New units shine Apple Computer outlook

A battered street-corner newspaper box dispenses copies of the San Jose Mercury-News. On the front page: a story chronicling the struggles of a Silicon Valley family caught in the semiconductor slump. But the news reads differently up and down Bandley Drive -- site of Apple Computers Inc.

The slate gray lobby outside the executive offices is quietly abustle. Third-party vendors sit on the edge of designer leather chairs going over their presentations in hushed tones. Apple workers zip down the halls, past a slender, glowing band of eye-level neon art tracing the length of the wall.

Morale here is up. The parking lots abutting low-slung buildings are packed. Macintosh sales doubled over the summer months. Earnings are at a record high. Debt is zero. And September saw the unveiling of Apple's IIGS, the first of a slew of new products.

``We believe our fiscal year 1987 will be a very good year from a revenue standpoint and a profit standpoint,'' said chairman John Sculley at an investment conference in San Francisco recently. ``But I would put the emphasis on the second half of the year.''

By then, the products being planted now and next spring will start to sweeten the bottom line, market analysts say.

The first seed cast is the IIGS (GS for graphics and sound). Strategically, this new computer, a far advanced offspring of the widely used Apple II, protects Apple's dominant (54 percent of installed base, 68 percent of sales) position in the kindergarten-through-high school market. ``The IIGS will lock up the education market for at least another year or two,'' says David N. Pearl, an analyst at BEA Associates Inc., an investment management firm in New York.

The IIGS seems to have enough going for it to keep IBM, Atari, and Commodore at bay. It's three times as fast as its predecessor, the Apple IIe. Moreover, it's compatible with 90 percent of the 10,000 existing Apple II software programs.

It won't run Macintosh software, but the IIGS incorporates some of the graphic virtues of the Mac (a mouse, icons, pull-down menus, windows) and then some. Unlike the monochrome Mac, the IIGS dazzles with a 4,096-hue color palette. And the ability to synthesize up to 15 musical instruments means the IIGS can sound like a small orchestra or human voice.

The sole criticism seems to be that the $1,900 basic price is too high for consumers and schools in a budget crunch. ``Next spring, I think the GS will come down by $100 or $200, and I wouldn't be surprised to see the IIc drop $200,'' says Paul Evans, a vice-president at S.G. Warburg & Co., a San Francisco brokerage firm. The IIc now sells for about $1,000. ``There's a debate raging in the company about whether to sell the low end through mass merchandisers.''

But educators don't seem phased by the IIGS price.

``Even the rumors weren't as good as the actual machine,'' exclaims Kim Jacobsen, computer coordinator with the Sanger Unified School District, near Fresno. He's already ordered two machines.

The IIGS is sophisticated enough to be used in secondary grades, Mr. Jacobsen says, but the crisp graphics and lifelike speech capabilities make it a natural for teaching the alphabet, verbally identifying pictures on the screen, and creating realistic animal sounds for the lower grades.

Jacobsen is relieved that previously purchased Apple II software won't be outmoded by this new computer. Apple officials say this common concern has held back sales of the IIe. But the introduction of the IIGS and a new circuit board that will upgrade an IIe into a IIGS (board is available in 1987) has eliminated these qualms. ``Now that they [customers] know where the product line is going, sales of the IIe and IIc are already strengthening significantly,'' says Tom Virden, marketing manager of the IIGS.

As yet, the IIGS is only trickling out of Apple's Singapore factory. So dealers probably won't have enough to go around this Christmas season. Limited by less-than-full production, analysts predict IIGS sales of 20,000 to 40,000. But consumers drawn to dealers by the IIGS may help clear out the IIc inventory.

In any case, Apple officials seem more focused on meeting demand next spring and summer when most schools purchase and install new equipment. ``We've got to deliver some really high-quality software, so it's good we've got nine months to work on it,'' says Mr. Virden.

Perhaps one of the most important benefits derived from the IIGS, Apple-watchers note, is that the hybrid machine has aided in mending the rift between Mac engineers (reportedly pampered by former chairman Steven Jobs) and Apple II designers. ``No division feels like an uncared-for son anymore,'' Virden says.

Indeed, Jean-Louis Gass'ee, vice-president of product development, has said that Mac and IIGS software will someday run on both machines. And the ``open architecture'' of the IIGS is a forerunner to the ``open'' Mac.

The not-yet-announced open Mac will allow users, for the first time, to add on peripherals made by other manufacturers.

A bigger-screen, color Macintosh and a ``bridge'' that will allow Macs to swap data with IBM computers (and its clones) are also believed to be in the works.

``By March, I think you'll see the open Mac, a hard disk, and a work station introduced,'' says Mr. Evans at S.G. Warburg. He speculates that a color Mac will come later in the year.

The new products are part of Mr. Sculley's vision of Apple as a high-margin technology leader. His three-pronged strategy involves ``reinventing Apple as a small computer systems company.'' The strategy includes:

Stand-alone personal computers (Macintosh, IIGS).

An Apple networking system (AppleTalk).

Data communication with other computers.

The last is ``the most ambitious and philosohically most difficult hurdle.'' Sculley concedes that ``the idea of embracing standards is almost considered a sellout'' by some at Apple. But he apparently recognizes that unless Macintosh can obtain, manipulate, and return data to a main computer system, specifically IBM, its success in the business world is likely to be limited.

And, Sculley says, ``We have to succeed in business, because that's where the biggest part of the growth is.''

To date, the Macintosh graphics have given it entree into a number of big companies including Boeing, McDonnell Douglas, DuPont, and Eastman Kodak. ``In Fortune 500 accounts, Apple isn't able to displace IBM as the workhorse, but with certain graphic-intensive areas it's making its presence felt,'' says Timothy Williams, director of channels and market analysis at Future Computing, a Richardson, Texas, research firm.

In a survey of 20,000 office computer users this year, Future Computing found that 40 percent used IBM products. Apple finished No. 2, with 14 percent of the installed base.

The small and mid-size business market is an expensive nut to crack. Retail computer stores can only do so much. A huge sales force is costly. Mr. Williams thinks Apple's on the right track by starting to seriously court some 5,000 value-added computer resellers. These vendors add value to a particular computer by providing services, special hardware peripherials, and proprietary software for specific business needs. ``Its a very important distribution channel,'' he says.

Already, Apple has gotten into many small -- and large -- businesses by virtue of its desktop publishing capabilities. In fact, by twinning the Mac and the sophisticated Laserwriter, Apple helped create the burgeoning desktop publishing market. As the competition plays catch-up, the Mac is selling well. Macintosh sales are running at about 80,000 units a quarter. Total Apple computer sales could top 1 million this year.

The recent success did not come easily. The icon of Silicon Valley stumbled in 1985, reporting its first quarterly loss ever. Sculley closed three plants. Some 1,200 workers got pink slips. Apple's founding guru, Steven Jobs, left. But the reorganization appears to have paid off.

Inventories are now in line with sales. The company has a stash of more than half a billion dollars in cash. Analysts expect 1986 earnings, for the fiscal year ended Sept. 30, to come in at about $2.35 a share, up from 99 cents last year. Wall Street, taking note, has doubled what it pays for Apple stock in the last year.

Without the guiding vision of Mr. Jobs, though, some wonder how long Apple can stay competitive in a field where product cycles are notoriously short. Evans at S.G. Warburg isn't particularly concerned.

Barring a recession, the new products should fatten the bottom line over the next year or two, he says. ``With Jobs gone, Apple may not have as much vision. But it's got a whole lot more performance.''