Below is the entire text of the RFI Update for 15 Jan 98. Enjoy....
There has been no change in the Indicator's signals and the previous rally signals are still in effect. As far as Strategy is concerned, tweaking the stops up to the support level of 942 is preferable. We could move them up higher, but then they might get triggered in normal volatility. And remember, Options Expiry is tomorrow so we can expect volatility.
AAPL reported 33¢/share earnings (fully diluted) for FY Q1 98. 37¢/share actually beat the revised estimates.
Goldman Sachs heavy buyer of AAPL shares on Wednesday. Goldman is Apple's IB. Currently has "Hold" rating on the stock. Building up inventory?
Earlier in the day, RFI learned that the registration and interest in the conference call was quite heavy and we were also notified that instead of the normal "5 Minutes prior" call in, that analysts should be on the line at least 15 minutes prior to the call.
RFI suspects that this interest is due to not only analysts looking for answers to their "quality of earnings" questions, but also enable them to get a "feel" for the overall impacts of the Asian Contagion on the General Tech Sector. RFI has to be completely honest when we state that analysts are looking wherever they can to glean any type of information about the situation in Asia, as well as prospects going forward in Asia, in order to gauge the total impacts on the general malaise is Asia and what companies on the ground in Asia expect. No slight to Apple, as analysts are extremely interested in how Apple performed and whether this is the beginning of a trend for Apple's results, but one of the main issues that are on their minds is Asia's impacts as well as Europe's apparent surging.
As reported prior to Macworld Expo SF, RFI reported that Apple had made its numbers in certain areas like Education, Europe, etc., and that was one of the reasons why we called it "Touch And Go" but were leaning towards the profit side of the fence. Apparently, Europe's improvement was one of the major factors in Apple's improved earnings outlook and contributed to those "surprise" earnings.
On another front, and back to the analyst interest, it appears that some analysts are also taking a fresh look at Apple. Whether this is the result of the earnings report for Q1, improving prospects and new strategy by Apple, etc., has to be answered on an individual basis with each analyst.
And all of these thoughts were interrupted when the call officially started....
During the analysts conference call, RFI hopes that all of the analysts concerns, ours included, about Apple's "quality of earnings" were allayed as the 37 / 33¢ eps (33¢ fully diluted) on profits of $47 million were "solid." Total revenues were $1.6 billion with 22% gross margins. Gross margins were up 2% from FY Q4 97 and up 3% from a year ago. And, Apple can thank the launch of the G3 boxes for those improved and sustainable margins; and we've got something humorous to relate about that later.
However, CFO Anderson went out of his way to stress that Apple's Q2 (March quarter) is "historically weak" (there were at least a dozen references to it and use of that phrase) and that analysts should not expect a sequential improvement in Q2. And CFO Anderson assiduously avoided addressing the Average Selling Price (ASP) issue even though it was brought up several times (whether the $2,400 ASP was going to be brought down). But, that's for later, even though on both issues "Methinks he doth protest too much." Back to the earnings.
The G3 launch was described as the most successful launch in the company's history and they made up 21% of all CPU sales in Q1. 28% of sales were "Value Boxes" and 11% were PowerBooks. PowerBook sales declined but Apple said that the sell through increased in December but Apple isn't pleased with the PowerBook Sales. Apple said this should be addressed once the "New PowerBook" ships in Q2 98. Sell in and Sell Through of the G3 boxes is "very strong." We'll address this issue later on.
The Average Selling Price (ASP) was $2,400 which was 24% higher than last quarter. When the call was opened to questions, this is when Mr. Anderson declined to discuss any decline in the ASP going forward as it would open up a discussion on future products which is against Apple's policy of not preannouncing new products. And this is where RFI believes that Mr. Anderson "doth protest too much."
Both the Consumer and Business Market sales increased in the quarter and RFI suspects that a lot of it was due to not only the G3 launch but the CompUSA "Salon Store" sales and pricing on 603/604 Macs. Contrary to rumors demand for the 603/604 boxes did not fall off the cliff once the G3s were introduced. And, Apple Store generated $15 million in sales between 10 November and 26 December 97 on 46 million hits. Mr. Anderson stated that if you extrapolated the growth of the Apple Store, it could generate $100 - $150 million in sales for Apple.
But, G3s and increased sales in the consumer and business markets are not the only bright spots. There was a 45% unit increase in Europe, which is probably going to be the"salvation" of a lot of Tech companies in their CY97 Q4 / CY98 Q1 earnings if the momentum in Europe continues. Sales in Japan increased 10% in sequential (Q4 to Q1) but is down year over year. Sales in Asia Pacific (excluding Japan) were down 14% but CFO Anderson related that Apple "passed on" some sales in this region because of creditworthiness and people being unable to line up the letters of credit.
While a 14% decrease in Asia Pacific sales might seem large, CFO Anderson's statements of "passing on" some sales because of credit problems was financially responsible as Apple might have booked more sales and revenues if they took them only to have to write them down if losses from the questionable sales led to a later charge in Q2 earnings. In other words, a portion of the sales decline in the Asia Pacific region were self induced. If Apple had gone ahead with those sales, the Q1 revenues and earnings would have been (on paper) better and the Asia Pacific decline less. Thankfully they didn't and it won't come back to haunt them like we suspect might happen to other companies.
As for going forward into Q2, Mr. Anderson stated that "Apple's Q2 is historically weak ... and not looking for sequential revenue growth for next quarter ..." CFO Anderson did state that we should see sequential revenue growth for both the June (Q3) and September (Q4) quarters. Gross margins (22%) should be sustained into the next quarter and Operating expenses have a target of $300 million, which is down from $313 million and down $40 million from Q4. R&D Expenses have bottomed out at $79 million and should be flat next quarter. As for the Restructuring Reserves, they were $144 million, down from $180 million last quarter and were due to severance pay, contract termination, and related expenses. So much for the "Slush Fund" Rumors. Overall, Mr. Anderson is "very pleased" with the balance sheet. Also, the $150 million investment fro Microsoft (MSFT.O) is reflected in the cash numbers and was fully reflected in the cash in Q4.
Getting into the details of the cloning market, Apple stated that they saw no real net benefit from decreased cloner presence in Q1 but that Apple might see a benefit in Q2 as the PowerComputing inventory is all but exhausted and Motorola is still in the process of liquidating inventory but Apple is not aware of Motorola's inventory levels. As a "flag", Mr. Anderson did relate that licensing fees from cloners decreased sequentially from Q4 to Q1. Therefore, while Q2 is historically weak, Apple might derive a benefit in this Q2 in comparison to FY97 Q2.
Mac OS 8 Upgrades is mostly through the upgrade cycle although Mac OS 8.1 might cause additional upgrades but Apple is not anticipating an OS upgrade spike until Allegro is shipped in CY98 Q3.
There has been a shift in Apple's OS emphasis from 6 months ago. Rhapsody is not a replacement for the Mac OS but is targeted as the Server OS and High End Desktop system, Mac OS will remain Apple's main focus for the general market. Folks, it's now "official" but the devil is in the details.
Benefits from the Microsoft Office 98 launch is viewed by Apple as positive going forward, so we gather it will be of benefit to revenues. Given the favorable reception of Office 98 at Macworld Expo San Francisco, we'll see the initial impacts of Office98 in the Q2 results.
The "New PowerBook" in Spring allays a lot of concerns, ours included, over the reported change in PowerBook strategy, but the decline in PowerBook sales reflected in this report also caused Mr. Anderson to state that they would be revisiting PowerBook pricing in this current quarter. Apple isn't pleased with the decline in PowerBook sales sequentially and year to year although PowerBook sell through increased in December. Ergo, we might see reductions in PowerBook prices going forward.
While addressing the "New PowerBook" Mr. Anderson also hinted at other new products but declined to discuss them as it's Apple's policy not to preannounce products. And this is where the $2,400 ASP issue was brought up several times but was avoided each time. The analysts were asking about the potential decrease in the ASP as a "polite way" to discern whether Apple intended to introduce a sub $1,000 box in its FY Q2. We'll tell you what we think later on.
Mr. Anderson repeatedly declined to comment on any future product plans while referring to the statistic that 40% of sales are in the sub $1,000 range and that Apple's lowest price point is $1,500. Mr. Anderson also referred to Mr. Mandich's Macworld Expo comments regarding the issue. However, it didn't stop the analysts from trying to discern whether Apple is going to enter into this market in the near future.
There were 3,000 BTO units sold last quarter and Apple intends to expand the BTO to new products as they introduce them. Mr. Anderson also stated that they are going to expand BTO to Higher Ed and K-12. He also mentioned a potential pilot program for International sales.
"Nothing to report. The search is ongoing."
That's all RFI is going to mention about this in the earnings analysis, and we'll leave our comments on this in another item.
"Damn Our Eyes!" RFI went into this conference call with a gimlet eye as we received a late rumor report that the profits were going to be higher than expected, and we were also concerned whether those profits were the result of "Smoke and Mirrors" or a "One Trick Pony." Well, they weren't and they aren't. And it looks like Apple's position is at least stabilized if not improving: but it is still early.
So, we're going to take off our analyst's eyeshades and head into "Intelligence Officer" mode after this. You see, RFI suspects that Mr. Anderson "doth protested too much" about Apple's Q2 earnings, amongst other things. In other words, we wouldn't be "surprised" if Apple posted better than expected results in its "historically weak quarter."
After the analysts portion of the call ended, e hung around to listen to a few of the media questions. Bruce Francis, of CNBC in case you didn't know, was first up and asked: "Is there one factor that you can point to for the gross margin increase and is it sustainable? And we're not hearing much about the Newton or eMate ...."
CFO Anderson's reply: "G3 products .... That whole portable area is strategically very important to Apple ..."
Well folks, there you have it. The G3 products will sustain Apple's margins and the "whole portable area is strategically very important to Apple" even though the MP2000 (not 2100, the 2000) has been discontinued from the price list. And since it's "Strategically important" to Apple, we'll all have to wait with baited breath for the "new" products.
It took an analyst from Goldman to broach this question, as it was avoided through the early part of the conference call, but it was broached jokingly and with a laugh from the analyst with the opening: "Well since you gave me the opening, what about the CEO Search?..." (nervous laugh). Mr. Anderson also laughed at how the question and topic was broached.
While Mr. Anderson's response that there was no news to report but that the search was ongoing has already been covered, it just goes to show that this is a very important issue for Wall Street and that most were "loathe" to broach the topic just goes to show how "sensitive" they are to the issue. No one wanted to be the one to ask, even though it was/is on everyone's mind.
Listen, there's an extremely dangerous "movement" that's gained traction in the Mac Community regarding Steve Job's walk out of the CNBC interview, replete with conspiracy theories to boot. For better or worse, until a permanent CEO is seated at Apple (Steve Jobs or whomsoever) both Wall Street and the financial media are going to have that issue at the top of their lists. Simple as that.
And, CFO Anderson's reply, while "glib", did some damage control as it was a "joke topic." No one really expected any other answer then what was given. However, the way the issue was brought up and treated goes to show that this is, and will continue to be an issue with Wall Street. Never mind the reactions we received from Trader's, etc., as well as the analysts' reactions to the conference call answer should be a wake up call to those who belittle Wall Street's concerns over this issue as well as the "Infamous Loop" incident.
Yes Steve & Co., it's still an issue or else an analyst from Apple's IB wouldn't have been the one who brought it up. Don't you think that was, and is, on everybody's mind? Or need we bring up Ed Zander's interview on CNBC?
Sure as God made fruit flies swarm on an Apple in the Sun, RFI has more than a sneaking suspicion that Mr. Anderson's reluctance to address any decline in Apple's $2,400 ASP and his declination to address any future Apple sub $1,000 box offerings belies the probable development that Apple does have a sub $1,000 box in the offing and it's not just the MacNC. And, RFI suspects that we might see it prior to, or at, Macworld Expo New York. Why?
Not only were the analysts "ever so politely" trying to elicit even a "telegraphed punch" or hint vis-a-vis Apple's intentions towards this market with their roundabout questions, but remember we hung on for the first few minutes of the media questions. The Dataquest reporter brashly brought up the issue in no uncertain terms and the same response by Mr. Anderson was given. Couple that with a previous thessaSource rumor report, Mr. Mandich's Macworld Expo statements, etc. and RFI was all over those puzzle pieces like a dog on a bone.
Of course, we could be totally off base but ....
On Monday morning, this was seen on the MacWEEK MTK Boards:
"MacWarehouse Employee - 07:04am Jan 12, 1998 PDT (#252 of 252)Here's a little followup on my previous post. I had to wait for this rumor to become common knowledge around MicroWarehouse since at least one other person from MicroWarehouse reads these boards. (I don't want to make it too obvious who is posting these tidbits.)
Starting in March there will be very significant layoffs in the Norwalk offices (headquarters) The corporate sales division is just going to be gone. If your a corporate client you'll all a 'special' 800 number but get the same tele-idiot that everybody else does.
There are going to be more layoffs in the MacWarehouse side of things. Graphic designers, product managers, just about every part of the Mac side is going to be cut. The numbers I heard were about 15-25% cut. The catalog itself is going to shrink by 70 pages over the next six months!
And here's the big rumor. (Note: This one sounds very wild, but it might be true) Apple has decided that there is money to be made by greatly expanding the Apple Store to offer third party hardware and software. They are supposedly looking to buy one of the weaker Mac mail order divisions. (Like MacZone from Multiple Zones) and use it as the processing center for Apple Store orders. Since Warehouse currently has that plum, this would be a bad thing for Warehouse. Supposedly Apple isn't looking to buy Warehouse because we are too expensive. (This gets great laughs when you look at our stock price for the past 2 years.)
That's all I've got for now. I've got to work on my cover letters for my job interviews. "
Well, RFI learned that this rumor report is "true" as the layoffs in the Norwalk Corporate offices, etc., started yesterday and that at least one catalog was decreased from 106 pages to 90 pages. And, even though RFI attempted to "warn" The Connecticut Post about this coming to pass, they're not going to touch that tar baby with a 10 foot pole until it becomes official, and "the obvious becomes apparent to all." C'est la guerre.