Apple falls short of lowered expectations

And in forecasting relatively flat sales for the coming fiscal year, Apple executives said the company has instituted a hiring freeze for nearly all of the company and is keeping a close eye on costs.

Excluding investment gains, the company said it earned $108 million, or 30 cents per share, on sales of $1.87 billion. Under the same criteria in the year-ago period, the company had $90 million in net income, or approximately 25 cents per share, split-adjusted.

Analysts had expected the company to report earnings of 31 cents per share, although the company had said they could fall anywhere between 30 cents and 33 cents.

Apple shares ended trading Wednesday unchanged, at $20.13. In after-hours trading, Apple's shares fell to $17.30, according to Island ECN.

Wall Street had been looking for Apple to report 46 cents per share until a warning three weeks ago that sales for the quarter ended Sept. 30 would be between $1.85 billion and $1.9 billion, or "substantially below expectations."

For the quarter, Apple had a $62 million after-tax gain from selling shares of ARM Holdings. Including that investment gain, Apple had a net profit of $170 million, or 47 cents per share.

Apple said it has about eight weeks' worth of inventory in the hands of distributors and retailers and will look to cut that to five weeks' worth over the quarter.

"Rather than reducing (inventory) gradually over the next several quarters, we have decided to reduce it to a normal level by the end of this quarter," Apple CEO Steve Jobs said in a statement. "This will result in a second disappointing financial quarter, even though our sell-through sales should be moderately strong. Our plan is to be back on track for the January quarter, and we remain very excited about our products and programs for 2001."

At the time of its warning, Apple said that it would lower its growth targets for the fourth quarter and coming year. Industry watchers said the new guidance the company provided Wednesday was worse than anyone expected.

"In light of September's disappointing sales and higher-than-planned ending channel inventories, we are resetting our revenue estimates for the December quarter to about $1.6 billion and are targeting a slight profit," Apple financial chief Fred Anderson said in a statement. "We are also resetting our revenue target for fiscal year 2001 to the $7.5 (billion) to $8 billion range and our target for EPS to the $1.10 to $1.25 range."

On a conference call with analysts, Anderson said lower-than-expected PowerMac G4 Cube sales accounted for $90 million of the company's revenue miss. Jobs told analysts that while the Cube is "the ultimate Macintosh for high-end consumers and professionals," many people find the price tag too high.

Apple has responded by lowering the price through rebates, Jobs said, and will introduce a cheaper version of the Cube by spring.

Lower-than-expected education sales accounted for $60 million of the revenue mix, Anderson said. Jobs said a move to bring education sales in-house--vs. through third-party retailers--may be smart, but doing that transition just ahead of back-to-school sales was a case of poor timing.

In addition, Apple said it expected far more professional customers to opt for Apple's high-end dual-processor computers, but instead sales shifted to the cheapest, single-processor PowerMac. That situation accounted for another $30 million in lower-than-expected sales.

When the dual-processor machines were introduced in July, CNET News.com reported that some analysts did not believe adding a second processor would satisfy power-hungry Mac users.

Some customers now appear to be waiting for machines with faster processors, Jobs said, while Apple has been unable to offer faster machines because its chip suppliers, Motorola and IBM, haven't been able to deliver faster G4 processors.

However, Jobs said, Apple will unveil machines with faster G4 processors in the next six months, looking to close the "megahertz gap" with Intel during the first half of 2001 and to "make substantial progress in the remainder of the year."

David Bailey, an analyst with Gerard Klauer Mattison, said the slow sales to schools were the most troubling considering the education market accounts for roughly one-third of Apple sales.

"Clearly they face many challenges," Bailey said. "They have some time to reorganize the education sales force, but it will be difficult having lost almost an entire year's momentum."

Apple's initial warning cost the company billions of dollars in market value as its shares were sliced by more than half. The company's chief sales executive, Mitch Mandich, also resigned earlier this month, though Apple representatives would not say whether the departure was related to the earnings warning.

In total, the company shipped 1.12 million Macs during the quarter, of which more than 570,000 were iMacs.