Briefing Document: Apple Computer, Inc. Fiscal Year 2000 Annual Report (Form 10-K)
Sources: Apple Computer Inc. - 2000 Annual Report
Executive Summary
Apple Computer, Inc.’s fiscal year 2000, ending September 30, 2000, was a year of significant growth coupled with the emergence of severe operational challenges. The company reported a 30% increase in net sales to $7.98 billion and a 32% rise in Macintosh unit sales, driven by the sustained success of the iMac and the successful introduction of the iBook portable computer. These consumer and education-focused products accounted for 60% of total Macintosh unit sales, highlighting a strategic shift toward these markets. The company also advanced its internet strategy through the launch of iTools, a partnership with EarthLink, and strong growth in its online store, which generated approximately $1.7 billion in sales.
However, this period of growth concluded with a deeply concerning outlook. A disappointing fourth quarter, which saw revenues fall approximately $180 million short of expectations, led to a substantial surplus of inventory in the company’s distribution channels. This was attributed to weaker-than-expected sales of the new Power Mac G4 Cube, a shortfall in the education market, and a shift toward lower-priced Power Mac configurations.
Consequently, the company issued a starkly negative forecast for fiscal year 2001. It anticipates a significant sequential decline in Q1 2001 revenue to approximately $1.0 billion and a net loss ranging from $225 million to $250 million, before investment gains. For the full fiscal year 2001, net sales are projected to fall to a range of $6.0 billion to $6.5 billion. This downturn is attributed to deteriorating demand, the costs of new rebate programs and price cuts, an aggressive plan to reduce channel inventory, and approximately $115 million in cancellation charges for component orders.
The company’s future success is critically dependent on navigating several key risks, including the monumental transition to its next-generation operating system, Mac OS X, intense industry competition, and significant vulnerabilities in its supply chain, particularly its reliance on single-source suppliers for PowerPC microprocessors.
1. Financial Performance Analysis (Fiscal Year 2000)
Fiscal year 2000 marked a period of strong top-line and bottom-line growth, continuing the recovery from previous years. However, gross margin percentage experienced a slight decline.
Key Financial Results (in millions, except per share data):
1.1. Sales Performance by Geography and Product
Growth in net sales and unit sales was strong across all geographic segments, with Europe and Japan showing particularly robust performance. The Americas remained the largest market, accounting for 54% of total net sales.
The increase in unit shipments was primarily driven by a 51% rise in combined sales of the consumer-oriented iMac and iBook systems. This shift underscored the increasing importance of the consumer and education markets to the company’s overall business.
Macintosh Unit Sales Breakdown (in thousands):
1.2. Significant Non-Operating Items
Gain from Sale of Investment: The company recognized a pre-tax gain of approximately $367 million from the sale of 45.2 million shares of its investment in ARM Holdings plc.
Executive Bonus: A special one-time charge of $90 million was recorded for an executive bonus for the CEO, Steve Jobs, for past services. This bonus was in the form of an aircraft.
2. Emerging Challenges and Negative Outlook
Despite strong annual results, the final quarter of FY2000 revealed significant weaknesses, leading to a severely negative forecast for the upcoming year.
2.1. Fourth Quarter 2000 Shortfall
The company’s performance in the fourth quarter was “disappointing,” with net sales falling short of expectations by approximately $180 million. The primary factors cited for this shortfall were:
Power Mac G4 Cube: Sales of the newly introduced G4 Cube were approximately $100 million below expectations.
Education Market: Net sales in the education market were about $60 million lower than anticipated.
Product Mix Shift: An unanticipated shift towards lower-priced Power Mac configurations resulted in approximately $30 million less in net sales than planned.
A direct consequence of this sales miss was that the company ended the fiscal year with “substantially more inventory in its distribution channels than planned.”
2.2. Fiscal Year 2001 Outlook: A Critical Downturn
The company provided a deeply pessimistic outlook for fiscal 2001, signaling a sharp reversal from the growth of 2000.
Q1 2001 Forecast: A significant sequential decline in net sales to approximately 1.0 billion**. The company anticipates reporting a net loss between **225 million and $250 million for the quarter, before any investment gains.
FY 2001 Forecast: For the full year, the company anticipates net sales will decline to a range of $6.0 billion to $6.5 billion. Profitability is expected only in the last three quarters of the fiscal year.
The key factors driving this negative forecast include:
A continued deterioration in product demand.
The implementation of rebate programs and price cuts, expected to cost $135 million.
A plan to substantially reduce channel inventory levels.
An estimated $115 million in cancellation charges for purchase orders of proprietary components due to the reduced sales outlook.
3. Strategic Initiatives and Product Portfolio
The company’s strategy centered on delivering innovative hardware and software, with a strong focus on ease of use, industrial design, and seamless internet integration. A pivotal element of this strategy is the transition to a new operating system.
3.1. The Mac OS X Transition
The planned 2001 release of Mac OS X is described as the “most fundamental changes in both core technology and user interface design... since the original introduction of the Macintosh in 1984.” This new client operating system represents a complete architectural shift.
Core Technology: Based on an open-source UNIX foundation (Mach 2.5 microkernel and BSD 4.4), it will feature memory protection, pre-emptive multi-tasking, and symmetric multiprocessing.
Graphics and Media: It will include the new Quartz 2D graphics engine (based on PDF), OpenGL for 3D graphics, and QuickTime for streaming audio and video.
User Interface: A new user interface named “Aqua” was developed, featuring a “Dock” for organizing applications and documents.
Status: A Public Beta was released on September 13, 2000, with the first full customer release planned for 2001.
3.2. Internet Strategy
The company’s internet strategy focused on integrating internet access and services throughout its product lines.
iTools: A suite of free internet services introduced in January 2000, including Mac.com email, iDisk online storage, and HomePage for personal website creation.
QuickTime: QuickTime 4, with its internet streaming capabilities, saw over 100 million copies distributed. The QuickTime TV (QTV) network was established in partnership with Akamai for content delivery.
EarthLink Partnership: A multi-year agreement made EarthLink the default Internet Service Provider (ISP) for Macintosh users in the United States.
Online Store: The company’s online stores generated approximately $1.7 billion in net sales during fiscal 2000.
4. Key Operational Risks and Dependencies
The 10-K report identifies several significant risks that could affect future performance, many of which are central to the company’s business model.
4.1. Competition and Market Position
The personal computer industry is described as “highly competitive” and characterized by “aggressive pricing practices” and “downward pressure on gross margins.” The Mac OS holds a minority share of the personal computer market, which is dominated by Microsoft Windows. The company’s future depends on its ability to maintain perceived design and functional advantages over competing platforms.
4.2. Supply Chain and Manufacturing
The company is highly dependent on external suppliers, creating significant risk.
Single-Source Components: Key components, including microprocessors and ASICs, are obtained from single or limited sources. This is a critical vulnerability.
PowerPC Microprocessors: The report explicitly notes the dependency on IBM and Motorola as sole suppliers of the PowerPC microprocessor. It states that the inability to obtain faster G4 microprocessors in sufficient quantities had an “adverse impact on the Company’s results of operations during 2000, particularly towards the end of the fiscal year.”
Outsourcing: A significant portion of manufacturing is outsourced, which reduces direct control over production quality and quantity.
4.3. Third-Party Developer Support
The availability of third-party software is considered crucial to customers’ purchasing decisions. The minority market share of the Mac OS makes attracting and retaining developers a constant challenge. The transition to Mac OS X presents a major risk, as there is “no assurance software developers will decide to develop software for Mac OS X on a timely basis or at all.” The company’s relationship with Microsoft, which ensures versions of Microsoft Office and Internet Explorer for the Mac OS, is important but does not require Microsoft to produce versions optimized for Mac OS X.
4.4. Market and Distribution Channels
Education Market: This is a key market where several competitors are increasing their focus. Apple’s sales in this segment fell short of expectations by $60 million in Q4 2000.
Distribution Partners: The company relies heavily on resellers and distributors. A single distributor, Ingram Micro Inc., accounted for approximately 11.5% of net sales in 2000.
5. Corporate and Governance Highlights
Company Information: As of September 30, 2000, Apple had 8,568 employees and an additional 3,160 temporary employees and contractors. Manufacturing facilities are located in Sacramento, California; Cork, Ireland; and Singapore.
Shareholder Information: A two-for-one stock split was effected on June 21, 2000. The company did not pay cash dividends. Under a stock repurchase plan, the company repurchased 2.55 million shares at a cost of $116 million during the fiscal year.
CEO Compensation: Steve P. Jobs served as CEO with an annual salary of $1. In fiscal 2000, he received a special executive bonus in the form of an aircraft valued at approximately $90 million and was granted 20 million stock options.
Minority Investments: The company holds significant investments in public companies, including ARM Holdings, Samsung, Akamai, and EarthLink, with a combined fair value of $786 million as of September 30, 2000. These investments are subject to significant price volatility.
