Has the magic gone at Apple?

After chief executive officer Steve Jobs warned that Apple would miss analyst sales and earnings estimates in the fourth quarter, the company's stock lost half its value as investors saw no good news on the horizon.

Serious questions are being asked by investors, customers and employees. Does the recently revived company have anything left to offer? Is its charismatic leader capable of keeping it on track?

The latest free fall in its stock price has it languishing at $20, just above its 52-week low of $18.75. The slide began when Apple failed to meet downgraded profit estimates in its fourth-quarter financial results, blaming poor sales. The vendor reported net income of $108m, or 30 cents per share, not counting profits from a stock sale.

In late September, Apple warned that earnings would be between 30 and 33 cents per share. Before the warning, the consensus among industry analysts was a profit of 45 cents a share, according to First Call/Thompson Financial. Since the profit warning, however, its stock has lost more than 60 per cent of its value.

Although Gerard Klauer Mattison's David Bailey was the only analyst to downgrade the stock from 'buy' to 'neutral', several brokerages did lower their 2001 estimates for revenue and earnings per share. "Some of Apple's problems are very challenging and may not be easy to resolve relatively quickly," said Walter Winnitzki, an analyst at Chase Hambrecht & Quist, in a research note to his clients.

Winnitzki lowered his earnings guidance for fiscal 2001 from $1.50 per share to $1.15. "Without more specific product details, we think Apple shares are for the patient," wrote Gillian Munson, an analyst at Morgan Stanley Dean Witter, in another research note. Munson lowered her 2001 earnings guidance from $1.53 per share on revenue of $8.5bn, to $1.15 per share on revenue of $7.5bn.

Changing desires
A research report from analysts Meta Group said that to succeed in the long term, Apple must deliver on the new products promised by Jobs and provide the value and features that consumers want. The real question for Apple will be whether the new products will meet the changing desires of the marketplace when they appear, the report said.

Addressing some of the issues in a recent conference call, Fred Anderson, chief financial officer at Apple, said that the next six months would be difficult as the company struggled to clear the bottlenecks in its channel distribution. Anderson claims that the reason Apple fell short of expectations includes factors such as Power Mac G4 cube sales that failed to meet expectations. The vendor also fell short in education market revenue by about $60bn, predominately in iMac and iBook sales.

The education sales were hurt by Apple's transition in July from a third-party to an in-house sales force. "We pulled in the reins on spending and implemented a hiring freeze across the company," said Anderson. Meanwhile, Gartner Group analyst Charles Smulders said: "Apple's problems stem from a hole in its product line. The iMac is now almost two years old. The new iMacs announced in the summer were disappointing in the sense that adding four new colours is hardly news."

Cheaper cube
Smulders also explained that, while the G4 cube is a nicer product, it is too expensive. "In other words, Apple needs an iMac replacement. Jobs alluded to a cheaper version of the G4 cube which may help," he said, adding that a further issue for Apple is its installed base, many of which have upgraded in the last two years. Apple is also under pressure in the education market where its ease-of-use advantage over the Wintel platform is being questioned in terms of cost premium and usefulness relative to platforms outside of the education environment, according to Smulders.

He went on to say that he was not sure about a takeover angle. "I struggle to find a well positioned candidate to buy it, and the exchange of ownership would probably mean the departure of Steve Jobs."

Jobs claims that the company has identified several factors that contributed to the sales shortfall last quarter and "is taking strong steps to remedy them going forward". He said September sales were "way below" the company's target, which left Apple with an unusually large inventory.

"Rather than reducing it gradually over the next several quarters, we have decided to reduce it to a normal level by the end of this quarter," he said. "This will result in a second disappointing financial quarter, even though our sell-through sales should be moderately strong." He suggested a few reasons behind the slow sales: a price point that was too high; design flaws including "flow lines that some saw as cracks"; and a faulty power switch that caused the Cube to turn off unexpectedly. Jobs stressed that these issues have been resolved.

He also pointed out that there were perceived CPU megahertz issues and that Apple is working closely with Motorola and would release speedier G4 CPUs within six months. "Our plan is to be back on track for the January quarter and we remain very excited about our products and programs for 2001," he said, explaining that Apple would offer a new line of desktop and portable computers aimed at both its high-end and education markets.

Best ever machines
Jobs referred to these new machines as "the best he had ever seen in his career". He promised that Apple's new OSX operating system would be released early next year, and that it "would dazzle users with its combination of power and ease [of use]". There were also other software and hardware innovations currently under development.

"There's a lot more coming but we can't talk about it," he said. "We've had two disappointing but profitable quarters and we are taking strong steps to remedy them in the future. Let me reassure you - the same spirit will drive Apple back to a profitable position next year."

Analysts accept that Jobs, who has incredible persistence along with his creativity and famous charisma, keeps fighting and doesn't give up. Apple is still profitable, and one or two disappointing quarters aren't about to discourage him. After all, he's been knocked down much harder many times before.