A $50 Million Shortfall? No Problem!

For 18 months, Apple Computer Inc. has been on a mission to buff up earnings and convince skeptics it's still a force to be reckoned with. And on Apr. 20, quarterly profits jumped fourfold over the year-ago period. Still, that was far short of expectations: $73 million on sales of $2.7 billion, vs. Street predictions of $114 million. And the stock? Oddly, given the bad news, it jumped three points in two days, to just over $39.

What gives? Credit the explanation--or the explainer, namely Joseph A. Graziano, Apple's chief financial officer. He says much of the quarter's shortfall can be explained by losses in foreign currency hedging--mainly resulting from the dollar's big drop in late March. The result: interest and other expenses constituted a $50 million loss, vs. a $7 million loss in the same quarter a year ago.

"SAFE PLACE." Graziano calls the decline a "paper" shortfall on forward and option currency contracts that run beyond the quarter. If the dollar stays level or rises, he says, the loss could be partially reversed as the contracts expire. "We're in a safe place here," he says.

Wall Street seems to agree. Analysts note that Compaq Computer Corp.'s hedging program suffered a $23 million loss in the quarter, too. Michael Murphy, editor of California Technology Stock Letter, figures if the hedges unwind in its favor, Apple could gain back some $13 million this quarter and another $17 million in the following two quarters. Apple's shipments also were up 20%--a bellwether of better health. Analysts generally laud Graziano for conservative fiscal management.

He does have moments of flashiness, though. In 1989, he earned the moniker "The Million Dollar Man" after Apple ponied up a $1.5 million bonus to lure him away from Sun Microsystems Inc., where he had been CFO for two years. He had already done a stint as Apple's CFO from 1981 through 1985, when he quit to spend time with his brother Anthony, who was dying of cancer.

Graziano returned at a crucial time. Apple's fat 51% gross profit margin was about to get hit by commodity pricing of PCs. And Microsoft Corp. would soon unleash the first versions of Windows, narrowing Apple's lead in the ease of use of its computers. Says Graziano: "I knew Apple had some real challenges ahead of it--well, maybe not to the magnitude that occurred."

Graziano has been key in steering Apple forward. Daniel Eilers, an Apple senior vice-president, says he was "instrumental" to the negotiations with IBM that led to the birth of the speedy new PowerPC chip. Plus, he has slashed costs: Operating expenses are down to 19.9% of sales, vs. levels of about 36% when he returned. Says Robert Saltmarsh, a former Apple vice-president who now is CFO of Radius Inc., a maker of Macintosh gear: "He has had a lot to do with making Apple a more competitive company."

Pinching pennies comes naturally to Graziano, 51. He grew up in Boston, the son of working-class parents of modest means. He did everything from delivering potatoes to hauling meat to pay his way through Massachusetts' Merrimack College, where he graduated in 1965 with an accounting degree.

Today, his lifestyle is less austere. He races vintage sports cars, and has a collection that includes two Lotuses, a Lola, five Ferraris, a Mercedes, a BMW, a Suburban, and a pickup. "He certainly brightens up the parking lot," says Eilers. And if his hedging strategy works out, it could yet brighten Apple's profits a bit. Otherwise, there will be more explaining to do.

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