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No comeback for Apple stock

Macworld Expo A long-awaited blueprint for Apple's future by CEO Gilbert Amelio fails to sway Wall Street.

Macworld Expo SAN FRANCISCO--A long-awaited blueprint for Apple Computer's (AAPL) future by CEO Gilbert Amelio failed to sway Wall Street today.

In an address to a packed room at Macworld Expo here that was broadcast via satellite anf the Internet, Amelio began his presentation on Apple's future an hour before the market's close. Shares of Apple stock ended the day down 3/8 of a point to 17-1/2. The stock's highest price during the day was 18-1/4.

The stock suffered a sizable decline Monday in the market's first session since the company announced last week that it expects a first-quarter loss of up to $150 million--far more than analysts had expected. Shares fell nearly 4 points that day to 17-7/8 from its close of 21-3/4 on Friday.

Although the industry had expected Apple to get a boost from its announcement of specific plans for a new operating system based on its recent acquisition of Next Software, Wall Street brokerage firms adjusted their earnings expectations and dropped their ratings for the computer maker after its preliminary financials release.

That didn't deter Amelio from trying to spin the news in his company's favor. "We expect a loss--and a disappointing one at that--but I want to put it in perspective," he said during his presentation. "We have a $1.7 billion cash position and good asset management."

Although Performa sales were off significantly in the United States, he added that but sales of its Power Mac and PowerBook were strong. "Shipments of our server units also increased 40 percent year over year," he said. "Our first quarter was about retail sales, not the recovery of Apple."

Still, there was no immediate sign that Amelio had succeeded in convincing the world that a comeback was at hand. Friday's announcement clearly caught many analysts off guard and continued to have a lingering effect.

"It came as a big disappointment and a big surprise," Lehman Brothers analyst Kimberly Alexy said Monday of Apple's disappointing financial report. "I think they would have done everything in their power to sustain profits and exceed Wall Street estimates to sustain investor confidence."

Alexy lowered her first-quarter estimate from a loss of 5 cents a share to a loss of 53 cents a share.

Apple said after market close Friday that it expects to post a whopping operating loss of $100 million to $150 million for the quarter, or 80 cents to $1.20 a share. Analysts had been expecting a loss, but one of only of 4 cents a share.

The troubled computer maker said quarterly revenues are expected to come in ten percent lower than the previous quarter, when it posted $2.3 billion. Apple, which closed its first quarter December 27, said weak Performa computer sales and a shortage of its PowerBook models contributed to the drop in revenue. The loss does not does not include costs associated with last month's purchase of Next.

The timing of Apple's announcement was unfortunate, coming just days before the company's center-stage appearance at Macworld Expo. Apple officials had been quoted recently as saying they hoped to achieve sustainable profits by the end of the second quarter, but Friday's news has made Wall Street dubious about this possibility.

"I get the sense that right now they can break even at best for the second quarter," Alexy said. "We may not see sustainable profits until the third or fourth quarter."

To right the ship agains, Apple plans to cut more than $1 billion in operating costs to restore the company to financial health. "Our disappointing Performa sales...dictate that we develop additional restructuring plans during the second fiscal quarter," Amelio said in a statement Friday. "These results suggest that we need to reduce Apple's cost infrastructure so that we can achieve break-even results at a revenue level of $8 billion [in the second quarter]. We expect that the Next acquisition will contribute to this cost-reduction process by enabling us to bypass some costly internal R&D activities."

Eugene Glazer, an analyst with Dean Witter, said he anticipates the company won't actually begin another cost-cutting round until the third quarter, in which case the company couldn't turn a profit until the fourth quarter. He added that the timing couldn't have been worse in terms of convincing the industry about the credibility of its new OS plans.

"Apple is trying to convince the customer base, the developer community, and Wall Street that momentum has turned in Apple's favor. But with this loss and the major cost-cutting effort, this momentum is not a positive. It's a negative," Glazer said.

Furthermore, any additional cost-cutting measures are going to hurt a lot more than the first cutbacks implemented in the first months of Amelio's leadership.

"There's not much fat left to trim, and that may be a major issue," he added. "The company wants to cut $1 billion in costs to break even. That means cutting into muscle and not just fat."

He revised his first quarter earnings estimate to a loss of 62 cents, up from his previous estimate of a loss of 4 cents.

The announcement represents a significant setback to Apple's recovery at a critical time for the company. Since the company's staggering $700 million loss for its second quarter last year, Apple had started to show some signs of improvement. It cut more than 4,000 jobs to reduce its workforce to 13,000 and posted a 6.5 percent increase in revenues and a profit of $25 million in its fourth quarter.

Apple did say it expects to save some research and development costs via its Next acquisition in the first quarter. The company announced last month that it plans to use Next's technology to aid in the development of a new operating system. But, here again, Glazer for one doesn't buy it: "They can't cut their R&D costs substantially because the new OS is not here yet and has yet to be developed."

Further draining Apple's resources will be last month's surprise acquisition of Next Software, a $400 million transaction designed to give the computer maker a new operating system, as well as bring former chairman Steve Jobs back to the company he cofounded as an adviser to Amelio. Apple plans to write off $300 million during the second quarter ending March 31 and amortize the remainder over the next five to seven years.

The company is still trying to put a brave face, however, on the news.

"Though consumer demand for personal computers in the United States was soft for the industry in general last quarter, the weakness in demand for Performa products in the U.S. is an obvious disappointment," said Fred Anderson, Apple's chief financial officer, in a statement. But he added that the computer maker is encouraged by demand for its Power Macintosh and PowerBook products.

"We experienced nearly 40 percent year-over-year unit growth in server sales during the quarter," Anderson said. "And our development efforts for an exciting new product year in 1997 remain on track."