(WSJ: "Apple Profit May Decline up to 30% In Quarter Following Chip Shortage")
September 21, 1999
Apple Profit May Decline up to 30%
In Quarter Following Chip Shortage
By DAVID P. HAMILTON
Staff Reporter of THE WALL STREET JOURNAL
Apple Computer Inc., in its first major stumble since rebounding from a near-death experience, warned that its earnings may fall 20% to 30% in the fiscal quarter ending Sept. 30 because of a shortage of microprocessors from Motorola Inc.
Apple said it expects to post net income of between $75 million and $85 million when it reports fiscal fourth-quarter results on Oct. 13. In the year-earlier quarter, Apple had net of $106 million, or 68 cents a diluted share, on revenue of $1.56 billion.
Steve Jobs, Apple's chief executive, blamed the problem on a shortfall of Motorola-produced G4 microprocessors, which are used in Apple's new Power Mac G4 computers. Apple has received only 40% to 45% of the G4 chips Motorola had originally promised, Mr. Jobs said.
Stock Is Hammered
Apple's stock was hammered by the news. While Apple shares rose $2.125 during regular trading on the Nasdaq Stock Market, ending at $79.0625, they later plummeted more than $11 from the close after the news was released. Apple was trading at $68.125 in after-hours trading, according to Instinet Inc.
Mr. Jobs, however, was quick to stress the chip shortage is a temporary problem and said it was exacerbated by the fact that it came so close to the quarter's end. "If this wasn't happening on the quarterly boundary, we probably could have caught up in the quarter in which it happened," he said.
Brian Wilkie, a Motorola official in charge of the company's personal-computer systems division, confirmed Motorola had missed its shipment targets. But he declined to go into details regarding the cause of the delay, saying only that Motorola had run into the "normal" problems faced when ramping up the manufacturing of a new product.
Chip sales accounted for only about a quarter of Motorola's revenue in 1998, and at this point the G4 shortfall doesn't appear likely to have a serious impact on the Schaumburg, Ill., maker of communications gear. Shares in the company closed up $1.1875 at $90.6875 in regular trading, and were unchanged in after-hours trading.
"When you start contemplating what you would like to do, you plan for a number of contingencies," Mr. Wilkie said. "If more contingencies than those happen, such as unexpected factory problems, then your schedules change."
Mr. Wilkie added, "We expect to catch up rapidly."
Apple and Motorola sought to cast the shortfall as a natural, but unfortunate, consequence of Apple's recent success. Mr. Jobs said the company already has received orders for 150,000 Power Mac G4 computers since the product was announced just three weeks ago, in line with expectations.
"If we could ship them all, we'd have a better quarter," he said.
Echoes of Past Problems
For Apple, the product shortage echoes past problems in matching supply with demand. Back in 1993, for instance, Apple's earnings crashed when it overestimated demand for its PowerBook portable, one of the events that helped precipitate then-CEO John Sculley's ouster by the board. Such problems have largely dissipated since Mr. Jobs took the company's helm in mid-1997 and streamlined its manufacturing processes.
The chip shortfall is also likely to highlight a recurring problem for Apple and other companies that become reliant on a single supplier for vital components. Computer makers once had the clout to compel chip makers to license alternative suppliers to set up parallel manufacturing lines. But the balance of power gradually shifted, and Intel Corp., for example, remains the sole source for most chips used in PCs.
At times, International Business Machines Corp. and Motorola have simultaneously made similar chips based on a jointly developed design called PowerPC. But Motorola is the only maker of the G4, which includes a technology called AltiVec that boosts performance.
"Apple bet that they could get enough parts from Motorola so they could make the quarter, and they bet wrong," said Louis Mazzucchelli, an analyst at Gerard Klauer Mattison. "Everybody is a little surprised by this."
No Backup Supplier
Mr. Jobs said he still is satisfied with Motorola's efforts and has no plans to seek a backup supplier. "This kind of thing happens from time to time in the high-tech industry," he said. "Unfortunately, this time it's happening to us," he said.
Mr. Mazzucchelli estimated Apple's earnings per diluted share for the current quarter would be between 45 cents and 50 cents, compared with First Call/Thomson Financial's old consensus analysts' estimate of about 76 cents. But he too believes Motorola will begin catching up quickly and doesn't plan to drop his earnings estimates for the fiscal year ending in September 2000.
Mr. Jobs unveiled the G4 last month, claiming the performance was three times as fast as the quickest Pentium III chips from Intel. Analysts, however, were skeptical of the claims, noting there was no accurate way to make comparisons on all types of software.
"On the one hand, they are at the mercy of a single source when two would ensure them a better source," said Keith Diefendorff, analyst at Cahners Micro Design Resources in Sunnyvale, Calif. "On the other hand, the market may not be big enough to support two suppliers."
Although the profit warning may take some of the recent shine off Apple, Mr. Jobs said the company remains far healthier than when he came back on board. "Having a disappointing quarter now means only earning $75 million to $85 million," he said. "I think that's a fair amount of progress for us."
Separately, Apple said the Tokyo District Court issued a preliminary injunction against a Japanese personal-computer maker that Apple claimed has illegally copied the design of its popular iMac computer. The court forbid Sotec KK from manufacturing, selling, displaying, exporting or importing its eOne computer, Apple said. Apple has similar lawsuits pending in the U.S. against eMachines Inc., Future Power Inc. and Daewoo Group.
--Dean Takahashi contributed to this article.
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