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ATPM 2.11
November 1996






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by H.M. Fog,

Financially Speaking…

There's been a lot of talk lately about the changes at Apple Computer. There's been a lot of confusion on Wall Street and on Main Street as to what Apple's recently released financial numbers and recent statements by Apple executives really indicate about the health of the company. There has also been some concern about the overall direction of Apple Computer and its extraordinary operating system, the Mac OS.

This article will attempt to help readers better understand many of the issues being discussed and how recent statements by executives of Apple Computer represent a more open, better organized and more forward looking management team. It is this writer's view that Apple Computer is positioning itself quite well for the coming changes in the personal computer industry and the way that we will communicate and exchange information.

Recent statements by Dr. Gilbert Amelio, Apple's CEO, have actually added a bit more intrigue to the seemingly endless speculation of market insiders and industry pundits as to the direction of a company which has become an icon of American entrepreneurial success and technological innovation.

When a company as large and well known as Apple Computer undergoes a major change in top management, corporate focus and direction, eyes and ears turn toward every "whisper." Many are tempted to try and "read between the lines" in order to detect any subtle nuance that may represent a "signal" of further change.

Dr. Amelio recently stated to a conference of investors that the company's revenue and market share were not his top priority. Rather, his primary focus was improving the company's underlying operations and continuing to enhance the company's product lines. To many people these statements sparked a great deal of conversation about Apple's industry position and financial condition. It is this writer's view that the above-mentioned comments were no more than the honest thinking of a very bright and talented corporate chief.

A year ago, computer stores and catalogs were flooded with Macintosh Performas built around the 68k chip technology. There were also many Powerbook models which featured the 68k chips as well. Meanwhile, Apple Computer was in the latter stages of its transition to the Power PC platform. Many people felt that the decision to continue to manufacture and sell the 68k machines was a short-term attempt to do nothing but grab market share and create short-term revenue and profits by saturating consumers with lower-priced, soon-to-be-outdated, machines. And, as many of us know, this decision helped create a financial disaster for Apple Computer.

Even if the plan to increase market share and market presence through the sale of lower-priced 68k machines had been more successful in terms of immediate sales and profits, the company would have been saddled with either very unhappy customers when the future operating systems and third-party software releases were not made "backward compatible" to accommodate the 68k machines or the company would have been burdened with much larger expenses and development costs to ensure backward compatibility, not to mention the costs to developers who would want to release software products for the Mac OS. No matter how you look at it, the decision was a disaster waiting to happen.

Dr. Amelio has been working quickly to reduce the company's expenses, eliminate inefficient product lines and restore a reasonable margin or 'return" on each piece of computer hardware that is sold by Apple. This necessitates a reduction in market share and sales revenue in the short-term, in order to reap the benefits of greater efficiencies, better products and larger margins in the long-term. It does not mean that Dr. Amelio and Apple's management are writing-off any markets or are disinterested in revenue growth, it means rather that they are more interested in solid financial fundamentals than they are interested in short-term sales and immediate profits. In the last fiscal quarter Apple was able to once again establish gross profit margins above 20%. This is a tangible sign that the company is poised for efficient growth and better financial health.

It has been stated by some financial analysts that Apple's turnaround is a three-year process. It's this writer's view that if it is a three-year process than Apple Computer is well ahead of schedule. A look at last quarter's financial (three months ending 9/27/96) gives a strong indication as to the swiftness of the company's turnaround. Below are a few of the highlights appropriate to the focus of this article:

This performance indicates that the company was able to significantly reduce inventories and convert these assets into positive cash flow. In this writer's opinion, the ability to create $410 million in positive cash flow is more important than the $25 million in net income for the quarter. The company also has ample financial resources to sustain operations while it continues to improve and streamline its products.

Although the unit shipments were down compared to one year earlier, Apple Computer was able to increase unit shipments significantly from the prior quarter. This indicates that sales momentum is continuing to improve for the company's products. In addition, the Mac OS compatible computers made by Power Computing and other licensees have not been factored into these numbers. In addition, there was a lack of higher-end Powerbooks and the Performa line had yet to be updated.

The fact remains that Apple Computer has a big international presence. Those of us who live in the States mustn't forget that almost half of Apple's revenue comes from areas outside of the U.S. It also demonstrates that Apple Computer is active and competitive in several major markets throughout the world.

There has also been a lot of speculation concerning the potential acquisition of the Be OS, which runs on Mac OS compatible Power PC computers. As of this writing no formal plans have been announced concerning such an acquisition nor should speculation on this matter lead people to believe that Apple if having undue trouble developing OS 8.

From a purely financial standpoint, the development of a new operating system is an extraordinarily large investment. This is true whether the new OS is developed in-house or acquired from outside sources. Apple Computer has stated repeatedly that it will release incremental upgrades to the Mac OS and that it is in the process is in the process of completing the planning of its long term operating system strategy. Many of us have downloaded and installed the latest incremental update 7.5.5. We're also looking forward the release of System 7.6

Whether or not the acquisition of the Be OS is advantageous will be determined by evaluating the operating system in comparison to Apple's plans for the Mac OS. If the Be OS fits the strategy and can incorporate many of the system enhancements Apple has planned, than an acquisition might be an appropriate approach to furthering the development of the Mac OS. Two other factors which need to be considered are the investment required by Apple to continue its current development versus the acquisition cost of the Be OS and also the matter of time in terms of bringing an updated OS to market and thus allowing for a quicker return on investment. It is not an indication that Apple is having trouble with its current development of OS 8.

In keeping with other comments by Dr. Amelio, there is one more issue that does signal a bit of a change in Apple's approach to the market place. It's apparent that Apple's current management team does thinks that the Mac OS is an underutilized asset. As Mac users I think we can look forward to more steady and timely incremental updates and commercial upgrades.

I recommend that readers spend some time at the Apple home page and read through the information made available concerning the company's direction and management plan. I believe that you will see that many of the recent announcements concerning the company are less new pronouncements of change and more of a refinement of the management plan that is already in place. Apple Computer will be in the fore-front of change as we revolutionize the manner in which we communicate and exchange information. Watch closely and listen carefully.

© 1996 H.M. Fog, H.M. Fog is a west coast computer consultant who sometimes writes articles for ATPM. [apple graphic]

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