Commentary: This PC price war is going to get ugly. Apple became the latest PC vendor to deliver a whopper of a profit warning. Apple officials said the price war is under way and the company is going to do its part to escalate the conflict.
Apple, like Gateway last week, said that it just didn't see a Thanksgiving sales spike. And Apple, also like Gateway, decided to take its medicine early. It all just makes you wonder what PC vendor is next.
The company said it expects a fiscal first quarter loss ranging between $225m and $250m, excluding investment gains, on revenue of roughly $1bn. Wall Street expected a profit of 3 cents per share on sales of $1.6bn, for the quarter ending 30 December.
Apple, already weakened from last quarter's miss, was in no condition to take a hit from slowing consumer demand.
Here's the death spiral facing PC vendors. Demand is weak and inventories are bloated, so Apple and others cut prices and offer promotions to spur sales. Demand is likely to remain weak because consumers are going to hold out for better prices -- we're not stupid. Why buy a PC now when you can probably get cheaper prices after 1 January?
In Apple's case, we're sure critics are going to start saying it's like the good old days when the company reported losses and disappointed Wall Street a lot. Last quarter, Apple said it wasn't going to blame the industry for its own blunder. This quarter, it's all about the industry. Welcome to the PC price war.
Apple chief financial officer Fred Anderson indicated that the company had already seen a few warning shots. "What we see is tremendous amounts globally of promotional sales going through the channel, so we see a lot of competition on the price level going on right now," said Anderson.
So what's Apple's plan?
Make things worse.
Apple guessed wrong on inventory, and now has 11 weeks of inventory to move. Apple had three weeks more inventory at the end of September than it initially thought, said Anderson, who noted that the company will spend $135m in unplanned sales promotion costs to clear out inventory.
That situation sounds bad, but it gets worse. Apple plans to end the December quarter with normal inventory levels. You'll see massive promotions to move iMacs, G4 Cubes and other key products. And if Apple doesn't succeed, it'll probably cut prices even more. At this point it has nothing to lose. Apple wants to lower the inventory so it can move on.
Apple's moves are likely to impact Compaq and Hewlett-Packard among others. Even Dell, a leader in the education space, may be affected.
After Apple's fourth quarter miss, I noted that the company was asking Wall Street to take a leap of faith it didn't want to take.
Look for more analysts in Apple's quarter to jump ship. And don't expect Wall Street to buy the company's projection that it'll be profitable in the fiscal second quarter. Let's look at what got us here.
Apple issued a profit warning for its fiscal fourth quarter and then failed to meet its lowered goal. On the fourth quarter earnings conference call, officials projected also lowered guidance again. Back in October, Anderson said Apple expected a "slight" profit on first quarter revenue of $1.6bn, and full year earnings per share of $1.10 to $1.25 on revenue of $7.5bn to $8bn, approximately flat with 2000. Analyst consensus at the time had called for per-share earnings of 45 cents in the first quarter and $1.73 for the full year.
And now Apple talks investors down some more. Forget the first quarter, which will come up about $600m short on the top line. The fiscal year also looks messy. Anderson said the company sees fiscal 2001 revenue of $6bn to $6.5bn.
Chief executive Steve Jobs said the company plans to hit sustained profitability in the next quarter, but Wall Street will be sceptical because of Apple's recent execution problems. It took analysts years to get on board with Apple's turnaround the first time.
Apple hopes it can generate buzz at Macworld in January with new products to juice sales. Good luck. Macworld magic isn't going to help Apple's bottom line.
Is it just me, or did Apple do much better when Jobs wasn't getting stock options?
Jobs, who turned the company around to build an impressive three-year run, pulled off his magic act without a big option payday. After all, Jobs was only an "interim chief executive".
Now Jobs has a lucrative options package and the company is sideswiped by an industry downturn while it's trying to regroup from its own miscues.
Maybe it's just superstition, but Jobs may want to hand the options back. The options are underwater and they may be bad luck anyway.
See ZDII for US tech investor news.
See techTrader for more technology investment news, plus quotes and research.
Have your say instantly, and see what others have said. Click on the TalkBack button and go to the ZDNet News forum.