G3 systems lead Apple profits

The spark that's lifting Apple Computer (AAPL) to profitability is the high-margin line of Power Macintosh G3 systems it released in November.

Apple today posted its first consecutive quarterly profit since 1995 based on strong sales of the G3 line, whose nomenclature designates systems based on the new PowerPC 750 processor introduced in August of last year. Unit shipments grew by 8 percent on a year-to-year basis, the first uptick since December of 1996, executives said.

The company now hopes to start reversing market share losses with low-cost consumer systems and the help of the user upgrade cycle. But analysts say efforts to improve distribution and presentation of Apple products in retail stores have been key to sales of the high-end systems.

"The channel strategy is going well," said James Staten, an analyst with Dataquest. "Sales are picking up because they are showing products better and dropping smaller retailers," he reported.

Apple's deal with CompUSA to develop the "store within a store" concept--giving Apple products expanded floor space and presentation in the retailer's superstores--has proved important, agreed company executives.

Earlier this year, Apple dropped its retail presence at stores where sales were not going well so that it could focus on delivering systems to CompUSA and other retailers with a significant commitment to selling Macs. The moves have helped to minimize the delivery shortages and delays that have characterized Apple product launches in the past.

But another, less subtle indicator is not upbeat. Some key vendors of Macintosh software applications--which are instrumental in attracting new Macintosh users and keeping the existing base of users loyal--are beginning to focus increasingly on software development for Windows-Intel computers. Adobe, for instance, said its Windows revenues were up 18 percent over the first quarter of last year, while revenue from the Mac platform declined. See related article Partners not as happy as Apple.

Also, while Apple appears to have stabilized itself in terms of profits, questions remain about how Apple will grow its business. Quarterly revenues fell in the second quarter to $1.4 billion from $1.6 billion in the prior year's second quarter, and worldwide unit market share hovers around 3.1 percent according to SEC filings.

Apple is betting the sales will jump with the release of new PowerBooks notebook systems, due sometime in "late spring or early summer," according to Fred Anderson, Apple's chief financial officer. Analysts expect the company to introduce the new systems by May.

Anderson also roundly hinted that the company will be offering a sub-$1,000 consumer desktop product by the end of the year.

"We believe that we will have the product lineup in place to begin to show year-over-year growth by our December quarter," Anderson said in a conference call. "We're still waiting for a low-priced product and obviously when we get the new consumer line out there we think we'll see a real growth opportunity in the consumer market for Apple" he added later.

Meanwhile, the G3 will probably retain its sales potential for a couple of years, said Louis Mazzucchelli, an analyst with Gerard Klauer Mattison.

"I think Apple will ship 2.8 million units for the year. Of that, 70 percent will be the G3, or 1.9 million. Apple has an installed base of about 27 million worldwide, so this represents 7 percent of the installed base. They have plenty of headroom [before saturating the installed base]," he said.

"We think we have an installed base that's a little aged...and ripe for upgrades and replacement sales. That's the first priority," Anderson said during the conference call. Typically, the lifespan of a desktop computer is about three to four years. The Power Macintosh, the last big debut before the G3 line, came in late 1994.

"I don't think we have to drive a lot of new customer business to return to growth because of the large installed base," he added.

Apple, which launched a build-to-order model for its G3 computers last fall, said it will offer the same model to its higher education market in the current quarter. The company also plans to expand that to the K-12 education market.

The K-12 market, reversing a slide, grew in the single digits in the second quarter, Anderson said.

"I wasn't surprised by this," Mazzucchelli claimed. "Once people see that Apple is not dead, the defections start to slow. Education has a large installed base which would rather not switch, unless they thought they had to."