By: Ryan Walker
A variety of announcements this week paint a clear picture of the future of the personal computer industry. Apple, Compaq and Intel announced earnings. Computer Retail Week released information about the Top 100 Computer Vendors of 1997. And Intel announced a new "low cost" microprocessor which is both slower and more expensive than its competition.
Intel sees their portion of the computer industry shrinking
On Wednesday, Intel announced it will lay off nearly 3,000 employees, roughly 5% of its workforce. Intel cast blame for a 36% decline in profits and 7% reduction in revenue to reduced demand for personal computers. "This was a disappointing quarter," Intel Chairman Andrew Grove said. Intel earnings slid from $1.10 per share a year ago to just 72 cents per share, just meeting First Call's revised estimates after Intel pre-announced their earnings shortfall. Grove continued, "the PC industry seems to have gotten ahead of itself, building more product than end-customers purchased." Andy Bryant, Intel CFO, expects revenues to remain flat or decline in the coming quarter, blaming surplus inventories in the distribution channels. Lou Mazzuchhelli of Gerard Klauer Mattison & Co. stated "the (earnings) number is not surprising, there has been pressure in the Wintel (Windows-Intel) space. The job cut ... underscores the potential of the seriousness of the problem in Intel's eyes." Intel said its gross margins are expected to be down a few percentage points from the first quarter to the lowest level in a year.
On Thursday, after two years of disappointing sales, resurgent Apple Computers stunned industry analysts, beating First Call consensus earnings estimates by 138%. Earnings per share rose to 38 cents beating First Call's consensus estimate of 16 cents, and even beating the highest estimate of 35 cents in the First Call calculations. Apple's profit increased to $55 million for the quarter ended March 27, up $8 million from the $47 million profit in the previous quarter and a $763 million improvement over the $708 million loss reported in prior-year quarter. Unit shipments increased 8 percent over last year, while gross margins increased from 19 percent a year ago and 22% last quarter to 25% in the current quarter. Apple forecasts continued profit through the next quarter followed by unit and earnings growth in their fiscal fourth quarter.
Compaq projects continued decline
Earlier the same day, Compaq announced extremely disappointing earnings. Compaq earnings plummeted 96% to 1 penny per share. First Call estimated Compaq earnings would drop from 75 cents per share in the prior-year quarter to 9 cents for the current quarter. Compaq failed to meet even that low estimate, barely managing to show a single cent per share. Compaq Chief Financial Officer Earl Mason expects continued pain at the PC clone manufacturer. "It will take another quarter of adjustment to put the company's core business on a track," Mason said. Compaq remains plagued with an inventory of $1.26 billion. Compaq blamed their poor performance on lower prices and weak demand. Coincidentally, Compaq further dropped prices by 6-25% on its older Pentium business computers just on Monday, desperately trying to clear out inventory. Compaq expects sales to remain sluggish through the next quarter and says that forecasting is practical right now with the Digital merger looming on the horizon. With a $9.6 billion merger scheduled to hit the books in the coming quarter, Compaq's outlook appears poor indeed.
Apple Open Systems approach succeeds where Intel Proprietary Technologies approach fails
Apple has streamlined manufacturing, reduced general expenses, and brought down cost of goods by increasing utilization of industry standard components in order to increase gains against the competition. Intel has opted to fight competition by selling microprocessors in proprietary cartridges resulting in costlier components and lower margins.
Intel releases slower, more expensive processors
Also on Thursday, Intel belatedly entered the sub-$1000 PC market. Intel announced a new processor named Celeron. Hoping to cash in on the booming low cost market, Intel's new chip is specifically designed for cheap personal computers. Unfortunately, you get what you pay for with the new Intel chip. Not only is the Celeron chip substantially slower than Pentium II processors, even at the same clock speed, it is slower than its direct competition. Cyrix has already announced its own M II-300 processor which is 25% faster than Intel's 266MHz Celeron chip for the same price. Intel failed to draw announcements of new Celeron based products from IBM, Dell, Hewlett-Packard, Gateway and Micron. None of the five companies have committed to using the product, only Compaq has made such a commitment. Advanced Micro Devices, which recently lost 39 cents per share instead of the 24 cents per share First Call estimate, continues to beat Intel in the low end market. AMD has vowed to keep chips priced 25% below comparable Intel chips, and is doing so with a 60% gross margin. AMD pulled IBM into its camp, signing the computer and chip maker to manufacture AMD K6 processors in order to keep up with demand.
Apple surpasses Microsoft
On Friday, Computer Retail Week revealed that Apple jumped over both Microsoft and Canon to become the number 6 Computer Vendor of 1997 based on retail sell through. While Apple moved from 8th place with retail sales of $925 million in 1996 to 6th place with retail sales of $1.51 billion in 1997, Microsoft slid from 6th to 7th with flat sales of $1.1 billion. Canon fell from 5th place with $1.125 billion in 1996 all the way out of the top ten in 1997. Sales through Apple's web site were not even counted since Computer Retail Week is only interested in retail sales. Also of note is that Apple's 63% retail improvement occurred while Apple removed product from all nationwide resellers except CompUSA.
Apple has Wintel on the ropes
While Apple Computer reclaims market with increasing unit shipments and increasing margins in the traditionally weak second quarter, the main Wintel manufacturers can only complain about their shrinking market and plummeting margins. Intel and Compaq both have disappointing quarters, and they both expect their misfortunes to continue. Apple Computer is marching ahead with PowerPC based systems already faster than the 400MHz processors recently announced by Intel. Compaq and Intel appear to be headed down the road of disappointment, unable to keep up with the once-beleaguered Apple.
The picture is clear: Wintel is on the way out, and Mac is back.