Apple in 2000: Boom to bust

Although most computer manufacturers also suffered in 2000, Apple's travails were highlighted by the fact that the success of early months was hailed as a "turnaround" for the company, which had previously been saddled with the label of "beleaguered."

"It's like Apple came around a bend in the road driving 90 miles an hour and slammed right into a brick wall," said Andrew Neff, Apple analyst at Bear, Sterns and Company. "It was only after the accident that they realized there were some things wrong with the car that led to the accident."

Apple (aapl) followed up a strong 1999 in the first two quarters of 2000, with the company posting a net profit of $233 million, or $1.28 per diluted share, in the first quarter. This profit compared with $135 million, or 84 cents a share, a year earlier.

Apple's net profit of $200 million, or 55 cents per diluted share, in the second quarter nearly matched a net profit of $203 million, or 60 cents per diluted share, in the year-before quarter.

Unit sales also improved early in 2000. Apple sold just over 1 million units during the second quarter, including more than 350,000 Power Mac G4 systems and nearly 450,000 iMac systems, driving unit growth of 12 percent.

Hardware sales remained solid from January to July. The company refreshed its desktop and portable products in February, added Circuit City as a Mac retailer in July and revamped its hardware line in July.

Through June of 2000, Apple had 11 consecutive profitable quarters, with net profits up 43 percent. "The turnaround is over," Chief Financial Officer Fred Anderson told analysts in July. "We're now in the early stages of a strong growth story."

However, those second-quarter financial numbers included hints that sales were slowing.

"iMac sales were a bit below expectations (in the fiscal third quarter)," Anderson said during that same call with analysts. He blamed the slump on customers anticipating new products and disagreed with other PC industry analysts who had been reporting that slowing sales were an industrywide problem.

An analysis of online sales through catalog retailers conducted by PC data company OneChannel.net showed that Apple's sales began a downward move in April and dramatically plummeted in early July.

"Things were going very well in early April," said Tim Haight, vice president of OneChannel.net's editorial content. "Online sales from e-retailers were up 92 percent compared to the first week in January. But in early July, sales went south, off 30 percent for example in the week ending July 8."

While a revamping of the iMac line in midsummer gave Apple a burst of sales energy, it didn't fully counter the general downward sales trend. On Sept. 28, Apple issued a warning to analysts and investors that fiscal fourth-quarter profits would fall "substantially below expectations," some 27 percent below what analysts had forecast.

After the announcement, Anderson blamed the shortfall on slower September sales, lower educational sales that usually peak in September and slower Power Mac G4 Cube sales.

"We've clearly hit a speed bump," said Apple CEO Steve Jobs in a surprise appearance during the analyst call after the warning. At the time, other PC makers were also indicating softening sales, but for Apple to lower its earnings forecast from the expected 45 cents a share to about 30 cents caught many market analysts by surprise.

"Sure, we have known for the better part of this year that a PC downturn was coming," Scott Bleier, chief investment strategist at Prime Charter Ltd., said in October. "But for Apple, the downturn is worse because they sell less boxes to the business market and more to the more volatile consumer market."

The company's stock took a beating, losing half its value in a matter of hours. Days later, Apple implemented a hiring freeze, but the final fourth-quarter numbers still came in at 30 cents a share on profit of $108 million.

During the analyst conference call, Jobs listed several factors behind the company's poor financial numbers. Some--an apparent "megahertz gap," no CD-RW drive option in Macs, an overpriced G4 Cube and bad timing in taking back educational sales from independent dealers--were of Apple's own making, Jobs admitted. But he also pointed to Motorola's inability to deliver faster G4 processors in a timely fashion.

"Apple has been unable to ship G4 processors running above 500MHz for the past year due to our G4 processor suppliers' inability to provide us (with) faster processor chips," Jobs said. "Our plan is to begin closing the 'megahertz gap' during the first half of calendar 2001 and to make substantial progress during the remainder of the year."

Even after launching new marketing promotions and rebates of up to $500, it was apparent in late November that a continued softening of the U.S. economy and a general slowdown in PC sales would exacerbate Apple's financial problems.

In early December, Apple warned that fiscal first-quarter 2001 revenue would be about $1 billion, or some $600 million less than already reduced projections, as the company braced for a quarterly loss as great as $250 million--its first in three years.

Apple also revealed that it was sitting on 11 weeks of inventory and that clearing out this stock would mean lower-than-expected earnings for not only the current quarter but also deep into 2001. Still, Jobs said Apple should return to profitability in the January-to-March quarter, assuming it can exit this quarter with a six weeks or less of inventory.

Analysts generally agree that Apple must clear out inventory; roll out new, faster and cheaper products; and release its long-delayed, next-generation operating system, Mac OS X, before the end of March--all things Jobs has promised to accomplish sooner than later.

Still, analysts have expressed pessimism that Apple can stage a turnaround in only three months, given that the fiscal second quarter is historically the company's slowest for sales.

"I am not convinced they can make a profit in the (fiscal) second quarter, much less break even," said Merrill Lynch & Co. Inc. analyst Steven Fortuna. "They say they will be able to get rid of existing inventory and get rid of their current problems. Fine. But they have to come out with new products in January and hope the economic and PC industry slowdowns don't get worse. That's a big 'if.'"

"Consumers just aren't spending money on PCs. It's just that simple," commented Dan Niles, an analyst at Lehman Brothers in San Francisco. "This new projection is about 40 percent less than the earlier projection. It shows that everything they did to try and spur sales--rebates, price cuts and new promotions--simply didn't cut it.

Their estimate was way off. A profit in the second quarter? Doubtful." Most analysts believe the slowdown in personal computer sales will continue into the new year, resulting in additional price reductions.

But as for Apple, analysts think it is more vulnerable to these conditions because consumer sales are at the core of its business. "I'm hopeful (for Apple), but a realist," said Charles Wolf, Apple analyst at Warburg Dillon Read. "This economic downturn is hitting all PC makers. Apple is going to have to be gutsy and different. But I wouldn't expect less from Steve Jobs."

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