Mac Vs. Mac: How Apple Plans To Cure Its High End Headache

Sometimes in the computer business, you can't win for losing. After years of complaints that Apple Computer Inc. didn't have a cheap enough product, out came the $999 Macintosh Classic last fall. It broke all Apple sales records. But while Apple celebrated that good news, it took its eye off sales of its more expensive computers.

One result: Apple announced on Apr. 15 that it logged a 19% increase in revenues, to $1.59 billion, in its March quarter. But profits, at $131 million, ran flat with last year's second quarter, thanks to slow higher-end sales. Indeed, gross margins in the quarter sank to 48.8%, down from a peak of 54.7% a year ago, and below recent estimates of 50.5%.

Wall Street analysts believe the glitch is temporaryalthough the news drove Apple's stock down 13% in a day, to 62. They say strong demand for the Classic, which spurred an 85% jump in shipments this year, is evidence that Apple Chairman John Sculley's low-end strategy to regain market share is working. "The basic story is still intact," says analyst Peter J. Rogers at Robertson, Stephens & Co. "It's just not going to be as smooth as we thought."

To fix things, Apple must rebuild sales of its sophisticated PCs, which cost up to $8,700 and yield margins around 60%, compared with about 45% for the Mac Classic. A new Mac, due this summer and based on Motorola Inc.'s fast 68040 chip, will help. Analysts in part blamed slow high-end sales on buyers waiting for that computer.

When Apple caught on to the problem, it slashed prices up to 31% on its more costly machines. But the Mar. 11 cuts came too late in the quarter, which closed Mar. 29. Sales were also hurt by another delay: Apple failed to ship a component of the $3,098 color Mac LC until mid-March. That cost nearly $40 million in second-quarter sales, analysts say.

LEGAL CLONES? Apple has other plans for kick-starting higher-margin sales. One boost will come from its System 7.0 operating system, due in May, which will add sophisticated capabilities to the Macintosh, including a means of running multiple software programs at once. Maybe the most important product under development is a six-pound notebook computer. Apple says it hopes to announce the machine, which Apple-watchers think is being made by Sony Corp., this fall.

Sculley is also promising to broaden the Macintosh franchise by licensing parts of its operating system. That should help the Mac talk to IBM-compatible PCs and build sales in big accounts. Even without a license, Nutek Computers Inc., a startup in Apple's hometown of Cupertino, Calif., plans to deliver the necessary chip sets and operating system to create what it says will be a legal Mac clone by yearend.

Nutek plans to license its raw technology to other computer makers, who could produce clones by as early as next year. Apple says it doesn't believe anyone can legally clone the Mac. Nutek's chief executive, Benjamin Chou, is conciliatory: "We don't envision ourselves as taking market share" from Apple, he says. "We'll increase the market share of the Mac."

OVERSEAS ACTION. Meanwhile, no matter how hard Apple is working to get its high-end house in order, analysts expect the average selling price of its products to drop this year to $2,950, from $3,822 in 1990 (chart). That has Apple relentlessly cutting overhead. In the March quarter, Apple slimmed expenses to 27.9% of sales, compared with 31.3% last year.

Apple also did a better job overseas. In the quarter, international revenues rose 30%, to account for 52% of sales. That has reassured Wall Street. "By the September quarter at the latest we'll see a resumption of the earnings comeback at Apple," says Rogers. He's counting on 1991 earnings to increase 20%, to $ 570 million on revenues of $6.75 billion, up 22%. If Apple can deliver on those numbers, it just may get credit for finally balancing its see-saw.

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