FOOL CONFERENCE CALL SYNOPSIS*
By Debora Tidwell (MF Debit)

Apple Computer, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AAPL)") else Response.Write("(Nasdaq: AAPL)") end if %>
One Infinite Loop
Cupertino, CA 95014
(408) 996-1010
http://www.apple.com

UNION CITY, Ca., January 17, 1997/FOOLWIRE/ --- Apple Computer released their fiscal 1997 first quarter results earlier this week. For the quarter, the company generated revenues of $2.1 billion and unit sales of 923,000, a sequential decline of 8% and 1% respectively from the September quarter. The company reported a net loss of $120 million for the quarter or -$0.96 per share, compared to a profit of $25 million or $0.20 per share in the September quarter and compared to a net loss of $69 million or -$0.56 per share in the first fiscal quarter of 1996.

The company achieved gross margins of 19% during the quarter, compared to 22% in the September quarter and 15% in the year-ago quarter. International sales comprised 56% of the company's quarterly revenues.

As previously reported, the company experienced shortfalls in its planned sales of consumer-oriented Performa-branded systems in the United States during the quarter. The weakness in demand for Performa products necessitated aggressive pricing and rebate activities that adversely affected gross margins. Those actions, coupled with the overall unit shortfall, resulted in the significant loss for the quarter.

Based on first quarter results, the company plans to develop additional restructuring programs during the second quarter with the goals of reducing its break-even point to $8 billion in annual revenues and enabling Apple to return to profitability by the fourth fiscal quarter which ends September 26, 1997.

PERFORMA MODELS BELOW PLAN. As they stated, sluggish sales of Performas in the US retail channel were the primary culprit behind the loss. Apple missed their US Performa volume target by approximately 90,000 units in the US and 100,000 units worldwide, so 90% of the shortfall was in the US market. On a sequential basis, Apple was actually up in their Performa sales in the US by about 21,000 units. Their first fiscal quarter is always a very high percentage of their sales in the US because of the consumer buying season. They did have a very small sequential increase from the prior quarter, but it was way below the prior year's level in Q1 1996 and obviously way below what their plan was. It was about a 19% shortfall from their internal operating plan worldwide and 35% in the US. They are focused on managing the company in terms of inventory and cash position, so they have scaled back their forecasts for the full year. They still are dedicated to focus on the consumer channel. They think that where they really missed in terms of the volume was at the entry level. There are entry level products down at the $1000 price point right now and Apple didn't get the volume at the low end of their Performa product line that they had expected. One of the things they are trying to analyze and haven't really gotten a total handle on yet is how much is that a totally price sensitive buy down there and do you have to bring your product line down to that entry level point at $1000 and is it really a commodity piece of the market that Apple should remain in, in a volume way. These are things they are still trying to analyze and are not the kinds of things they will have answers to two weeks after the end of the quarter. Other anecdotal information they have is that MMX coming in this quarter had an impact on sales last quarter. Again, though, they want to do their homework and analyze the situation rather than respond based on anecdotal input from the field.

OTHER PRODUCTS. Sales of Powerbooks and Power Macs, however, were strong -- exceeding their plans by over 25,000 units on a worldwide basis. They finished the quarter with approximately $200 million in backlog for Powerbooks which were not ramped to full production in the first quarter due to their product transitioning. Their channel inventory in the retail channel in the US is up from last quarter. They don't have precise numbers, but their guess is that it is probably up something on the magnitude of a couple weeks of inventory. In terms of their inventory reserves, Apple feels they are adequate and they feel good about their inventory position despite having a shortfall from their planned level in terms of revenues this quarter, they really have gotten their act together in terms of the whole supply chain management and the inventory management area. In spite of the miss, they were able to bring inventory down by about $170 million.

SALES BY GEOGRAPHY. Total shipments in Europe were up 50% on a sequential basis, while unit sales in Japan and Asia/Pacific combined were relatively comparable to sales in the September quarter. Sales to education customers in the Americas exceeded their expectations to yield $310 million in revenue. Their sales to US business customers, however, were down approximately 15% on a sequential basis. Their split between US and international revenues was 44% and 56% respectively. They finished the quarter with their total backlog at $368 million, over half of which was related to the Powerbook orders.

GROSS MARGINS. Their margins declined from 22% in the fourth quarter to 19% in the first quarter. This decline is due primarily to an increase in the unit mix of Performas, which were 35% in the first quarter compared to 25% last quarter. That mix shift combined with the aggressive pricing and rebate programs undertaken to stimulate demand was what caused this decline. In fact, they have calculated that discounts and rebates as a percentage of revenues were significantly higher in the first quarter than either the fourth quarter or their previous four-quarter experience. They estimate that these higher than average discounts and rebates cost them about a 2 point degradation in their first quarter gross margin percentage. Since Performas will constitute a seasonally lower percentage of their unit mix going forward and because availability of Powerbooks will continue to improve, they expect to achieve gross margins of about 20% in each of the remaining quarters of fiscal 1997.

OPERATING EXPENSES. Excluding the restructuring adjustment they took in the September quarter, spending increased sequentially by $60 million to $521 million, primarily due to increased sales and marketing spending related to the consumer buying season. Aside from write-offs associated with the NeXT acquisition and restructuring charges, they expect operating expenses to drop noticeably in the second fiscal quarter and beyond, due to both seasonal factors and as a result of restructuring measures. Their goal is to achieve an additional $400 million in operating expense reductions as a result of additional restructuring which they are planning to put together over the next couple of months. That does not include NeXT on the operating expense side. They would have to look at NeXT and determine what the effect of that will be on the combined company. NeXT is doing about $50 million in revenues a year and this last quarter were close to break-even.

LIQUIDITY & PROGRESS IN ASSET MANAGEMENT. Apple continues to maintain a very solid cash position. They exited the quarter with over $1.8 billion in cash and short term investments which is $677 million more than their outstanding debt. They also reduced net inventory sequentially by $174 million, largely as a result of improved efficiencies from their just-in-time procurement program. During the quarter they achieved inventory turns in excess of 12 and they are optimistic that they will continue to see quarterly inventory turns of 10 times or better going forward. They were also able to maintain days sales outstanding at 50 days, which was down slightly from the 51 days during the fourth quarter. Capital expenditures during the quarter were about $20 million and they have now revised down their capital expenditure target for the year to a range of between $60-65 million. Their depreciation for the quarter was $25 million. They generated $94 million in positive cash flow from operations.

RESTRUCTURING & NEXT ACQUISITION. Based on their first quarter results, they have revised their break-even revenue target from $9 billion to $8 billion. To accomplish that, they anticipate taking restructuring charges during the second quarter and expect to realize the majority of the restructuring benefits by the fourth fiscal quarter. Headcount at the end of Q1 was 13,631, a slight increase of about 233 people from last quarter. The planned acquisition of NeXT Software which was announced on December 20th is expected to close by mid-February. Apple remains committed to NeXT customers and will continue to enhance NeXT Web Objects and OpenStep enterprise products. They believe there are significant opportunities to grow NeXT's current enterprise business. The NeXT acquisition will result in a cash outlay of approximately $380 million during the second fiscal quarter. In addition, Apple expects to write off approximately 75% of the estimated $400 million purchase price as in-process R&D during the second quarter. Aside from the writeoff and amortization of goodwill, they expect the NeXT acquisition to be earnings neutral in fiscal 1997 and earnings positive in fiscal 1998 and beyond.

THE MAC OS AND RHAPSODY. They have gone to shipment on the Mac OS release they had called Harmony. They will be shipping a release called Tempo in July and they will be having two shipments in 1998. They see licensing revenues continuing to grow sequentially. Their first fiscal quarter licensing revenues were up strongly from the fourth quarter. But, as a percent of Apple's total revenues, their licensing revenues are inconsequential at this point. Relative to Rhapsody, their plan shows a developer release mid-year and a customer release they are calling Premiere at the end of the year. The Premiere release will work on PowerPC, it will support the OpenStep programming interface and therefore support the NeXT customer set. They will also have an early release of their compatibility feature. They will follow that release in the middle of 1998 with a release they are calling the Unified release and that release will have both the compatibility feature and the OpenStep programming interfaces on the PowerPC platform. Between the releases of the operating system, both the Mac OS and Rhapsody and then the independent shipments of the other products, Apple said to expect to see extensions to their multimedia support with the Quicktime media layer. We will also see them focusing on Internet support. We will see some support relative to Knowledge Management with a unique architecture from Apple called MCS or Hot Sauce. We will see extensions to the hardware line as it relates to servers and mobile devices. So, through 1997 we will see new technologies, new support, focused on the ease-of-use of the Macintosh platform and areas that are emerging such as the Internet (including intranets), multimedia, and they will be taking advantage of the NeXT object technology as well as their Web Object offerings.

OUTLOOK FOR THE REST OF 1997. Based on Q1 results, Apple hopes to return to profitability now by the fourth fiscal quarter of 1997 rather than the previously expected second fiscal quarter. They also expect sales volumes in the second quarter to be down from the first quarter as a result of seasonality of demand and they are targetting revenue for the fiscal 1997 year now in the range of $8 billion to $8.5 billion. They feel good about their abilities to sustain gross margins at about the 20% level and are taking measures to reset their annualized operating expense target to $1.6 billion.

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