FOOL ANALYSTS MEETING COVERAGE
By Dale Wettlaufer (MF Raleigh)

APPLE COMPUTER <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ: AAPL)") else Response.Write("(NASDAQ: AAPL)") end if %>
Apple Analysts Meeting
November 4, 1996
New York City, New York

Addressing approximately 100 analysts, Apple's Chief Financial Officer, Fred Anderson, and Chief Administrative Officer, George Scalise, gave an update on Apple's three year strategic transformation process.

THREE YEAR TRANSFORMATION PLAN

Fiscal year 1996 was the first year of Apple's strategic plan to stabilize the business, improve liquidity, regain profitability and reverse negative momentum. The company's new priority? To build a foundation for success in the future, not to enter into a disastrous war to try to regain lost market share.

In 1997, Apple intends to strengthen its competitive position, rebuild margins and maintain its hold on its target market through developing high value-added products and strengthening their brand.

In the third phase of the plan, to take place in 1998, the goals will be to grow at or above the market growth rate for personal computer related companies. They believe they can acheive thsi in part by expanding in underdeveloped markets like China, India and Brazil, and explore acquisitions focusing on the Internet and software markets.

In May, the company announced its new strategy; in June, a new organization; now, Apple is putting in place a balanced set of metrics that tie incentives for everyone in the organization to operational and financial objectives. The $661 million June convertible subordinated debenture offering strengthened the company's balance sheet. Anderson commented that the company's cash burn rate was "scary" when he joined the company in April and that he "sleeps well at night" now.

The company is pleased by its forecasting ability with regard to inventories. Operating expenses are also under control, dropping $50 million per quarter. With an annualized reduction in operating expenses of $200 million, the company's sales break-even point is now approximately $9 billion at the 20%+ gross margin. An example of moves made to cut operating expenses is the sale of Apple's Fountain factory. This move has allowed Apple to achieve better gross margins through outsourcing. On an annualized basis, doing this saves about $25 million in manufacturing expenses.

The first goal in 1997 is to simplify the product line. The company is committed to reducing the product line to about 40 models by summer 1997 from 80 this year. By dropping models , the company aims to improve its time-to-market performance, reduce manufacturing costs, and focus its research and develop (R&D) efforts on the areas where it can add the most value.

PRODUCT STRATEGIES

The company is planning to introduce the PowerPC platform, known as the CHRP or Common Hardware Reference Platform, in this fiscal year. Apple also wants to increase commonality of parts to reduce product costs and increase inventory turns. The company also wants to improve product quality to reduce unproductive costs, as $120 million was burned in incremental costs in FY 1996 to support warranty expenses and re-works.

Delivering key elements of the Mac operating system (OS) is a key strategy and the company plans on delivering a new release, incorporating new features, every six months. This strategy takes the enterprise computing market very much into account, as the Mac OS must offer a high value added alternative to the dominant operating system in the market to succeed.

The company also aims to deliver strong middleware software to exploit its strengths in the internet and multimedia.

The company will focus on its PowerBook line of computers, as the line is critical to Apple's recovery. The company struggled with quality and availability last year and is going through a product transition this quarter; the PowerBook line should be back at full production by the second quarter, representing 15%+ of product mix. The company expects to be back in the lead with the market's fastest laptop computer with this PowerBook.

Newton has to be established as a viable long-term business whereas it's a drain on profitability right now. Losses on the product amount to around $40 million per year for this product investment. The company is excited about the opportunities for its Newton family in markets such as education and is re-positioning Newton as more than a hand-held consumer market product.

Last week, the company announced its E-Mate 300 for the education market. The $800 range device comes bundled with a graphics, word processing, spreadsheet, calculator, and mail software. Available in the latter half of the year, the E-Mate is designed to put computing power in the hands of more children. Because of its size and weight, Apple believes that the E-Mate will be demanded by a variety of users.

The company has also introduced its Message Pad 2000, available early in 1997, in the $1,000 range. This unit will be ideal for business people. It'll be ten times as fast as what is available today, will come with email and web browsing capabilities, one hour recording capability, and will be able to deal with voice notes. The unit will synchronize to both the Mac and Windows operating systems. Battery life will be measured in weeks.

The company is concentrating on reducing its products' time to market from 14 months to 12 months or less. If the company can achieve this goal, it can hit the early part of a product cycle where prices and gross margins are higher.

Product introductions are on schedule.

FINANCIAL MODEL

At the end of the transformation process, the company will aim for the following financial model:

23% Gross profit

10% Sales, marketing, and development expense

2% General & administrative expense

5% R&D expense

6% Operating margin

4% Net margin

20% Return on equity

The model assumes $12 billion in sales in 1998-1999.

STRATEGIC REVIEW

Demand creation undergirds Apple's strategic plan for the coming years -- plug and play, ease of use, total cost of ownership, and cross hardware environments are all trends that bode very well for Apple.

Apple's mission statement: "We will be a leader in providing simple, powerful, high quality information products and services for people who learn, communicate, and create."

The company has been at this point in the past, so the above mission statement recalls past successes and guides the company to build upon core competencies.

The company's channel strategy will seek to exercise all opportunities; the company will provide customers with solutions to their challenges.

The new Apple will be customer and market driven rather than product driven: the market and the customer will let Apple know what it should produce. The companies business units will have profit and loss responsibilities with measurable goals. The company wants to put together entrepreneurial energy with management excellence in meeting defined goals.

The company will have a number of operating divisions, defined as: Macintosh; Imaging; Servers and Alternative Platforms; and Information Appliances. These divisions are responsible for developing the product, bringing them to market, and maintaining cost structures. These are the divisions that run the P&L centers. Supporting these divisions are Apple Assist, Worldwide Sales, and Segment Marketing. Apple Assist will not only be responsible for traditional customer service but will also endeavor to keep the customer using Apple products as their needs change and grow. Worldwide Sales is now a consolidated unit, allowing for cost savings, which can tailor its services to the needs of the individual markets it serves. The Segment Marketing group will go out and find out what the customer needs and bring that information back to the operating division that can fulfill that need.

AppleSoft and AppleNet are both elements of the company's R&D structure and will work with the OS, middleware, and Claris in application software. Applenet is responsible for making sure that products fit into the networking arenas of the inter- and intranet. Apple's Research Labs is the vanguard of product development.

The company's strategy is not to be the volume leader in all markets but to be the volume leader in its markets of choice. Those are enterprise, general business, home, education, science and technology, applications, and multimedia.

The company is already doing very well in some of these markets, such as 23% market share in corporate publishing; 47%, commercial publishing; 63%, multimedia development; 50%, chemical scientists; 40%, life sciences; 50% , aerospace; 14%, general engineering; and 25% of web browsing and 50%+ of web authoring are done on Mac machines. Apple is also the number two seller of web servers.

Two megatrends will guide the next phase of Apple's evolution: pervasive communications and multimedia. The company believes that it is well positioned here, too. Apple is the leader in webcasting with QuickTime as the de facto standard. The first customer goal the company has for its internet strategy is to make the internet as least as easy to use as the Macintosh -- the company wants to make "complex technology simple."

The Mac OS will be around for a long time and the company will continue to enhance the software. Two software packages in development that will make the internet easier to use are V-Twin and Hot Sauce. V-Twin is a search and cataloguing engine which is able to compress a document to its most salient points. Hot Sauce structures databases across platforms much like HTML did for text.

ALLIANCES

The Sun agreement will allow for a client/server environment that will be truly competitive with Wintel offerings and allows for development choices that have not been available.

The alliance is also aimed at the inter- intranet spaces. Java Beans and OpenDoc will be combined and have interoperability. Java media and QuickTime will be integrated.

The IBM-Motorola-Apple alliances, AIM, will allow the company to keep parity between its and the Pentium in speed and power. The sublicensing agreement allows those companies and licensees to introduce new products using the Mac OS. The company is working on a subnotebook product with IBM; Apple will bring to market the first generation of the product and the two companies will investigate further developments after that.

Apple has doubled its developer relations budget and wants to achieve parity in timing and features in Mac platform software compared to competitors' software. The company is launching its "Software Storm" marketing campaign that will let consumers know when Mac software can be found in retail software packages that are marketed, either by labeling or in store placement, as Windows products.

85% of the people in the world do not have access to computers yet. With its products and pricepoints, the company wants to build its base of users in new markets and broaden its base in established markets.

FURTHER FINANCIAL COMMENTS

The company achieved $700 million in operational cash flow in the last six months. The combined cash and debt figure has turned around from negative $200 million in Q2 1996 to over $600 million at the end of the fourth quarter.

Annual operating expenses have dropped to $2 billion with the cost savings the company is achieving. The company wants to achieve sustained profitability by Q2 this year. The ramp on the PowerBook this quarter will take away about $150 million in sales growth, though.

Sequential sales growth from Q3 to Q4 1996 was 7% with a 22% gross margin. Taking into account inventory reserves which were charged to operations in Q4, gross margin stayed above 20%. Q4 sales growth was driven by strong US sales performance. Sales in the K-12 education market reached a record level, up 3% from Q4 1995's record sales.

Inventory has been reduced from almost $2 billion at the end of Q1 to $662 million last quarter. Inventory turns has historically been around 6 -- the company would like that to increase to 10 turns. Accounts/receivable is targeted to stay at 50 days sales outstanding. The company is no longer building to forecast but is building to demand. Country warehouses are being closed down and the company will ship directly to the customer while inventory being re-stocked continually, helping to keep up inventory turns and decrease working capital liquidity.

The company's goal is to achieve comparable revenues in FY1997 though year-over-year comparisons will be negative in Q1 1996. Investments in the developer program will increase by $25 million this year. The company expects to be able to continue its strategic investments in 1997 and to achieve profitability. Capital expenditures are targeted at $75 million.