Tech Industry

Apple's financial health has a price

Apple's bottom line may only break even with the layoffs. It will need far more to become a market leader.

It is the basic goal of free market economics that every company must face: how to grow while keeping costs under control.

 
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But when the company is a former global market leader and the costs run into the hundreds of millions, that goal can quickly turn into a vicious cycle.

To assuage frustrated investors and calm anxious accountants, Apple Computer (AAPL) is laying off 2,700 full-time employees and 1,400 part-time and contract workers. That move, combined with other cutbacks, will help get its costs down, but only enough to break even on the company's much-scrutinized balance sheets.

At the same time, the significant staff reduction will surely hamper its ability to stay competitive, let alone create new products and regain precious market share that it has lost steadily over the last decade. Apple's staff was still recovering from another large round of layoffs last year, a restructuring that cost $130 million.

The company wants to cut $400 million from its operating expenses to turn profitable in the fiscal fourth quarter that ends in September. Annual revenues are expected to come in at least $1 billion less than last year's $9.8 billion.

The second fiscal quarter, which ends March 28, may not be of much help to Apple's goal. Chief financial officer Fred Anderson said today that the company expects revenues of between $1.6 billion and $1.7 billion, significantly less than the $2.1 billion reported in the previous quarter, which resulted in a $120 million loss.

Although the company was pleased with its sales, they have been offset by Apple's difficulty in maintaining a "normalized channel inventory," Anderson said in a conference call with analysts. "This phenomenon, coupled with the traditional seasonal softness of demand in our second quarter, suggests that we will generate lower revenues significantly than those we achieved in our first fiscal quarter."

Apple executives also said they expect to take charges of $155 million for the layoffs and restructuring outlined today. The ability to recoup those costs are key to Apple's chances of meeting its goal of profitability by September.

"It's a critical factor," said Daniel Kunstler, an analyst with J.P. Morgan. "If they take measures that bring down their break-even point fast without incurring a risk to remain liquid, they may be able to weather the expenditures related to that charge."

Dean Witter analyst Eugene Glazer said the $155 million restructuring cost was not outrageous. "It's pretty clear they are not taking a charge for much beyond the reduction in personnel, as opposed to writing off the kitchen sink," he said.

In addition to the restructuring, however, Apple plans to write off $325 million for the previously announced acquisition of Next Software. That would bring charges for the current quarter alone to $480 million, figure that could grow even more if the company incurs any operational losses.

Analyst Michael Geran of Pershing said the amount of cash that Apple has is a pivotal factor in its ability to endure these charges without severe damage. The Next charge will be applied against the $1.8 billion Apple had in cash at the end of the first quarter.

On the markets, analysts don't expect to see Apple's stock price jump Monday--but that's not necessarily any indication of investor confidence. "I don't think we'll see any major movement because people don't expect much from these guys," Geran said.

The scenario is a familiar one to Apple. The company has posted multimillion-dollar losses for nearly five consecutive quarters on falling revenues.

 
Execs question Amelio leadership
go to story
Financial health has a cost
Productive moves for Apple
go to story
Apple rank and file paralyzed
go to story
Apple faithful won't give up
go to story
Last year, Apple took $501 million in inventory write-downs and restructuring charges largely attributed to dramatically slower sales in its second quarter. That quarter was marked by an astonishing $740 million net loss, which prompted chief executive Gilbert Amelio to announce layoffs only months after he joined the company.

That quarter, the second of fiscal 1996, was the largest the troubled computer maker had seen since 1993, when it posted a third-quarter $188 million net loss.

The company posted a surprise $25 million profit in the fourth quarter ending in December, but that resulted largely from unused reserves set aside for severance packages. Without the reserves, the company would have posted a profit of $8 million on revenues of $2.3 billion.