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Newton: Bad news may be good

Apple Computer's decision to drop its much-hyped Newton may end up boosting the company's earnings.

Apple Computer's (AAPL) decision to drop its much-hyped Newton may end up boosting the company's earnings--at least slightly.

Meanwhile, Apple's stock continues to rise in the wake of the company's decision to drop Newton, interim CEO Steve Jobs's latest effort to get the company back on track.

The maker of personal computers said earlier this week that it would discontinue further development of the Newton operating system (OS) and Newton OS-based products, including the MessagePad 2100 and eMate 300.

The business expenses associated with running the Newton division far outweighed any benefits the company received from sales of the product, said Daniel Ries, an analyst with Nomura International Equity Research. Therefore, Apple's decision to cut its losses is likely to boost its earnings.

"[Cutting Newton] will have a positive impact on earnings because the division was posting a negative operating income," Ries said.

Salomon Smith Barney analyst Richard Gardner agreed that the decision to abandon Newton would impact earnings, but said the impact would be minimal because only 1 percent of the company's revenue came from sales of Newton products. By comparison, expenses associated with Newton development amounted to "a few million a quarter," out of total expenses of about $300 million.

"The division never made any money," he said.

Based on Gardner's estimate that Newton accounted for 1 percent of Apple's business, the Newton division pulled in about $15.8 million, on revenue of $1.58 billion reported during the December quarter.

But, shares gained 1-5/16, or nearly 6 percent, yesterday, closing at 24-7/16, a price that the stock hasn't traded at since October 15, when it briefly hit 24-3/4 during intra-day trading. August 20 of last year was the last time Apple's stock hit a comparable price.

Despite the fact that canceling Newton operations will reduce Apple?s revenues and produce potential upside going forward, the judgment was one that management made reluctantly, Ries said.

The decision to drop out of the handheld devices market is one in a string of significant rulings Jobs has made in his ongoing effort to get the company back on track. Analysts say Jobs has made decisions for Apple that a new CEO would have had a hard time putting into action.

The laundry list of Jobs's big decisions--in addition to the one to halt further development of the Newton OS--include the removal of Apple from the cloning business, the acquisition of Power Computing's Mac business, and the acceptance of a $150 million investment from rival Microsoft (MSFT).

Jobs also led the company to sell computers to customers directly via its Web site, an initiative that resulted in more than $12 million in orders during its first 30 days.

In February, Apple reversed its broad-based retail sales initiatives at Best Buy, Circuit City, Computer City, Office Max, and Sears. The move followed the deal that Steve Jobs struck with CompUSA (CPU) to develop a store-with-in-a-store format within the company's superstores.

Jobs also reorganized Claris, Apple's independent software subsidiary. In addition to absorbing the ClarisWorks productivity suite and various other software products, Apple will once again assume full responsibility for distribution and production of the Macintosh operating system.

"The strategic course of the company has been largely determined by Jobs," said Gardner. "He is taking most of decisions in that area, and we are seeing the results of that by how hard it has been to find a replacement for [ousted Apple CEO] Gil Amelio."

Despite all of the changes designed to make Apple's business more efficient, Gardner said he is unsure if Apple can move beyond its core markets, such as education--an area in which the company has been losing market share.

"Not only have they become a niche company, [Apple] is under attack from Intel (INTC) and Microsoft, and Apple has a tough road ahead," said Gardner. "I thought licensing was the best hope to build demand, to getting systems out there."

Gardner added that Apple should have implemented the build-to-order model and Internet sales in conjunction with a licensing program, rather than instead of one. "They should have viewed [the clone makers] as partners instead of competitors," he said.

Ries added that the day Apple names a CEO will not necessarily be a positive day for the company's stock.

"The day they name a new CEO, Steve Jobs is no longer CEO, and that may not make a lot of people too happy," he said. "He has really done a lot to turn the company around."

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