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

Apple Computer, Inc.
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One Infinite Loop
Cupertino, CA 95014
(408) 996-1010
http://www.apple.com

UNION CITY, CA (April 27, 1997)/FOOLWIRE/ --- Apple Computer announced results for the company's fiscal 1997 second quarter on April 16th. Revenues for the quarter were $1.6 billion compared to $2.1 billion in the first quarter and $2.2 billion in the year-ago quarter. International sales accounted for 49% of total revenues in the current quarter.

NON-RECURRING ITEMS. As previously indicated, Apple incurred two large charges of a non-operating nature during the quarter. Pursuant to generally accepted accounting principles, they recorded a charge of $375 million for the write-off of in-process R&D activity related to the February 4, 1997 acquisition of NeXT Software, Inc. Additionally, they recorded a charge of $155 million to increase reserves to cover the costs of restructuring activities previously announced on March 14, 1997.

EARNINGS. Apple's total loss for the quarter was $708 million, or $(5.64) per share, compared to a net loss of $120 million, or $(0.96) per share in the December 1996 quarter and a net loss of $740 million, or $(5.99) per share, in the year-ago quarter. Exclusive of the charges for restructuring and the write-off of in-process R&D, Apple's current quarter loss from operations was $186 million, or $(1.48) per share. Excluding the non-operating items the loss from operations was $178 million or $(1.42) per share.

UNIT SALES. Unit sales were 602,00 units. Q2 is typically Apple's weakest seasonal quarter and that phenomenon was really compounded by the fact that they exited the first quarter with excessive channel inventory. Based on reporting from their resellers, they estimate that channel inventory declined by approximately $200 million during the quarter. This would imply that customer demand or sell-through exceeded revenue by a comparable amount. There has been no substantial change in their channel profile and they feel that the channel inventory levels at this point are about at normal levels, so that overhang is essentially all gone.

POWERBOOKS. Availability of Powerbooks has improved significantly relative to recent quarters and sales of Powerbooks accounted for 22% of their unit mix during the quarter, up from 10% in the first quarter. Revenues to US business customers were up 35% on a sequential basis primarily due to the strength of Powerbook sales.

BACKLOG/POWER MACS. They exited the quarter with approximately $420 million in backlog, most of which consisted of newly announced high-end Power Macintosh systems on which they received very favorable reviews. They have not been able to keep up with the demand for these products, either due to a shortage of components for certain configurations or due to delays in releasing certain configurations from design to their production group until they were confident that the product met their quality standards. They expect now availability of these products that have been constrained in the last quarter to improve over the next few weeks.

CLARIS CORPORATION. Their Claris Corporation experienced its most successful quarter ever, generating revenue of about $70 million and a record operating profit. They think this is important because the Claris revenues reflect unprecedented sales of Apple-labeled software which was largely driven by strong customer demand for upgrades of their MacOS 7.6.

GROSS MARGINS. At 19%, gross margins for the quarter were flat relative to the first quarter. Higher gross margins on an increased unit mix of Powerbooks were offset largely by lower margins on both their Performas and their Power Macintoshes. Their goal in terms of gross margins has not really changed in that it is still to drive 20% or higher gross margins going forward. In terms of their ultimate success model looking out to fiscal 1999, they have set as a lofty goal for the company to hit 23% gross margins. Now, as to why it was at 19% this quarter, and around 19% last quarter, which is a little below the 20%, they point to one major thing. Of their $400 million backlog, approximately $300 million of it was in the Power Macintosh space and their new models, which is where their highest margins are, so obviously had they been able to ship a significant part of that $300 million in Power Macintosh backlog, their gross margins would have been better than reported. They think going forward they can drive 20% or higher.

OPERATING EXPENSES. With respect to operating expenses, exclusive of the charges related to the restructuring and the NeXT writeoff, the operating expenses were $489 million or down $32 million from the first quarter. They expect to continue to see significant declines in operating expenses in the next couple of quarters as the results of their restructuring actions kick in. Their plans call for an eventual $125 million quarterly expense reduction below their Q1 run rate of approximately $525 million per quarter. Their goal is to realize about 80% of this quarterly expense reduction target by the end of their third quarter and about 90% of the reduction by the end of their fourth quarter.

LIQUIDITY. They continued to maintain a very strong cash position with over $1.4 billion in cash and short-term investments at the end of the quarter. They ended the quarter also with net cash, meaning cash less debt (both short and long-term debt), of about $374 million. They continue to manage their inventory well, finishing the quarter with a balance of $509 million compared with $488 million last quarter, and they achieved annualized inventory turns of just over 10 in the quarter. Their days sales outstanding were 57 days, slightly higher than last quarter due to some special financing terms granted during the first quarter. During the quarter, they repaid $47 million of their short-term bank debt, leaving them with a balance in terms of short-term bank debt of $133 million. They will be attempting to renew the remaining bank loans as they mature over the next few months.

RESTRUCTURING UPDATE. As they indicated a few weeks ago, the financial goals behind their restructuring are to take approximately $500 million out of their annual operating expenses and to return the company to profitability as quickly as possible. They think they can achieve most of the needed expense reductions by the end of Q4 and over half of the restructuring costs will relate to layoff activities, but there will also be significant non-layoff related costs including contract cancellations, lease cancellations, and asset writeoffs. As of the end of March, approximately 1,200 permanent employees have been given layoffs. During the month of March, they also reduced temporary and contract employees by about 150. On April 11th, they also announced the layoff of about 100 employees for their Singapore-based Apple Design Center. The remainder of the targeted headcount reductions will take place over the next few months as various projects are phased out. During the quarter they completed the sale of their distribution facility in The Netherlands which, by the way, yielded about $10 million in cash proceeds. Additionally, a major program is underway to consolidate the company's facilities, particularly in the US, and sublet excess leased space. They also have an active program to divest certain other non-strategic assets.

NEXT ACQUISITION. They completed the NeXT acquisition on February 4th and have reported a charge, as indicated, of $375 million to reflect the writeoff of in-process R&D. The amount of this writeoff is greater than their preliminary estimate and is based on a comprehensive independent appraisal. The increase in the writeoff did not result from any increase in the purchase price of NeXT and it will result in charges for amortization of goodwill in the future quarters that are lower than originally estimated.

GENERAL COMMENTS ON QUARTER'S PERFORMANCE. The financial results are disappointing, however they don't think these financial results tell the whole story. They correspond to a quarter in which Apple took some major decisive, corrective actions, made some important technology investments, and strengthened their competitive position through the introduction of some, they think, dazzling new products. They feel the worst is behind them and their strategy is on track. They made progress in addressing some of Apple's greatest challenges -- liquidity, quality, faltering OS strategy, and a lack of organizational cohesiveness. They dealt with all of these issues during the past year and they think they can say that to a very large extent they have moved much of those behind them at this point.

FOCUSING ON WHAT THEY DO BEST. They knew exactly what they needed to work on -- streamlining their business and defining what they would and would not do, and focusing on what they could do best. Their recent reorganization and restructuring, they think, demonstrate their dedication to strengthening Apple's focus on their core competencies -- ease-of-use, multimedia, Internet, elegant personal computer hardware design, unique plug-and-play capabilities, and OS design -- which bring distinctive value to their customers. But, they want to make one thing clear, they won't be satisfied until they return to a sustainable profitability. Their very highest priority is to get the company profitable as quickly as possible and, in that regard, they have taken some very significant measures this past quarter.

PRODUCT STRATEGY. Nonetheless, great companies are built on great products and they promised that 1997 would be a year of great new products for Apple and they have begun to deliver on that promise. They are simplifying the product line and making it easier for customers to find the product they need. They have consolidated the entire desktop line under the Power Macintosh brand as part of the simplification process.

NEW PRODUCTS. During the second quarter, they began shipping the fastest notebook computer on the market, the 3400, as well as the first truly portable computer designed for young students, their EMate 300. In addition, they announced a 300 MHz home desktop system which they will begin to ship in the next few weeks. With the acquisition of NeXT Software, they have laid out a clear roadmap for how they plan to carry their customers into the future by creating a new state-of-the-art operating system platform. They will continue to make major enhancements to the MacOS, however. With MacOS 8 expected to ship this Summer, they plan to strengthen the differentiation between the MacOS and competitive operating systems. The last 12 months have been stormy, to say the least. But they are confident that the steps they have taken were steps that were absolutely essential to take and that will pave the way towards their return to profitability.

DEMAND STILL STRONG IN CORE MARKETS. They think, relative to the publishing market, they continue to have strong demand. In fact, most of the demand they spoke about in terms of backlog, which is a stronger backlog than they normally carry, is primarily driven by professionals who demand the high-level systems and that tends to be dominated by the people who do graphics and other forms of authoring and publishing. They think there is real strength there and they are very pleased by that. Relative to the product line simplification they think it is a little too early to tell whether that is going to have the intended effect, but they are getting a lot fewer questions about differences between various models, so they think the line is a lot simpler. Frankly, what they think is going to drive the consumer in the short-term is going to be the performance of their machines. Having introduced some great products recently, and they have many more in the pipeline, they expect that they are going to get more of the people out of their homes and into the stores to buy some of these products.

LICENSING PROGRAM. They are fully committed to their licensing program. As with any program that is new, as you get into it you find there are things you need to do to improve it and make it a more successful program for both parties. So, they have been going through some discussions with their licensees on that. It is their intention to create a profitable business for licensees as well as a profitable business for Apple. They continuously monitor these licensing activities. Relative to their System 7 licensing, they are not subject to change, the contracts are fixed there. But, as they move into the next generation operating system and into the common hardware reference platform architecture, frankly a number of the aspects of the original license are going to be forced to be changed. So it was a consequence of those changes that they took this fresh look. They expect to see their licensing revenues continue to grow. They expect to see their partners continue to do well in the marketplace and to help them grow their presence for the MacOS platform around the world.

STRATEGY WITH WINDOWS COMPATIBLE MODELS. The availability of Power Macintoshes that includes compatibility with Windows through hardware emulation and the presence of an Intel microprocessor is part of strengthening one of the advantages of the Macintosh which is that they will end up being the most compatible personal computer people can buy. It is not a replacement for the MacOS. All of these Power Macintoshes are MacOS machines that, in addition, run Windows applications. They want to make this a much more visible feature of the Macintosh because their customers like it.

CLONES. As far as clones, in the first quarter there were about 128,000 units shipped to the clones. As of right now they haven't had a roll-up that they have seen in terms of the number of units that were shipped by the clones, so they don't have anything but anecdotal input.

ISV SUPPORT FOR RHAPSODY. In terms of ISV adoption of the new operating system, they have seen some primarily among the more innovative, cutting edge developers who want to try some things. They also have had, right off the bat, a significant support from Metrowerks who has historically developed development tools for the Macintosh, which was very critical for them going forward. Despite some of the press reports, Apple's relationship with Adobe is going extremely well in this are and they fully expect they will be successful in getting them to the point. Given the fact that they haven't shipped a developer machine yet, so they have a chance to really look at it, it's not uncommon for them to wait until they have a chance to play with the machine. Apple will be shipping that developer release sometime in the Summer. They expect within a few months after that, they will begin to see this momentum building in terms of ISV support. As far as compelling features of Rhapsody for developers and users -- OpenStep, or the advanced portion of the Rhapsody system, is in effect a portable operating system. Therefore, it allows you to move that operating system from one platform to the other and, in so doing, you can preserve the user experience and user operating environment and use the identical applications as you do that. This will be the first system ever that will be able to do that. That leads to significant opportunities for new innovation going forward.

PC INDUSTRY TRENDS. They think there are two trends going on in the PC industry today. One is to build kits so people can use the erector set model to build the machine they want. And, they think another trend is almost in the opposite directions, which is to provide people with fully integrated solutions, where the machine gets shipped with the right equipment then software and so forth, ready for use. They think both will be successful and customers have indicated that they are interested in both categories. They have not seen any flood of letters or input from customers or dealers for Apple to move in a different direction in this category, so they think they will stay with what they have been doing for now but will keep monitoring it closely and see if something indicates that they ought to change.

PERFORMANCE BY GEOGRAPHY. Geographically, they had a very weak quarter in Japan in terms of revenues. The positive news is that they had excellent sell-through in Japan this quarter and made significant progress in bringing their channel inventories down to a more normal level in Japan and, as a result, the would expect a much better revenue quarter next quarter in Japan. The Americas had a very successful sell-through this quarter on the Power Macs which is why it came down. So, overall, the weakest spots were Japan and Europe and the US held up the best.

OUTLOOK. Looking ahead to the third and fourth quarters this year, they expect to see sequential growth in revenues and a significantly lower operating loss as they begin to realize expense savings from their restructuring. The third quarter is the beginning of their "education" quarter, which sort of straddles third quarter and fourth quarter in terms of the buying season for back-to-school. So, they would also expect to see a rise in revenues associated with the increased demand in their education channel. Last year they were very late getting the models that they wanted to ship into education into the marketplace and they lost some momentum there. This year they are well ahead of that game and the factories are running. There may be some isolated problems along the way as there always are, but they think they will be in much better shape this year. They continue to pursue their goal of returning the company to profitability by the fourth fiscal quarter of 1997.

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.