Tech Industry

Amelio survives lion's den

CEO Gilbert Amelio faces a tough, even hostile audience at the annual shareholders meeting but manages to pacify angry Apple investors.

CUPERTINO, California--Apple Computer (AAPL) CEO Gilbert Amelio faced a tough, and at times hostile audience today during the annual shareholders meeting but managed to pacify Apple investors with promises to develop a product "hit list and hot list."

Awaiting Amelio's speech in a college auditorium here, investors chastised Apple executives for giving Amelio a merit bonus, despite the company's $816 million net loss for fiscal 1996 and ten-year-low share price.

That was just for openers.

Some 2-1/2 hours later, investors were mostly mollified, though they still had plenty of remaining questions. Apple's stock finished yesterday at 15-1/4, down 3/8 of a point from yesterday's close and near the company's 52-week low. The stock today closed slightly up at 16, up 3/4.

"I didn't try to pretend we have no problems. There's a real problem here, and I owned up to it," he said after the shareholders meeting. "I described the problems and when we're going to fix those problems, including some fairly massive changes. They were happy I went into a lot of detail."

One of the massive changes Apple is considering is licensing the Windows NT operating system from Microsoft. While Apple hasn't made up its mind on this question, Amelio confirmed that Microsoft chairman Bill Gates did bring it up during a recent meeting at Apple headquarters.

Amelio didn't explain how this would mesh with the recent $400 million acquisition of Next Software and its plans for its own high-end operating system based on Next technology, Rhapsody.

But as Apple moves forward on developing the next-generation operating system, Amelio said he would be a "damn fool" not to consider also placing the new operating system on Intel-based boxes. He added that the company has been weighing such a move for the past five years, but that Rhapsody will be easier to move to a new chip than the current operating system.

The comments were part of an unusually frank address for an Apple chief executive at a meeting with investors. Amelio acknowledged that this was a departure: "I had chosen to focus on actions, not what I said. Today, with the stock at such a low point, I felt I had to talk about our crises."

His main message was, naturally enough, profits. "Let me assure you that my very highest priority as I stand here is to get this company in the black as quickly as possible."

He seemed mostly successful in retaining the loyalty of the assembled investors, even if his plan didn't inspire any resounding endorsements.

"I've been an investor for ten years," said Austin Marx, a resident of Santa Clara, California, not far from here. "I haven't bought any stock or sold. I'm hopeful for a gradual recovery. I bought the stock way back when because I thought it was a great, exciting company. And I will even hold onto the stock if it falls to $5 a share."

Investors seemed most pleased by Amelio's announcement that merit bonuses for senior vice presidents and above, including Amelio, will be suspended until the company's finances return to profitability. The decision was made before shareholders voiced their grievances today about Amelio's own bonus. The directive does not apply to stock options that managers have already been granted.

Amelio's other concrete commitment was to begin formalizing which products and people will remain on a "hot list" and the opposite number, the "hit list."

The process starts tomorrow, the chief executive said, although employees won't know which list their products are on until March, when the bulk of the changes will be announced. Until then, Amelio or other Apple execs won't discuss the magnitude or nature of the cuts, even though investors are deeply concerned with the specifics of his cost-cutting campaign.

But Amelio acknowledged that slashing expenses is not in itself going to restore Apple's lost market share. "We realize, however, we can't save our way to prosperity," he said.

To that end, he painted the broad strokes of his plan for restoring Apple's sales and reputation, discounting rumors about what the company might actually do to achieve that.

Amelio said Apple will mostly continue with the same basic business model: a PC vendor that makes integrated hardware and software but also licenses its operating system to other box makers. A recent comment from the head of the technology division, Ellen Hancock, had implied to some that Apple might drop hardware production altogether to become a software-only vendor.

To foster this model, Apple's key investments will go to operating systems, multimedia, and developing new PC models that rely on more standardized components. The idea is to reduce component costs and a dangerous tendency to rely on a single vendor for key components.

Amelio insisted that Apple's reorganization announced yesterday was not a shift of strategy but simply the implementation of his turnaround strategy.

As for marketing, Apple is going on the "attack" with a marketing campaign featuring the slogan "We're back" and information-heavy comparisons with competitors' offerings.

Apple also plans to create a direct-sales force for its large corporate accounts, emulating already successful direct sales programs in the education market. Amelio also hinted that Apple may explore direct sales to consumers via "electronic shelf space," although he said the company won't "abandon" its channel partners.

Analysts also thought Amelio did well at the meeting.

With reports circulating that the investment and analyst community doesn't think Amelio has done as good a job as expected during his year-long tenure, the CEO spent a good portion of his address explaining how much worse Apple's situation was than he had realized.

Amelio described his dismay and surprise after taking the helm of Apple as he gradually learned how dire the company's financial situation actually was.

"There were five devastating crises that threatened the viability of the business," Amelio said, noting that he had no idea of the depth of the problems as a board member. "I felt when I was a director that our problem was strategic, not practical, probably 90 to 10. As CEO, I found quite the opposite--about 10 to 90."

The problems were practically zero liquidity, quality problems on high-profile products like the PowerBooks, an operating system development project that appeared to be going nowhere fast, and a corporate culture that lacked a cohesive structure and direction. The company, for example, lacked an adequate system for gathering data that would allow for proper inventory forecasting.

All that may have been true, but investors gathered here today also know that Apple has continued to lose market share and revenues during Amelio's tenure. The latest blow arrived in its fiscal first quarter, when Apple reported a net loss of $120 million.

The company had expected to break even on revenues of $9 billion this year but is now projecting that it will bring in $8 billion. Expectations that the company would return to sustainable profits have since been pushed back from March to September.

As a result, Amelio needs to cut $400 million in operating costs in the next year, more than the $300 million he has already trimmed.

The easy cuts have been made. That makes for a tense two months at Apple as the top executives named yesterday prepare their recommendation for what stays and what goes.

But for today, Amelio seemed to achieve what he set out to achieve: keeping investors off his back. "He answered most of the questions about the negative vibes that were out there," said investor Roland Quintero, who has held the stock for seven years.