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Apple reports expected profits

Bolstered by cost-cutting and unexpectedly high sales of its new PowerPC 750 series, Apple posts its first quarterly profit in over a year.

Bolstered by cost cutting and high sales of its newly introduced PowerPC 750 series, Apple Computer (AAPL) today posted its first quarterly profit in over a year.

But despite the results, which confirmed previous announcements, questions remain whether Apple is on a road to sustained profitability and how long sales of it PowerPC 750, or G3, series can avoid pricing pressure from competitors.

The computer marker, which has posted declining revenues and four consecutive quarters of losses, today reported fiscal first quarter profits of $47 million, or 33 cents a share, for the period ending December 26, compared with a loss of $120 million, or 96 cents a share, a year ago.

"The December quarter results reflect the benefits of the disciplined focus that Apple has undertaken in recent months," said Steve Jobs, interim chief executive, in a statement. "Returning Apple to sustainable profitability is the company's No. 1 objective for fiscal 1998, and we believe we're making great progress toward that goal."

Analysts had initially expected the computer maker to post a loss of 6 cents for the quarter, before Apple announced during Macworld Expo earlier this month that it would post a profit. Wall Street had a revised estimate of a profit of 35 cents a share, according to First Call.

Revenues for the quarter fell to $1.6 billion in the quarter, down from $2.1 billion a year ago. And, despite the first quarter usually one of the strongest given the holiday selling season, revenues remained flat over the previous quarter.

Apple's revenues have declined as shipments have fallen and market share dropped. The company reported shipments of 635,000 in the first quarter, down from more than 700,000 in the previous quarter.

And as revenues shrink, Apple will have to continue to cut its costs to stay ahead on the profit side.

Apple cut its operating expenses to $313 million during the quarter, compared to the $521 million in expenses reported a year ago and the $353 million in expenses reported for the previous quarter. For the second quarter that will end in March, operating expenses are expected to fall to $300 million, chief financial officer Fred Anderson said in a conference call.

The company's gross margins were 22 percent during the quarter, compared with 19 percent reported a year ago and 20 percent reported for the previous quarter.

"We believe that the current gross margins that we achieved this quarter are sustainable, and that operating expenses will continue to trend downward over the next couple of quarters," Anderson said.

Richard Schutte, an analyst with Goldman Sachs, said Apple's stock may get a slight bounce tomorrow on news of its results but noted that investors will be looking for more in the long run.

"If they eke out a profit but their revenues tank, they won't get much credit [for turning things around]," he said.

Analysts say investors don't look favorably upon companies that remain profitable solely by slashing costs. Wall Street wants to see revenue growth.

Apple historically has found that its March quarter is the weakest of the year. Anderson said that this March quarter likely will be no different and that he did not expect the company to post revenue growth.

Over the past two years, Apple's revenues have fallen by 25 percent to 30 percent between the first and second quarters. After the fall, revenues largely have remained flat rather than bouncing back. For example, Apple has remained a roughly $1.6 billion company for the past year, after having posted $2.1 billion in revenues during the fiscal first quarter of 1997. The company also fell from a $3.1 billion company in the fiscal first quarter of 1996 to $2.2 billion during the following March quarter.

Given its expected operating expenses of $300 million this year, Apple will have to maintain revenues of at least $1.3 billion to break even by this year's second quarter, a figure that represents a 19 percent drop over the first quarter and a smaller decline compared to the previous two years, Schutte said.

So what's to drive revenues?

Sales that previously went to Mac cloner Power Computing may now go to Apple in the second quarter, given that Power has closed up shop and stopped shipping Macs at the end of last year. Motorola also is winding down its Mac business, but Anderson said he doesn't know how much inventory Motorola has left.

Shipments of the Apple's G3 series have been strong, and the product mix in the first quarter drove the average selling price of systems to $2,400 a unit, up 4 percent over last quarter. But analysts note that pent-up demand for the G3 is expected to decline, as with any new system, and those sales may drop in the following quarter as a result. Pricing pressure also is expected to hit the G3s, further reducing revenues.

Anderson said that while the clone issue and sales of the G3 are expected to help the second quarter, such factors are not expected to offset the anticipated revenue drop in the March quarter, compared with the first quarter.

Meanwhile, Apple's sales to its core education market have been slipping, which means the company's summer quarter, during which it usually receives the greatest benefit of education sales, could suffer.

"We expect to see sequential revenue growth in both the June and September quarters, but don't expect to see year-over-year revenue growth before the September quarter," Anderson said.

Anderson added that Apple's backlog of orders in the first quarter remained unchanged from the previous quarter, with the company ending with over $200 million in orders.