maybe in spitting distance of posting a profit."

Bosak cited the recent surge in sales of Apple?s OS8 operating system, in which the company reported sales of 1.2 million copies during the first few weeks after its release in late July.

He also noted that the naming of Apple cofounder Steve Jobs as interim chief executive, and some of the deals he has announced--such as a $150 million investment from Microsoft (MSFT) for sharing patent information to easing requirements for resellers to participate in selling the company?s products--have helped bring life to a lagging stock price.

But other analysts question if these recent events are enough to drive demand for Macs and boost sales, and hence reverse a lengthy decline in market share.

Bret Rekas, an analyst with BancAmerica Robertson Stephens, said the recent revamped channel strategy won't necessarily translate into a sudden rush by resellers to sign up to carry Macs.

"Apple tried this a couple years ago, but they didn?t manage it right to have enough people to field more calls," Rekas said.

Anderson, however, said the company believes the changes in its reseller policy should make a difference and benefit the company down the road.

Another issue that may have a huge effect on the company?s earnings in upcoming quarters is Apple?s move to step away from the clone business.

This may not only reduce demand for the Mac, should fewer developers have an incentive to develop for the platform, but it also could result in PowerPC chip makers Motorola (MOT) and IBM (IBM) having less incentive to develop the chip for PC platforms, preferring to concentrate on developing the PowerPC for consumer electronics, Rekas said.

"Apple also has not been successful in forecasting its manufacturing needs," he added. That, as a result, has hurt the company?s ability to meet demand for such products as its PowerBook laptops.

And finally, Rekas said, the company has undergone a lot of management instability, which could slow recovery efforts.

Apple today announced that Dave Manovich, senior vice president of international sales, and James McCluney, senior vice president of worldwide operations, have resigned. The departures mark the latest in a string of executive changes since Amelio?s departure.

Nonetheless, Jobs said in a statement: "We don?t expect to hit any speed bumps as a result of these changes."

 

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