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Apple stuns Wall Street
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September 20, 1999: 9:28 p.m. ET
Shares skid as firm says 4Q profits will short because of G4 chip shortage
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NEW YORK (CNNfn) - Apple Computer Inc. stunned Wall Street Monday by warning its fourth-quarter earnings will fall well below analysts' expectations due to a shortage of high-powered chips to run its new line of personal computers.
Apple officials attributed the shortfall to production problems at Motorola Inc., which manufacturers the G4 processor. The G4 is the heart of Apple's new line of Power Mac computers.
"We are very disappointed that this quarter's deliveries of G4 processors will be lower than planned," Fred Anderson, Apple chief financial officer said in a statement. "Orders for the Power Mac G4 have been strong and we anticipate ending the September quarter with a substantial order backlog. We continue to expect significant year-over-year growth in units and revenue in the December quarter."
In an interview with CNNfn.com, Apple interim Chief Executive Officer Steve Jobs said the company had originally expected to ship around 150,000 Power Mac computers in the fiscal fourth quarter. But the production problems are likely to cut that figure by as much as 60 percent.
"It's unfortunate," Jobs said, adding the company hopes to make up most of the shortfall in the fiscal first quarter ending in December.
News of the earnings warning caught Wall Street by surprise because many analysts had grown accustomed to Apple exceeding expectations since co-founder Jobs reassumed control of the company in 1997.
"We were all surprised by the magnitude of the shortfall," said Louis Mazziucchelli Jr., an analyst with Gerald Klauer Mattison. "I think Apple bet on being able to get these chips from Motorola, and it was a fair bet, but they bet wrong."
In after-hours trade, Apple (AAPL) shares tumbled almost 14 percent to 68, down from Monday's close of 79-1/16.
Motorola disputes Apple's claims
Motorola officials contested Apple's claims of slow shipments, saying they routinely advised the Cupertino, Calif.-based computer company of its timetable as advanced orders increased.
"There are no surprises here," the company said in a statement. "Motorola has advised Apple of the G4 schedule status everyday."
However, Jobs said it was not until the last few weeks that Motorola officials disclosed the full extent of the production problems.
"This is sort of a low integrity statement," Jobs said. "They accepted an order to supply well in excess of what we needed and now they can only ship 40 to 45 percent of that."
Brian Wilkie, general manager of Motorola's personal computer systems division said the actual number of deliveries has changed constantly the past few weeks.
"Like any high-technology launch, this schedule has gone back and forth quite a few times," Wilkie told CNNfn. "However, the schedule is going well and we expect to catch up fairly quickly."
Supercomputer on a chip
Apple has been promoting the G4 as the world's first "supercomputer on a chip," noting it can process data in 128-bit chunks - double the speed of most traditional computers. Apple officials claim the chip is nearly three times faster than the 600MHz Pentium III chip manufactured by rival Intel Corp. (INTC).
Wilkie said he expected Motorola to fill Apple's current orders within a few weeks and he did not expect the shipment dispute to interrupt his company's partnership with Apple, which spans some 20 years.
He also said he did not expect the pace of shipments to hurt Motorola's earnings forecasts.
"We're always concerned when we have an unhappy customer and we're moving heaven and earth and part of Texas to get this order filled," Wilkie said.
Jobs, while clearly disappointed with Motorola, also said he did not see a change in the company's long-standing partnership.
"Even married couples have arguments," he said.
Apple's new Power Mac G4
Long plagued by its inability to meet customer demand for its products and, therefore, sales expectations, Apple has routinely impressed Wall Street with strong earnings performances under Jobs the past two years, including seven consecutive quarterly profits.
Investors have rewarded the company in-kind, nearly doubling Apple's stock price since mid-June alone.
Analysts said investors should keep that in mind when deciding whether to buy or sell Apple stock Tuesday.
"The good news is they're saying they've got more demand than they can possible fill there," one analyst said. "If you are a true believer, you're probably going to sit tight."
Strategy questioned
Still, analysts' openly questioned Monday whether Jobs may have oversold the G4 Power Mac's sales potential this quarter when he unveiled the machine last month.
One analyst, who asked not to be named, called that bet a "calculated risk" on Apple's part to introduce the machine before Motorola made enough chips available.
As a result, the company likely significantly cut into orders for computers powered by the older G3 chips before the new Power Mac was actually ready - setting the stage for Monday's earnings warning, the analyst said.
Mark Specker, an analyst with Soundview Technology Group, said "there were some very limited rumors" on the Street that Motorola was having problems delivering the G4, "but nothing you could point at for sure."
He said Monday's announcement clearly caught the investment community off-guard.
"If there's one thing you can say, it's that this was not anticipated," Specker said.
Breaking down the numbers
Apple said it expects to report a profit between $75 million and $85 million for the quarter ending in September. Based on Apple's 177 million shares outstanding, the profit would equal about 42 cents to 48 cents per share.
Analysts polled by First Call Corp. had expected Apple to report fourth-quarter earnings of 76 cents a share, compared to its year-ago earnings of 68 cents per share, or $106 million, on sales of $1.6 billion.
The company's earnings estimate would also fall well below its earnings of $114 million, or 69 cents a share, excluding a one-time gain posted during the third quarter.
Taiwan quake an unknown factor
Analysts said Tuesday's massive earthquake in Taiwan could also pose a problem for Apple because the company gets components for its popular iBook portable computer from the region.
However, Jobs said it is too early to determine how the quake will affect component shipments.
"The whole industry gets components from Taiwan," he said.
Apple is expected to report earnings during the second or third week of October.
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