As mentioned in yesterday's Updates, RFI was heartened by Mr. Birinyi's naming of Apple Computer (AAPL.O) as one of "The Stocks Of 1998" as well as Mr. Job's announcement that due to cost cutting and margins Apple was able to make approximately US$ 45 million in its fiscal Q1 that is due to be reported next week. And the associated news of the success of the CompUSA "Store Within A Store" (Salon Stores) in the initial run were all heartening news. That Macs went up from 3% of all CompUSA sales to 14% is a heartening sign, but there's a lot of tough sledding going forward as there are also problems being reported with CompUSA's efforts; mostly from the sales floor side.
Yet, all of that was "good news", even the "expected" Oracle "partnership" where Oracle is porting its business applications to the Mac platform. Microsoft's continued commitment to the Mac was also welcome but not unexpected.
Prior to Macworld Expo, RFI stated that the big hurdles that Apple had to vault over in the very near term were Macworld / Jobs' Keynote and its Q1 Earnings Report on 14 Jan 98. Both were addressed in Mr. Jobs' keynote so both were addressed and vaulted at the same time. So, not only have the hurdles been vaulted but it also means that "All The Good News Is In The Stock." Even with that "Good News", Apple was only able to hit the 19 resistance level and crest at 20. It closed on Tuesday at 18'15, "at" resistance at 19. Now, comes the next four to six months where Apple will have to exhibit positive forward momentum, even starting next week if Apple's share price is not going to decline. But, that's where "The Bad" comes into play and we'll discuss that later.
As for the "quality" of Apple's Q1 profits, they weren't due to expanding the top line but came from the Bottom Line and could be a "One Trick Pony" as they can't cut costs and experience improved margins on G3 boxes twice in a row. Which is something that analysts recognized as soon as Apple announced its profits and how they came about. Encouraging yes, but a lot depends on what Apple does next quarter and the quarter after that. Earnings estimates might rise because of this, but RFI would have preferred continued decreased expectations because of "The Bad" that might impact Apple's performance going forward.
While we wouldn't go as far as calling Apple's Q1 profits "Smoke & Mirrors" (as they are "real"), we would call them the result of being a "One Trick Pony" for the previously mentioned reasons.
Another purported "Good" was that the Apple forecast 80,000 G3 boxes to be sold but actually sold 130,000. Quite a trick if Apple could ramp up production cycles and lines to increase production by 62.5% in such a short period, but it's not really realistic unless those "Hecho en Mexico" boxes were those excess G3 boxes that were in demand. A plausible explanation as those "Hecho en Mexico" boxes never surfaced anywhere as RFI was informed and has been expecting.
A more likely explanation to the differential in the "internal forecast" versus actual demand was that Apple "low-balled" the forecasts while adding in a "Fudge Factor" into production so it would be an easy target to hit and exceed. Thereby allowing Apple to "honestly" state that sales exceeded their forecasts. Not "dishonest" really, just a "marketing gimmick" and RFI calls "Marketing" a form of "Legalized Lying."
If this suspected "low balling" was the case for the "better than forecast demand for G3 boxes", while adding a "Fudge Factor" in production numbers, then Apple has done nothing worse than most Tech Sector companies have done and still do. Also, there is o way that Apple could have boosted its production capacity by 62.5% in such a short period, even using the Build To Order practices of the Apple Store. Come on. They'd have to have the parts on hand, or get them shipped post haste, as well as ramp up production so much that their cost cutting would have been impacted by increased labor costs worldwide as they ramped up production after being "Caught Off Guard" due to a 62.5% increase in demand.
But, we'll let Apple slide on this issue as it doesn't really matter whether they low balled their forecasts so as to easily beat them. But, this issue does explain a lot of the reports RFI received about Apple meeting their numbers in the U.S., Europe, Education and other places. And, this low balling was also part of a report that Europe had met its numbers. We're not belittling Apple's G3 sales, or the efforts of Apple's Sales Force, but this might be less than a true reflection of the actual expected demand for those G3 boxes that Apple felt was probable. You just don't "come up" with an extra 50,000 G3 boxes between November and 26 December, do you?
Mac OS 8.1 will also possibly spur sales of Mac OS 8, etc., and we're still expecting the Premier release of Rhapsody on schedule, but what wasn't addressed in Mr. Jobs' keynote was louder than what was. That's where "The Bad" comes into play....
Yes Virginia, PowerExpress was executed and even the potential for a 275 MHz G3 "Son of PowerExpress" is also allegedly headed towards the same fate as its ancestor. Which means that there will be a gaping hole in Apple's product line (not just "consumer" and sub $1000 arenas) until at least the end of CY 98 when the G4 boxes will be released at the earliest. That is, unless Apple pulls a rabbit out of it hat.
Another potential member of "The Bad" is that Apple is allegedly rethinking its PowerBook Strategy and if you are looking to get your hands on Apple's "Wall Street" or other "Future PowerBook" anytime soon, you might as well just plunk down the money for that speed bumped G3 PowerBook, or the initial G3 PowerBook once its price is lowered. Yes Virginia, more potential "holes" in the product line.
So, those are the two largest "Bads" that could impact Apple's interim performance and also become a topic of dissection amongst the pundits and others regarding a "browning Apple." But, their hand wringing can only be resolved and addressed by Apple filling in its product lines in light of these most recent reports.
There are "Bads" lurking out there as well, but these are enough for now. Apple, as a computer company, needs to refill its product lines on a regular basis in order to keep up with the latest and greatest, as well as addressing consumers needs and desires; like a sub $1000 box that isn't a MacNC but a "real box" that they can run their software on. You can't dismiss or explain that away. Why spend $2,000 on a Mac when a $699 Compaq is available? Maybe that will change if Apple launches an X86 RhapTel box, but Apple continues to deny such rumors and reports.
Also, in the hardware area, if Apple does not get its product line filled out RFI would have to relegate Apple to the "No Compelling New Products", other than Rhapsody, QT 3.0 and other software offerings and the G3 lines will eventually reach penetration and saturation which will exacerbate downward pricing pressures to get those who haven't bought them yet to buy them. And that means lower margins for Apple. See the potential "vicious circle"?
Yes, this is all coming from an Apple Bull but these recent developments make this Long Term Apple Bull a little nervous until Apple addresses these concerns. We're still on the fence and taking a "Wait and See Attitude" even though we're concerned that Apple's share price might weaken once the "bad" comes out. Which brings us to ....
Introduction: This item was written on Wednesday morning after Morgan had the chance to cool off after the "Infamous Loop" incident, a debacle that should have never happened. And, some think that maybe a healthy dose of a Prozac and Thorazine cocktail should have been administered even before writing this. But, Morgan is a master of manners and self-restraint so it wasn't necessary. That it could have been a lot more scathing of Mr. Jobs' behavior goes without saying. And, unfortunately, what a lot of others are saying (privately) about Mr. Job's "performance" is unrestrained and quite scathing, derogatory and even profane. Something that would make Apple Bulls wince in pain at the prospect for a future swipe of Bear claws and teeth. But, Morgan restrained himself and things are not beyond salvaging. With that said, here's "The Ugly":
Steve Jobs' "performance" during his post keynote interview with Bruce Francis of CNBC was "deplorable" if you take a look at it from a Wall Street perspective. But, before we get into this, we want to clear up some issues.
First, RFI has had our disagreements with Mr. Francis' reporting in the past so it's not as if we're giving knee jerk support to Mr. Francis and/or CNBC. The questions about the CEO Search and Mr. Jobs possibly taking the "Interim" out of his title, even the line and form of the questions, were full in the purview and interest of CNBC's "Core Markets": Wall Street. And, contrary to what you stated in your walk off, there was NO agreement that the CEO Search and your taking the position was "taboo." In other words, you were either confused about preconditions made with others or you lied as an excuse to walk off. Never mind that the CEO Search status was one of the key issues that CNBC had been covering all morning, and your Public Relations people should have warned you that those questions were highly probable. Even the question that caused you to walk off.
Secondly. CNBC is piped into every trading room and back office area on Wall Street. It's even piped into the trading stations on the floor of the NYSE. Never mind those who are watching it in the background at home and/or work. If you wanted to make yourself appear to be an ass to the entirety of Wall Street, CNBC is the best place to do it.
Third. Mr. Jobs was not talking to some cub reporter, or established and well respected reporter, of a Mac Centric or Computing related publication, mag/rag or Internet site. He wasn't even talking to Bruce Francis or CNBC. He was talking to Wall Street. And you don't act like a churlish ass towards the people who: Buy, Sell, Recommend, etc. Apple's stock. Mr. Jobs, you were talking to not only "Me", but all the rest of Wall Street when you were talking to Mr. Francis. Maybe you forgot that, or maybe you didn't care. But, you just about spat in all of Wall Street's eye when you did what you did during that interview.
Fourth. Mr. Jobs' "Interpersonal Skills" have always been a topic of discussion but that display went beyond the pale for a lot of people, which we'll discuss in the "meat." Any first year Public Speaking student, or reportedly "troubled computer consultant campaigning for the CEO slot" could have easily sidestepped that question without resorting to your behavior.
Fifth. The majority of the Macworld Expo attendees, etc., were blissfully unaware of Mr. Jobs' actions, and the reactions as they giddily went about the rest of the day as well as preparing to go to the evening's festivities and activities. Thankfully most of them were blissfully unaware that the "Infamous Loop" was being played and replayed, as well as being a topic of discussion on CNBC's "Bull Session" show; which is targeted at "Wall Streeters" who are ending their long day by seeing what happened being discussed, as well as listening to those who are commenting on issues raised in the show. What did the "Infinite Infamous Loop" replace? Steve Jobs' accepting a Macworld Editor's Choice Award from Colin Crawford; which was running in a loop until the "Infamous Loop" was received. If Mr. Jobs handled himself properly, a "Good News Clip" would have been in its place. The "Infamous Loop" even made it to CNBC's early morning lineup as well as the widely watched CNBC "Squawkbox" show. Both of which are broadcast worldwide. Good job Steve. What are you going to do for an encore? Go on Larry King and then behave in like manner when Larry King asks you about the CEO Search and taking the job yourself?
Sixth. The "Reaction" to your behavior was "Sure, Swift and Severe" if our experiences of those reactions were similar to others. We were inundated with queries about your behavior and none of it was favorable. But that's for the "meat" too.
Seventh. On CNBC, and other places on The Street, Apple's performance and the content of the keynote and events at Macworld were no longer the "issue and focus." What became the "focus" was your behavior, ergo the "Infamous Loop" as well as it being a topic of discussion on "Bull Session" when it came to discussing Apple's CEO Search. Good job Mr. Jobs. What are you going to do for an encore?
Which brings us to the "meat." It's really "ugly" and remember that it's toned down because we're writing this long after we took almost 20+ hours to cool down after having to handle the queries sparked because of it. A "disaster" that was not of our own making.
Thankfully, we were working on an Update and Supplemental Report during the time of the initial interview and we were listening to it in the background. We heard Mr. Francis asking the questions about the CEO Search and the initial question about taking "interim" off of Mr. Jobs' CEO title when it suddenly broke to commercial and it did not resume after the break. So, we didn't have the fortune to "see" the original debacle. but that didn't matter as a Trader called as soon as they recovered enough from the shock to dial the phone. That was the first we knew of it.
The Trader was totally hacked off because they could not believe that a CEO of a Fortune 500 Company would "Talk to Him" (see?) that way. Even the Trader only saw Mr. Francis as the vehicle for asking questions that he wanted answered as well. This particular Trader has nothing vested in Apple rather than an interest in seeing the share price go up. They don't use Macs, nor are they emotionally invested in the prospects for Apple. When they saw Mr. Jobs do what he did, his stomach wrenched and he was dumbfounded that Mr. Jobs would behave that way when all of Wall Street was watching. And he voiced doubts and concerns over whether he even wanted Mr. Jobs as an Interim CEO much less a permanent one if that was the way that Mr. Jobs was going to treat "his linemen."
You see, it's all of those people on Wall Street (including small investors that make up Apple's Core Markets, remember "Proxy Poll" Mr. Jobs?) that are the "Offensive Linemen" for Apple. Those who: Buy, Sell, Trade, Recommend, etc. Apple's shares on a daily basis. They're the ones that take the punishment for Apple so the "Star Quarterback" can scramble around and get off the plays to help Apple "Win" in the long run. Care to guess what happens if the "Star Quarterback" acts like a churlish ass towards his linemen? Kind of like former Bears QB McMahon did? Next time the QB yells "Hike!", the offensive linemen step out of the way and let the defensive linemen sack the QB and totally maul him. They keep on doing it until the "churlish ass" learns his lesson; if ever.
That Trader was aghast that Mr. Jobs' acted in the way that he did because he not only "spat" on the "linemen" but he also made their jobs that more difficult. Good guns Mr. Jobs. You just gave the "Defensive team" (Apple's Bears) motivation and one of Apple's weaknesses. That Trader (Upstairs "Capital T" Mr. Faber), was also aghast at the display of Mr. Jobs' interpersonal skills. He asked, rightly: "Why didn't he just deflect the question and change the topic? What? He doesn't know how to do that? What do you think Francis was going to ask about? QuickTime? ....."
Said Trader also acknowledged that Robert Morgan was/is "the person most hooked into and in tune with Apple as a company and stock" (back patting ends) and asked what Morgan's opinion of Mr. Jobs' behavior was. While they were on the phone, Morgan saw (for the first time) that "Infamous Loop" and he reacted to it "live" with the Trader. After seeing it, he could only agree with the Trader that Mr. Jobs had effectively made himself look like a horse's ass in front of all of Wall Street and that there was no credible excuse for behavior like that. And, he had to agree that Bruce Francis was only asking the questions that were most on Wall Street's collective mind regarding Apple. And it was at that point that the loop of Steve Jobs and Colin Crawford disappeared, to be replaced by the "Infamous Loop." And, each running of it only seemed to increase the queries.
Mr. Jobs probably wouldn't want to hear the majority of the adjectives, adverbs, nouns and other words that were used by those who wanted answers as to what Mr. Jobs was thinking, if at all, when he did what he did; as well as the fact that Mr. Jobs' behavior became the issue and somewhat of a joke amongst those on The Street that couldn't believe he did that to Apple (AAPL.O) during a live interview: "Buy Apple (AAPL.O)? Right."
Furthermore, the incredulity of it all was something that people couldn't really fathom as it was totally beyond belief. And some of them didn't even want to get into Mr. Jobs' grooming habits for an appearance to all of Wall Street. Mr. Jobs is not Bill Gates, nor can he afford the churlish behavior that even Mr. Gates does not exhibit towards the press. Nor can he afford Mr. Gates' personal grooming habits. And Apple isn't Microsoft and can't afford "Arrogance" towards Wall Street. Uh Steve, it's not the Mac Fanatics that buy your stock, bonds, debt, etc. It's those people you spat on yesterday. RFI knows your "The Messiah" of Apple, but you needn't try to replicate the historical artistic representations of "Messiah" to reinforce the point. As one person who commented on your recent sartorial appearance, before Macworld: "God Help Us All..."
Which brings us to Mr. Jobs' "Interpersonal Skills", which have long been a topic of discussion on Wall Street, as well as other places. Mr. Jobs can be quite charming, jovial, persuasive (that famed "Reality Distortion Field") but he can also exhibit the type of behavior that was seen on CNBC yesterday. Call it "Loose Cannon Syndrome", "Mercurial" or whatever else you want. But for all of the "Gunslinger" reputation that Wall Streeters have and like to encourage, for the most part Wall Street is still pretty much "The White Shoe Haven" that it was in times past and has always been. Yes, it's become a lot more "egalitarian" but overall it's still the same place as when the: Morgans, Remsens, DePuysters, Stuarts, Stanleys, etc. laid the foundations for Wall Street and the Global Financial Powerhouse that it would become. For better or worse Mr. Jobs, even though you're a "One Man Powerhouse" in the eyes of many you are still a "guest" at a much larger and older Powerhouse and you should behave as such. Wall Street is still a pretty conservative "White Shoe" place. Behaving like a "ill mannered lout and bore" when you're a guest in someone's house is deplorable. Even when treating its "servants" (like the financial press, Mr. Francis et al) you're expected to behave with your best manners. That's something you did not do. Maybe it's time for "Charm School."
By the time fielding the reactions was all said and done, we were totally hacked and Wednesday morning brought in more queries from those who missed the "Infamous Loop" on Tuesday. Definitely not the way to start our morning. And it didn't help our mood when sitting down to write this either. Which is why it has taken so long to comment. We didn't want to publicly say things that we'd later regret.
Mr. Jobs' "performance" during the CNBC interview on Tuesday probably did more to "hurt" the perception of Apple on Wall Street more than the previous 7 quarters of losses did, although the impacts were not immediate. And, Mr. Jobs can salvage the situation by "making nice" to not only Wall Street but to CNBC as well. If you want to really assess the potential damage, you need only to have watched the Bull Session episode from Tuesday, seen and heard people's reactions to Mr. Jobs' "performance", heard what analysts were saying about the CEO Search and "why" it will be harder to attract a top drawer CEO in light of this incident: "Those who were thinking about going to Apple are probably having second thoughts...", etc.
Good guns Steve. What are you going to do for an encore? Make amends? Or do something else that will only reinforce the impression that you gave Wall Street on the day of your keynote? Bruce Francis isn't Ric Ford. Wall Street isn't MacWEEK or MacInTouch. Ergo, you best reflect on what you did and what you should do next. It's that important.
Enough said, lest we let fly with our "anger" over this debacle that didn't need to happen....