Apple's 5-step recovery plan

The computer maker spells out a plan for renewal in its first financial analyst meeting in nearly two years.

5 min read
Apple Computer this week held its first financial analyst meeting in nearly two years, which some Wall Street analysts are taking as a positive sign that the company has finally gotten its financial house in order.

The New York meeting covered, among other matters, iMac shipments to date, the number of Macintosh users vs. unit shipments, and upcoming low-cost computers. Apple told analysts that its renewal hinges on three factors now that the company's viability has been established, according to a report from Morgan Stanley analyst Gillian Munson.

Specifically, chief financial officer Fred Anderson outlined Apple's "renewal process" as a five-step plan, according to Morgan Stanley. The plan was outlined as follows: (1) survival, (2) stability and profitability, (3) setting a product strategy, (4) regaining application support for Apple platforms, and (5) driving growth.

The strategy was first outlined to Apple customers at Macworld Expo 98 in New York, the difference being this time around the company is offering more details about its standing in the PC market and its strategy for improving its position.

Anderson indicated that the company is working on stages 3 through 5.

For fiscal 1998, Apple generated net profits of $309 million, or $2.10 per share, on revenue of $5.9 billion. This compares to a net loss of $1 billion, or $8.29 per share, on revenue of $7.1 billion for the previous year.

Apple's market share in brief
  Consumer Education Business*
Market share, new computers shipped 3 % 25 % 27 %
Installed base market share 17 % 44 % 36 %
Source: Apple
* Publishing and design market, not entire business market.

Among the specific efforts the company is engaged in: boosting software availability for the Apple platform and filling out its product lineup with a low-cost "consumer" portable computer.

The portable will apparently be an important manifestation of a new product philosophy. Interim CEO Steve Jobs told Fortune magazine that Apple tried to buy the PalmPilot platform from 3Com as a part of its effort to enter a new and growing market. But now the company is developing its own laptops that would sell for just a few hundred dollars--and palm computers as well--that are based on a "Macintosh foundation," said Larry Ellison, Apple board member and Oracle CEO, in the same issue of the magazine.

As for markets the company already participates in, the fiscal quarter just ended marked the first time since December 1993 that Apple's year-over-year unit shipment growth outpaced the industry average, Apple officials told analysts.

Anderson has previously said he expects to repeat the feat during the December quarter, based in large part on holiday sales of the iMac and Apple's professional-level desktops and PowerBooks.

Continuing to ship more computers generally translates into more revenue--a key indicator of future prospects for Apple's stock price. Apple's stock is trading at $36.18 in midday trading, resulting in a price-earnings ratio of 15.46 and a market capitalization of about $4.8 billion. By comparison, Dell's stock started trading at $59.63 with a price-earnings ratio of 75.93 and a market capitalization of almost $76 billion.

While Apple executives enthuse about the company's prospects now, some analysts are still questioning whether the company has the ability to drive and sustain revenue growth that could propel the stock to a value similar to that of comparable companies in the PC industry.

Reiterating news Apple presented to an audience at Macworld New York, the company told analysts that it had an installed based of 10 million consumers, 6 million users in education segments, and 6 million in users in businesses. Munson said in her report that "This is bad news on the one hand, because it demonstrates how much unit shipment share Apple has lost."

"On the other hand, the data also shows that if Apple executes, it could drive significant unit volumes by just increasing its unit shipment market share to a level approximating its installed base market share in core market segments," it was noted.

Apple spelled out to analysts where it stands in each of its core segments. In the consumer market, Apple reported that it has roughly 17 percent of the installed base of computers but just 3 percent unit shipment share. Its unit shipment numbers have declined precipitously in the last two years because of a wide array of problems ranging from quality control issues to concerns about the company's viability.

However, that trend is beginning to reverse itself with the hugely successful launch of the iMac.

Apple said it has sold 278,000 of the computers in six weeks, and more importantly, just over 12 percent of those were former users of Windows-based PCs, and 29.4 percent were first time computer buyers, it claimed. A continuation of strong sales would go a long way toward convincing software developers to write new programs for the Mac, one of Apple's cited needs in growing the bottom line.

The education market is one of the most important markets Apple participates in, and one where it still holds a commanding lead. Morgan Stanley research shows that the company does about $2 billion a year in business to this segment, representing about one-third of the company's overall revenues.

But its share of that market continues to erode in some segments such as colleges and universities. PC companies with greater financial wherewithal have been conducting aggressive marketing campaigns for education. Apple, however, continues to exhibit a dominance of the K-12 market, according to research analysts.

Overall, Apple says it has roughly 44 percent of the installed base of computers in educational settings, although its current share of new systems shipped is closer to 25 percent. With the successful launch of the iMac to consumers behind it now, the company is expected to try and rev-up education sales in the upcoming quarters as this $5 billion market ramps up into its customary buying cycles.

Apple's main share of the business market comes in the design and publishing segment, the report said. Here, Apple believes that it has roughly 36 percent of the installed base but just 27 percent unit shipment share.

Munson thinks Apple "has done a number of great things to turn its business around" and that the company does finally have some positive momentum. Morgan Stanley is still holding to its current "Neutral rating" on the stock "until the company can prove that it can drive and sustain top line growth," the report said.