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Banking on the iMac

The industry will wait and see if the new computer is Apple's silver bullet.

Green is the color of money.

Apple is banking on its new translucent greenish computer, the iMac, to spur its turnaround efforts.

The computer maker has already shown it can keep a lid on expenses and pull itself into the black. But Wall Street repeatedly has said they want year-over-year revenue growth before declaring the company a turnaround success.

The question is can the See special report:
Apple's Gambit iMac be the revenue driver and the key to Apple making its turnaround complete?

Analysts say the iMac may not be Apple's silver bullet.

"The iMac is an important mission for Apple, but it's not driving the whole company," said Lou Mazzucchelli, an analyst with Gerard Klauer Mattison.

And Richard Schutte, an analyst with Goldman Sachs, said the iMac is expected to pull down Apple's average selling price, or ASPs.

"I don't doubt the iMac's unit shipments will be a success, but I doubt it will be a financial success because the iMac's ASPs are 30 to 40 percent lower than Apple's ASPs, so their shipments will have to be 30 percent higher just to be level."

Though lower hardware component costs can offset this somewhat, Schutte added that without the iMacs, Apple's average selling prices would probably hold up better and the company could afford to sell fewer units to make the same amount of revenues.

Sources estimated that Apple's average selling price for the iMac is

Shipments of Apple computers
Year Quarter Units shipped
1997 Q4 652,000 total
1998 Q4* 740,000 total / 250,000 iMacs
1999 Q1* 914,400 total / 525,000 iMacs
Source: News.com research and industry analysts
between $1,100 to $1,150 a unit. The suggested retail price is $1,299.

Schutte estimates that Apple will sell roughly 740,000 units overall in its fiscal fourth quarter that ends in September, of which iMacs are expected to account for a third, or 250,000 units. The overall unit growth is expected to increase more than 14 percent in the quarter over the previous year, but he expects revenues to fall to $1.48 billion in the quarter, down from year ago figures of $1.61 billion.

Kurt King, an analyst with Montgomery Securities, said Apple has previously indicated that it does not expect to post year-over-year revenue in the fiscal fourth quarter, but it anticipates such growth in the following fiscal first quarter.

Meanwhile, Charles Wolf, an analyst with Credit Suisse First Boston, said Apple's move out of the printer business is contributing to the drop in comparable periods for the company's revenues.

Wolf added that he has an aggressive forecast for the company's fiscal first quarter that ends in December. He estimates the company revenues will increase 30 percent over year-ago figures. And he noted that unit shipments will rise 67 percent over that period, with iMac sales reaching 425,000 units in the first quarter to the consumer market, and another 125,000 units to Apple's core education market.

And while some complain the iMac is too expensive for the consumer market, several Wall Street analysts said they think the price tag will not deter sales, given that the unit comes with an attached monitor. Analysts said they're more concerned that the lower than usual price for an Apple product will hurt the company's overall profits.

"Apple's gross margins were 25.7 percent overall last quarter, and the company has cautioned us that they'll come down because [of the iMacs]," said Jimmy Johnson, an analyst with AG Edwards.

Analysts largely expect the iMac to have gross margins of around 20 percent, despite the recent fall of component prices that are used inside the computers.

"The profit margins for the iMac are lower than other new Apple products," Wolf said. "The G3 series, which is sold to business customers and professionals, had profit margins that were in the mid-20s."

But Apple is willing to live with lower ASPs and gross margins, in order to compete as it re-enters the consumer space.

Resellers are reporting a mixed bag on how their margins are expected to do with Apple's iMac pricing. One noted that his firm is having to throw in additional software and memory--leaving only a profit of $10 off each unit--while another said it's inline with the high single-digit margins that resellers typically receive.

Meanwhile, analysts said challenges Apple faces with its iMacs include possible cannibalization of its other products and uncertainty whether it will attract new users and defectors from the Windows-Intel camp.

"Apple's G3s, [which carries a higher sales price and margins], is coming off a healthy cycle," Schutte said. "But if someone buys an iMac, would they have bought a G3 if there was no other alternative?"

He added buyers of the iMac will likely come from Apple's installed base of customers, but no data will be available whether the company is growing its market share with new customers and defectors from its competitor.

As consumers start to get their hands on iMacs this Saturday, questions of sustainable demand will not likely emerge until Apple's second quarter that ends in March. That's because iMacs will be available for only half of the company's fiscal fourth quarter and the holiday season will inflate figures in the first quarter, analysts said.

"The March quarter will be the litmus test," Schutte said.  

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