Apple Expects to Post Surprisingly Big Loss


Apple Computer Inc., indicating that its problems are worse than even critics had believed, said Wednesday that it expects to post a $68-million operating loss for its fiscal first quarter ended Dec. 29.

Apple had announced several weeks ago that it might report a loss for the quarter--traditionally a strong one for personal computer manufacturers--as a result of fierce price competition and slower-than-expected sales. But few had expected such a large deficit, and Wednesday's statement spurred a new flurry of speculation that Chief Executive Michael Spindler might soon be out of a job.

Apple said in its statement that "while unit shipments and revenue increased, compared to the same quarter a year ago, gross margins declined significantly." Apple said it will take a restructuring charge that will result in a net loss greater than the $68 million, but it withheld any details until the release of its full quarterly earnings report next week.

A major layoff has been expected at the company for several months, and most analysts expect 1,500 to 2,000 of the company's 13,000 employees will lose their jobs. An Apple spokeswoman declined to comment on possible layoffs.

"We are obviously disappointed about the results for the quarter and are taking actions to meet our challenges," Spindler said in the statement. "It is our top priority to return the company to profitability and provide value to our shareholders." The announcement came after the close of financial markets, but Apple shares fell $2.50 to $31.75 in after-hours trading.

Apple's troubles have been brewing for some time, intensifying dramatically over the last year. With Microsoft Corp.'s Windows all but eliminating the once-vast differences between Apple's user-friendly Macintosh and IBM-compatible PCs, Apple has been forced to cut prices to compete. And Apple carries the burden of designing its own hardware and software--unlike IBM-compatible vendors that do little more than repackage microprocessors made by Intel Corp. and software made by Microsoft.

Apple has also been hobbled by erratic management and the absence of a clear strategy. A number of senior executives have quit or been forced out over the last year, and morale has plummeted as the financial problems have intensified.

Apple's gross margins--the profit a company makes on a product after the cost of goods is subtracted--have been tumbling for years, and fell from 20% of sales during the last quarter to 15% in the current quarter. Apple is said to be considering a move out of the low end of the computer market, leaving that business to third parties that would license its software.

"They're going to let someone who doesn't have the overhead do the entry-level products," an Apple insider said.

"There is no question that Apple is in serious trouble," said Tim Bajarin, president of Creative Strategies, a Santa Clara, Calif., consulting firm with close ties to Apple. "They need a massive restructuring to create a business model that is viable."

The timing of the Wednesday announcement could not have been worse, coming during the Apple trade show, Macworld, in San Francisco. Although Apple is reporting record crowds--it predicts about 80,000 will attend the six-day event--the mood at the show is somber, with attendees wondering aloud whether the 19-year-old company will survive. As Apple's problems have mounted, so has speculation that it will be bought by a larger, stronger firm, such as IBM, Hewlett-Packard or Oracle.

Spindler was nowhere to be seen at Macworld this week, leaving Senior Vice President James Buckley to deliver a defensive speech to kick off the show Tuesday.

"Let's just take a moment and address a question some have been asking," Buckley said. "They've been asking if there will be an Apple Computer. Scary question. Especially last year. . . . When I hear that question about Apple's future, I have to remember it was also asked in 1978, 1981, 1985 and 1993. Know what? We're still here."

But there are many Apple veterans who are no longer "here," most notably the popular chief financial officer, Joseph Graziano, who was forced out in an October power struggle with Spindler. Apple confirmed Wednesday that two other senior executives recently resigned: Barbara Krauss, vice president of corporate communications, and Keith Fox, vice president of the home division.

Spindler has enjoyed the backing of Apple Chairman A.C. "Mike" Markulla and the rest of the board. But with the company continuing to flounder, Markulla--who fired previous Apple chiefs Steve Jobs and John Sculley--may be losing patience.

"I don't think he'll last through next week," one longtime Apple watcher said of Spindler. "Apple is going to have to undergo a massive restructuring, and I don't think he's the guy to do it."

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