Apple CFO: Strong product lineup will equal growth

In an economic environment where good news is hard to come by, Apple today delivered just that. Not only did the company announce a US$38 million profit for its fiscal 2002 first quarter that ended Dec. 29, 2001, but also Chief Financial Officer Fred Anderson was guardedly optimistic about the rest of the fiscal year.

“The March quarter is one of product transitioning, but we remain optimistic about our growth prospects for the year because of a strong lineup of new products and a robust pipeline of new products yet to come,” Anderson said. “Mac OX is gaining momentum, our vision of a digital lifestyle is beginning to take hold, we have full complement of best in class digital products, more retail stores are coming, and the iPod is very successful.”

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One of the primary bright spots is the much-lauded new iMac. Announced during CEO Steve Jobs’ keynote address at last week’s Macworld San Francisco, the completely revamped consumer desktop is apparently a hit right out of the gate.

Anderson said that orders for the new iMac have exceeded expectations. In fact, pre-orders for the product are the highest in the first week after a product announcement since the original iMac was introduced three years ago, Anderson said, though he didn’t give any unit numbers. In fact, if there’s a fly in this ointment, it’s that Apple won’t be able to make enough iMacs to fill the initial demand, the CFO said.

“It will take most of the quarter to ramp up the manufacturing of the new iMacs, so we’re not likely to meet the demand,” Anderson explained.

Still, that’s good news considering that last quarter’s iMac sales tanked compared to previous quarters. That and the weak economy lead to slightly lower sales than Apple had predicted despite the tidy profit. But the CRT iMacs aren’t gone for good. Apple will continue to offer two entry-level models with CRT screens for under $1,000.

“They’re in our product lineup to cover the sub-$1,000 price point for consumer and education markets,” Anderson said. “We realize that we need to have products at that price point for those customers, and the costs on flat panels isn’t low enough yet to reach that price point with flat panel systems.”

If last quarter wasn’t a good one for the “old” iMac, it was a fine one for Apple’s portable line. The PowerBook moved 116,000 units, which Anderson attributed to lower price points and the introduction of a combo drive. The real sales champ, however, was the iBook.

“The new iBook has sold over 600,000 units since its introduction last May,” Anderson said. “The original iBook sold over 700,000 over 20 months. And we expect the iBook momentum to continue with last week’s announcement of lower prices and a 14-inch model.”

However, Apple thinks that the new iMac will do very well indeed in the education marketplace. Anderson said that the feedback from customers in both the higher ed and K-12 markets had been “very favorable.”

“Educators can bring this whole digital media capability into the teaching and learning environment with the new iMac,” he added. “It has a small footprint and the swivel display is ideal for limited space classrooms and collaborative work.”

Apple remains optimistic about its rebound in the education market despite the possibility of tighter economic funding due, again, to the soft economy. In fact, last week it was announced that Apple and the state of Maine had worked out a deal to equip Maine middle schoolers with iBooks. The biggest single educational deal ever for any computer vendor will generate $37.2 million over the next four years.

Part of the appeal of new Apple products is the price tag. Argue all you want, but the SuperDrive-equipped G4 iMac for $1,800 is a great deal, as are the entire line of iBooks.

In fact, one of Apple’s new tactics is one that the company has sometimes snubbed in the past: lowering gross margin to sell more units. Anderson admits that the gross margins on new iMac for the March quarter will be lower than the gross margins for the old iMac. While Apple wants to bring up those margins over time, the company has “really aggressively priced” the new systems to make them competitive when it comes to bang for the buck.

“The first order of business is to drive iMac sales growth back to what it was a couple of years ago,” Anderson said. “Lofty gross margins are hard to maintain over the long haul. We’ll trade some of this for top line growth and more market share.”

Isn’t Apple worried that the aforementioned $1,800 iMac will cannibalize Power Mac tower sales? Anderson said they aren’t concerned. The Power Mac line is specially designed to meet the performance and expansion needs of professional customers. A faster system bus, Level 3 Cache on high-end models, faster graphics, Gigabit Ethernet, a dual processor system, the ability to add larger and multiple displays, four open PCI slots, more memory capacity and the capacity for adding extra hard drives makes “quite a difference” in the pro systems and even the top-of-the-line iMac, Anderson said.

Still, Power Mac sales declined last quarter. Anderson said this was due to the economy and the fact that many end users are waiting for “certain products” to come to Mac OS X. (Can you say Photoshop and Quark Xpress?).

When it comes to Apple stores, it’s a mixed picture. Apple’s online stores accounted for 43 percent of the company’s revenue last quarter, which is “up significantly” year over year, Apple’s Peter Oppenheimer said.

A survey in December showed that 40 percent of the visitors to the retail stores didn’t own a Mac. Anderson estimates that 40 percent of those visitors were Windows users because “sales to first-time computer users has slowed.”

The retail stores are also getting thumbs-up from those who frequent them. Anderson said that 99 percent of store visitors who were surveyed would recommend the shops to a friend. The stores are also getting high marks for the quality of their staffs and customer assistance, the CFO said.

“The retail stores continue to gain traction,” he added. “Overall, we’re pleased with our retail strategy and believe it’s helping us reach out beyond our installed base. Expect to see the retail financials improve quarter over quarter. There were significant expenses in pre-opening store costs. As we continue to add new stores, there’ll be more ‘absorption’ of such costs. And under Ron Johnson’s leadership, we’re working to strengthen the sales culture of the stores out there. It’s already very good, but we’ll make it better as we fine tune things and improve revenue per store.”

He wouldn’t comment on how many retail stores might launch this year. But more are planned.

Apple is also “pleased” with the CompUSA Apple employee initiative, Oppenheimer said. They’ll look to expand the program in Europe, as well. CompUSA’s Apple stores-within-the-store also saw improved ASPs and growth margins because of beyond the box sales.

Mac OS X also has Apple optimistic about the rest of the fiscal year. Anderson said that there was a 40 percent increase in the release of native Mac OS X applications after version 10.1 was introduced. And he thinks that by spring, almost all of the crucial applications will be native to the operating system.

Approximately one million copies of Mac OS X have been sold, and over two million Macs have shipped with it pre-loaded. Anderson said it was a “high order” of business to have a modern operating system running on such impressive new systems as the iMac II.

“My first wish is that new and existing users would buy a new system with Mac OS X and all the bells and whistles, and digital hub applications such as iMovie, iTunes, iPhoto and iDVD, and not just upgrade an older system,” he said.

The iPod has also been a big hit, selling over 125,000 units in two months. It’s a safe bet that Apple has more digital devices planned. Gleaning what they might be is a bit harder.

Looking ahead, Apple expects revenues to be up sequentially in the March quarter to $1.5 billion. However, lower gross margins, aggressive pricing on the new iMac and higher component costs for flat panels and memory could be speed bumps along the way. Oppenheimer said that prices for those components began inching up in November, but seemed to have stabilized, at least for now. Otherwise, component costs are flat or down compared with previous quarters.

Anderson said that Apple wasn’t giving guidance beyond the March quarter, but that he “felt good” about the second half of the fiscal year. Over the next three years, Apple hopes to drive revenues up to the $8 billion level enjoyed in fiscal 2000 — and beyond Anderson said. The company hopes to accomplish this even while upping its investment in research and development.

“We’ll continue to invest in the foundational areas of software, hardware, marketing and retail,” he said.