Apple to Post Record $700-Million Loss

With warehouses filled to the rafters with unsold computers as worried consumers continue to delay their purchases, beleaguered Apple Computer Inc. said Wednesday that it will post a record loss of about $700 million for the second quarter ending Friday.

Although Apple had earlier warned of the loss, the magnitude will be far greater than industry analysts had expected. That is a strong indication that customers are still fretting over the future of the Cupertino-based personal computer maker.

However, analysts generally praised new Apple Chairman and Chief Executive Gilbert Amelio for taking decisive action by including aggressive write-downs as part of the projected loss, and the company’s stock actually closed higher on the news.

Inventory write-downs will account for more than half of the $700-million shortfall, and another quarter of it will be used for restructuring charges such as severance packages for departing employees. In January, Apple said it would furlough an estimated 1,300 people--or about 8% of its work force--during the next year, costing the company $125 million in the second quarter alone.

Since then, Apple has apparently increased the number of workers targeted for layoffs, adding $50 million more to the restructuring charges it will take for the quarter. Apple declined to say exactly how many more employees will be let go and whether the $175 million in total restructuring charges includes other common cost-cutting measures such as shutting down inefficient manufacturing operations.

Another $175 million is an operating loss, and analysts predict it will take at least another quarter before Apple’s sales levels exceed its business costs and it can return to profitability.

Apple tried to put the best spin possible on the troubling news. In a prepared statement, Amelio said, “The inventory write-downs and restructuring charges are critical first steps in orchestrating the comeback of the company.”

“I’m confident at this point that I know what the problems are and that they are fixable,” he added.

George Scalise, the company’s recently appointed executive vice president and chief administrative officer, said that with the company’s cost-cutting plan in motion, Apple is now putting the finishing touches on a new marketing strategy recommended by a task force of senior Apple managers. It expects to unveil the strategy in May.

Analysts say that Apple is hoping to license its admired Macintosh operating system software to at least two major PC makers before year’s end.

Analysts praised Amelio, who joined the company Feb. 5, for taking decisive action, saying it represents a welcome change from earlier Apple chiefs, who often dithered when faced with difficulties.

Apple’s reassurances and analysts’ favorable reactions seem to have carried some weight with investors. The company’s share price rose $1.375 to $25.25 Wednesday in trading on the Nasdaq market. But not all on Wall Street were appeased. Apple’s bond price plummeted after debt-rater Moody’s Investors Service relegated it to “junk” bond status.

And retailers continue to be concerned by sluggish sales. As with many personal computer makers, Apple’s holiday revenues were much lower than it had forecast, prompting it to slash prices in recent weeks. But its well-publicized problems have left potential customers skittish, leaving Macintosh computers languishing on store shelves.

Last quarter’s $68-million loss, announced in January, “put a big damper on sales,” complained Mark Silverio, marketing manager for ComputerTown in Salem, N.H., the largest Apple-only reseller on the East Coast. “I wish they had taken even deeper discounts on some of these models.”

“The price cuts haven’t been deep enough to counter all the bad news,” agreed Seymour Merrin, president of Merrin Information Services, a computer retail consultant based in Palo Alto. “There’s an old saying in retail, ‘Your first markdown is the most important markdown.’ If the machines don’t move after that, they lose value in the minds of the customer, who thinks of them as old merchandise.

“What they should have done is blown it all out at some ridiculously low price rather than do it in dribs and drabs,” Merrin added.

In a matter of months, Apple has suffered the defection of about a dozen key managers, fired its chief executive and considered selling out to computer workstation maker Sun Microsystems Inc.--leaving employees, investors and customers reeling.

And although Amelio is enjoying something of a honeymoon, shareholders are unlikely to remain patient. Only a year after he took the post, Amelio’s predecessor, Michael Spindler, came under harsh criticism for Apple’s lackluster performance.

Apple said it will formally report second-quarter results sometime during the third week of April.