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A good crop in 97, but can Apple grow again?

Steve Jobs surprised Wall Street analysts and the Apple faithful last week by announcing a return to profitability. But despite a surge in sales, warns Cliff Joseph, the company is not out of the woods yet.

After two years and losses of almost $2bn, Apple Computer has finally made a profit. At last week's MacWorld Expo in San Francisco, Apple's co-founder and CEO, Steve Jobs, announced that the company had made a profit of $45m in the last quarter of 1997. The previous three months produced a loss of more than $150m and Wall Street analysts had been predicting a smaller loss of around $10m for this quarter.

"It's all starting to come together," Jobs announced to a cheering audience. "Apple is coming back."

Much of the profit has come from simple cost-cutting, with Apple laying off thousands of staff and abandoning many unprofitable research projects. However, it has also launched several successful new products in recent months. The latest version of the Mac operating system has sold almost three million copies, and a new range of Macintosh computers launched in November has exceeded Apple's sales forecasts. The company expected to sell around 80,000 of its new G3 systems in the run-up to Christmas, but actual sales came to more than 130,000.

In November, Apple also launched an online store that allows people to buy Macs on the World Wide Web, and announced a partnership with the CompUSA chain of computer stores. Apple claims that the online store has already become one of the 10 most profitable sites on the Internet, and estimates that it will account for more than 10 per cent of its sales by the end of this year.

The deal with CompUSA allows Apple to set up special "AppleStores" within all of CompUSA's 150 branches. Fifty AppleStores have already opened and the other 100 will open in February. The AppleStores are specifically dedicated to selling Mac products, and CompUSA reports that Mac sales in the first 50 stores have leapt from just 3 per cent of total sales to 14 per cent.

Apple's profits might have been even higher if it weren't for the financial crisis in Japan and Asia. These regions account for 20 per cent of Apple's sales - and there was a significant drop in sales towards the end of the year. "We would have had a much stronger year without it [the crisis]," admitted Fred Anderson, Apple's chief financial officer.

More good news at the expo came from both Microsoft and Oracle. Microsoft demonstrated a new Mac version of Microsoft Office, while Oracle announced that it would be producing Mac versions of all its financial and accounting programs. The lack of business software has damaged Mac sales in recent years, and Apple needs these new programs to sell Macs to the business, government and higher education markets.

But Apple isn't out of the woods yet. One profitable quarter doesn't represent a complete turn-around, and Apple's overall sales figures still haven't recovered from the slump that took place in 1996/97. Apple also has a gaping hole in its product range. The new G3 Macs are expensive, high-margin models, but Apple lacks a low-cost computer for the price- sensitive consumer market. Systems that cost around $1,000 represent more than 40 per cent of the total computer market, but Apple simply doesn't have anything to offer. Apple executives rather lamely admit that they are "aware of the situation", but there is no sign of any new products to cater for this important market sector.

Jobs also admitted that he couldn't promise a complete end to Apple's financial losses. "The second quarter of the year has traditionally been Apple's worst quarter," he said. "So who knows? But we'll be burning the midnight oil."

For many people, though, the most important question was whether Jobs would be staying on as CEO. Jobs took over on an "interim" basis six months ago, following the forced resignation of Gil Amelio, but he is still the CEO of Pixar Animation Studios, the company that produced Toy Story. Apple's management has made it clear that they would like him to stay on, but he insists that he wants to return to Pixar once his reorganisation of Apple is complete.

Apple had hoped to find a replacement before the end of the year, but Jobs is a tough act to follow. Part of the problem is that Jobs will continue to hold a place on Apple's board of directors, even after he stands down. It will be difficult to find a top-level CEO who won't be overshadowed by Jobs. But then Apple probably isn't trying too hard to replace Jobs, anyway.

Apple may have halted the slide for now but its troubles are far from over. It still needs to regain some of the market share that it has lost in the last two years. That will be an enormous challenge and, no matter what he says in public, it looks like Apple and Steve Jobs will sink or swim together.