Apple faces challenges in shaky PC market by Michael Flaminio December 6, 2000 In a day of record gains for the NASDAQ, Apple Computer Tuesday dropped an after-hours bombshell. The company announced that it will report drastically lower earnings for its current quarter. The company expects to report a loss of $225 to $250 million. The quarter will be the first unprofitable quarter since Steve Jobs returned to Apple over three years ago. According to the company, Apple's problems result from a combination of events. At the heart of the problem is a slow down in sales of Apple computers during the current and past quarters. The causes of the slow sales are numerous, however, the end result is the same; Apple is left with mounting inventories during what usually is a bustling time of year. Inventory Woes In a conference call Tuesday Apple reported that it is currently carrying 11 weeks of inventory. During the previous quarter, Apple saw inventory levels running at 8 weeks. Apple had expected to carry around 5 weeks of inventory during the quarters. After last quarter, Apple attempted to clear out inventory of Macs with promotions. After the expected sales failed to materialize, the company announced a new promotion for Power Mac G4 desktops, which took $300 or $500 off of the price of new systems. This promotion joined with others cut Apple's product margins to the bone. The end result was that last quarter's problem became worse as boxes continued to stack with only the slightest of profits being generated. Industry-Wide Slow Down Apple cites lagging sales around the globe for its problems. Also Apple is still nursing sluggish sales in the educational markets from last quarter. During the conference call Tuesday, Jobs said in regards to slipping to #2 in education that Dell didn't win educational for the quarter, but rather Apple had lost it. Apple is not alone in its slowing sales. Other computer manufactures, such as Dell Gateway and Compaq have recently warned of slowing PC sales. Apple noted that it did not see any significant increase in sales during the second half of November, traditionally the first surge in holiday spending. Gateway last week announced similar news as it drastically reduced its financial forecasts for the quarter. The problem could be that this year's holiday season is seeing significantly fewer people shopping for computer gifts. Other technology items such as handheld computers and MP3 players may be winning the hearts of shoppers. Rocky Road Ahead To clear this mine field, Apple must move its inventory as it is now facing a triple threat. Every indication seems to point that PC sales will continue to be slow well into 2001. Apple may need to continue slashing prices as other PC manufactures are facing similar dilemmas and are expected to continue cutting their own prices. The result could be a short-term price war as manufactures try to quickly move aging boxes. It's also believed that Apple is planning a new product cycle for early 2001. If Apple can't clear inventories quickly, it will be bringing new products into a sluggish market with warehouses filed with obsolete products. With new products on the horizon, consumers may need enticing offers to buy today what may be obsolete tomorrow. If inventory is still running high after Apple refreshes its product line, prices may have to be reduced further to entice consumer to buy already obsolete products. Apple does not beleive that its troubles will end with the quarter. For 2001, Apple has reduced its revenue outlook from $7.5 to $8 billion to $6 to $6.5 billion. Apple does expect to return to profitability during the last three quarters of its 2001 fiscal year. Apple also points out that it has over $4 billion in cash assets. Apple CFO Fred Anderson was quick to point out that the acounts to $11 per diluted share.