In Focus

Looking Into Apple's Core

There are certain things that make you feel old. Telling my kids about 8 track tapes will certainly be like my mom trying to tell me about listening to 78 speed records. Yeah right, Mom, and you didn't have electricity either! It is hard to imagine, however, life without the toys and gadgets we have become accustomed to. Sure the answering machine and the VCR have changed my life, but not like the personal computer. I'm addicted to doing my finances on Quicken and using a word processor to type, but it's the internet I would probably miss the most. The ease of communication and access to information makes my life so much easier. I can remember so well the first Personal Computer that ever came into our home. My older brother was proud to be the owner of an Apple Computer. I can't remember the year, but it couldn't have been long after its initial introduction in 1984. Our whole family gathered around him as he showed us the user-friendly icons and painted pictures on the screen using his little "paint can." It was incredible.

About ten years later, when I found myself unemployed after completing my contract acting on a soap, I decided it was time I became equipped too. I had money in my bank account and was looking for something to fill the time while waiting for the phone to ring for the next audition. I bought a Mac. (That's the lingo for an Apple Computer, it stands for Macintosh.) I chose an Apple because of its reputation for just being the doggone easiest thing to run. I'm not really known for my technological prowess, so anything easy was the desired route for me. Much later, I came to realize something kind of interesting about buying software for an Apple. It was simple all right, mainly because there wasn't much to choose from. Sure there were aisles upon aisles of software, but those were for PC's that were designated IBM compatible. Poor Mac users didn't even get their own aisle, usually it was just a meager couple of rows. Sure, my Mac performed fine but I sort of felt like an outcast. Believe it or not, this has been one of the main stumbling blocks for CEO Steve Jobs and Apple Computer Inc. (Nasdaq: AAPL).

I'm sure the day Microsoft came out with their new Windows format was a difficult day in the home of Mr. Jobs. That which separated the two companies was now somewhat blurred. Apple's main appeal had always been its user-friendly desktop. Even a first-time user could easily find his or her way around without having to learn a bunch of foreign commands. Unfortunately (for Apple), Microsoft came out with their much ballyhooed Windows format that could run on any compatible PC. Suddenly, the playing field was leveled. It seems Apple has been striving ever since to give users a reason to buy their brand over all those other compatibles. Well, creativity is born out of necessity, they say, and that's exactly what's occurred at Apple. The company has survived by living by its motto "think different." Their sleek and futuristic designs have definitely invited new customers and kept old ones returning. Looking at their financial statements, one can see that they are more than surviving. Their margins are definitely not Chicky, but nicely profitable just the same. For the quarter ending 3/01, Gross and Net Margins came in at 27% and 3% respectively. Their cash situation is beautiful, having 13x more cash than they do long-term debt. Even better, is Apple's Flow Ratio. It is a lean, mean .67. That's the sign of an efficient business that keeps inventory moving.

I think those numbers are pretty outstanding considering the overall economy has been in a slump. Technology has been hit hard, the PC business included. Two weeks ago, Apple released their latest earnings report for the third quarter ending 6/01. The good news was that they actually beat analysts' estimates by two cents. The bad news was that their profits had fallen a whopping 70% from the same period a year ago. This would worry me more if the whole economy weren't being hit. In fact, powerhouse company Intel reported earnings on the same day showing a 76% drop in profits from the previous year. I'm sure Apple's misery is happy to have a little company. Apple also announced that sales in the near future would continue to be challenging, warning that they would fall short in their 4th quarter and full year sales estimates.

On the bright side, European sales made up a full 44% of their revenue indicating that the situation over there has somewhat stabilized. In addition, Apple enjoyed better than expected computer sales to schools, having increased 7% since last year. Apple basically has four product lines to choose from: two desktops and two laptops. Steve Jobs has always maintained that his company will have to innovate its way to the top, especially out of this current downtrend. Remember, their motto has always been "think different." Well, when you think outside the box, as they say, you're bound to have some hits and misses. Most recently Apple suffered a miss with their PowerMac G4 Cube. It was a powerful system packed inside a little eight inch box. Apparently, it wasn't powerful enough to support its price tag, forcing the company to put its "cube" on ice.

Following their recent earnings announcement, Apple held their annual MacWorld exposition in New York. Unfortunately, I think people have become accustomed to the company's intriguing innovations and were disappointed to see only modest upgrades to current systems being unveiled. Sometimes, try as you might, you just can't win. But the race is certainly not over for Apple. In an attempt to create stronger brand awareness and further penetrate their products into the market, Apple has opened two retail stores, with plans to open 23 more by the end of the year. We'll have to wait until next year to hear any sales figures. I have to admit, even though I've since converted to a compatible PC myself, I still find myself pulling for this company. It's an underdog that continues to think big. Despite the might of Microsoft, Apple continues to be the thorn in their side that presses for innovation. For the consumer, competition is good, real good. For the shareholder, it's a mixed bag.