Apple
Q3 '96
| Apple
Q3 '96
|
| (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 %> UNION CITY, Ca., July 18, 1996/FOOLWIRE/ --- Apple Computer announced its Q3 earnings after the market close yesterday. In the conference call following the earnings release, Apple executives read the numbers from the press release and then spent the rest of the call covering the issues most people who follow the company are talking about. Since the numbers were read verbatim from Apple's press release (available online in Company News or on Apple's web site listed above), like last quarter's report I will cover here what wasn't in the press release.
Apple's CFO, Fred Anderson, started with some additional perspective on the numbers. Apple made significant progress during the quarter toward their dual goals of strengthening Apple's liquidity and returning Apple to sustainable profitability.
SALES
Revenues were basically flat with Q2, but down 15% from the strong prior year quarter. Unit shipments totalled 837,000, down 6% from Q2 and down 16% from the prior year quarter. Much of the unit decline was attributable to quality problems with Powerbooks, all of which are being addressed. Powerbooks declined from 14% of unit mix in Q3 1995 and 15% of mix in Q2 1996 to 8% of mix in Q3 1996. Revenues for the quarter would have been noticeably higher than Q2 levels without this problem. The Powerbooks are slightly lower margin products, so had they shipped, it would have had a slightly negative impact on gross margins, but not a significant impact (within 0.5%). The margin issue with the Powerbooks is temporary, at least at the levels they have now. Apple has a new range of products that will come out in Q1 1997. Every quarter they will have a new product that they expect will increase margins to where they were in 1994-95. Powerbooks will continue to be at below-normal levels until calendar Q1 1997. Apple's server business is small when viewed relative to a company like Compaq. However, servers are the fastest growing segment in Apple's product line. The growth rate for servers was above 50% in the quarter. In terms of sectors, education held up well, enterprise was a little weaker although they had some big wins in that segment including EDS, Lockheed Martin, Motorola, US West, KPMG, and several others.
Consistent with their strategy to move toward a value-added product portfolio, their sales were strongest among high-end CPUs and servers. Their split between US and international revenues was 48% and 52% respectively. Japan and Asia/Pacific was relatively stronger than Europe and the US. Total backlog at quarter end increased to $428 million from $249 million at the end of Q2. Their 18.5% gross margin represented a significant improvement from the margins before inventory adjustments of 9% in Q2. The gross margin improvements were primarily attributable to favorable mix shifts to the high end and lower component and manufacturing costs. They were pleased by the progress in the quarter toward their goal of returning gross margins above the 20% level. They are doing a number of things to offset pricing pressure from the PC market to sustain and improve gross margins. They have a stated goal to reduce the number of SKUs by 50%. They are trying to move more and more toward standard components. They are pushing their manufacturing procurement organization to find ways to negotiate better pricing in terms of the components. They have programs to drive higher-end mix, consistent with their strategies. Those are a few examples of the programs put in place to get the cost structure down and get the mix on the higher end strong.
RESTRUCTURING ACTIVITIES & EXPENSE MANAGEMENT
Operating expenses declined by $35 million from last quarter and $53 million from Q3 last year. Operating expense reductions were due to decreases in headcount, cuts in discretionary spending such as advertising, and the shutdown of eWorld, Taligent, and Kaleida. Total headcount declined by about 1800 during the quarter. This represents a 12% decrease from last quarter and an 18% decrease from a year ago. The headcount reductions included the transfer of about 1000 employees to SCI Systems as part of the Fountain sale. Approximately 550 layoffs have occurred since January and another 400 have been notified but not yet terminated including about 200 related to the Sacramento PCBA closing. There have been anecdotal rumors of key engineering department resignations, particularly in the Copland team. The company was asked to comment on these rumors as far as what percentage of the headcount reductions were layoffs versus resignations, and if there were key resignations on the Copland team that would delay the product. Apple answered that their R&D area continues to ramp up its headcount and did in Q3. In terms of Copland or George projects, there have been people leaving but Apple doesn't see any major impact on the schedules as a result of that and the company indicated that the resignations have not been proportionally higher in the Copland group than in other areas of the company.
Key restructuring events during the quarter including the sale of Fountain on May 31st, their plan to close the Sacramento PCB Assembly plant by the end of the 4th quarter, and a plan to sell and outsource one of their data centers by the end of this month. During the quarter they substantially strengthened Apple's liquidity and balance sheet. Both gross and net cash increased during the quarter. In June, they successfully completed a $661.25 million convertible bond offering. In June, they also cut their short term borrowings in half through net repayments of about $165 million. They now have about $188 million in short term loans remaining with 5 Japanese banks with repayment scheduled during the September through December 1996 time frame.
Gross cash increased by $767 million during the quarter and net cash increased by $283 million due to improved asset management. Most noteworthy is that receivables decreased by $74 million during the quarter and inventories declined by $406 million to $1.060 million. The reduced net loss in receivable and inventory decreases enabled Apple to generate about $287 million in cash from operations during the quarter, a significant improvement from the negative $364 million in cash from operations during Q2.
During the quarter, Apple set the framework for their new strategy and realigned the organization to support it. They completed the executive management team with Ellen Hancock as Cheif Technology Officer and Marco Landi as Chief Operating Officer, and created 6 new product P&L centers under Marco Landi. They also separated hardware and software functions to enhance flexibility and accountability; established divisions dedicated to the Internet, advanced research, and systems software; and established a worldwide sales organization to support a global focus.
They are moving along as planned on the licensing programs. They don't have any new licensees to talk about right now, but as a result of their efforts and the efforts of their partners, Motorola and IBM, they are working very closely with a number of potential companies at this stage. As a result of this, they expect to see a significant increase in the number of units produced on the MacOS platform as they go through the next fiscal year. Going forward, Apple is working on the CHRP platform which will be coming forward in the next several months and opens up a whole new set of opportunities for them.
NEAR-TERM OUTLOOK
Apple expects sales to be below year-ago levels for the remainder of the calendar year, but up from the third fiscal quarter just reported. Their goal is still to return Apple to profitability by their Q2 1997. They expect price competition in the PC industry to continue to exert margin pressure. They have factored in pricing, it is not their philosophy to be the price leader but they know they have to present the most value in the marketplace. They try to do value pricing and know that they need to be within a close relevant range of what the pricing is in the marketplace. They expect to continue steady progress toward lowering the break-even revenue level to $9 billion by targeting gross margins above 20% and targeting annual operating expense reductions of at least $300 million of the Q2 operating expense run rate of $2.2 billion per year. In the Fall time frame Apple will be announcing new products across all major sections of their product lines -- notebooks, Performas, Power Macintosh systems, etc. Going into 1997, there will be new products based on the PowerPC platform specification. The company was asked if the Harmony update was still on target for the end of the year and they indicated it is on target. * 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. | |
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