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Apple CFO Speaks about current,future finances


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Source: MacCentral.com

With a profit of US$14 million for the company's fiscal second quarter ending March 29, Apple expects a slight profit for the third quarter, according to Fred Anderson, Apple's chief financial officer. In addressing reporters and analysts about the company's financial status, Anderson said the company's strongest areas are the consumer, portable and retail markets, even as the education and creative-professional areas lag.

"We're pleased to have achieved our revenue target despite an increasingly challenging and unpredictable economic environment," Anderson said. When asked about the effects of the Iraq war on Apple's finances, he added, "we're not able to separate the impact of the war from other geo-political and economic factors."

Apple expects revenues to be flat in the third quarter, which ends in June. Gross margins and operating expenses are also expected to be flat, so the company is expecting a small profit.

"We're encouraged by the significant achievements this quarter as we innovate through these challenging times," Anderson said. "We believe the investments in our retail initiative and research and development will fuel growth when the economy improves."

Two Apple retail stores opened during the second fiscal quarter, bringing the number to 53. The stores brought in $135 million in revenues, down seasonally (as expected) from $148 million. Anderson said Apple was seeing revenue of $2.6 million per store, about the same as a year ago. The retail unit still lost $3 million for the quarter, though the company believes the foot traffic the stores generate and the non-Mac users they attract are paying big dividends.

Anderson said that during the previous quarter, Apple's retail stores saw 144,000 visitors per store per week. He added that the company believes that 50 percent of those making purchases at the stores haven't previously owned a Mac.

Apple plans on expanding its retail initiative further with up to 70 stores open by the end of 2003. One of those will be the company's third "large format" store and will be located on Michigan Avenue in Chicago, Illinois. Anderson added that the company had "no announced plans for international stores."

Apple attributed part of the stores' success to Apple's "education nights" on Tuesday and Wednesdays. On these nights the retail stores have educators, students, and parents visit the stores and showcase the teachers and pupils' achievements using technology in education.

"The tie-in of our retail stores to education and small business are helping the stores a great deal," Anderson said. "A year ago we focused almost exclusively on the consumer market."

He said the program in which Apple employees worked at the Apple store-within-a-store in CompUSAs was going "very well." A similar program in Japan, involving 75 Apple employees in 60-plus high-profile tech shops, was also working. Sales in Japan were "up sequentially," Anderson said. Also, online revenue continues to be a growth area. In the second quarter, it accounted for 46 percent of revenue, up from 31 percent in the previous quarter.

Apple shipped 711,000 Macs during the second quarter. Of those, 256,000 were consumer desktops: 41,000 CRT iMacs, 86,000 eMacs, and 129,000 flat panel iMacs. iBook sales were down slightly ($151 million from $180 million) due to "some cannibalization" from the 12-inch PowerBook, Anderson said. On the other hand, PowerBook revenue rose to $353 million from $198 million. Apple sold approximately 82,000 12-inch PBs, 70,000 15-inch units, and 14,000 17-inch models. The 17-inch models have only begun trickling out, and there's a "substantial backlog," Anderson said.

"Steve [Jobs, Apple's CEO] believes this is the year of the portable for Apple," Anderson said. "Laptops made up 42 percent of sales for the previous quarter. That's a much higher percentage than the industry average, but where the trend ends, we're not sure."

iPods remained hot items. Approximately 78,000 units were sold, half of them the Windows compatible models. Anderson said that software sales were "great," fueled by the release of iLife, KeyNote, and Final Cut Express.

Unfortunately, Apple's pro desktop line continues to struggle. Power Mac G4 sales (including servers) only totaled 156,000 units. That's down 25 percent from the year-ago quarter.

"We think it's a creative market weakness issue," Anderson said. "All data shows Apple with the dominant market share in this area. Research also indicates that most creative professionals who plan on buying or upgrading technology over the next 12 months plan on buying Macs."

Apple thinks that many Mac-centric businesses, such as ad agencies and magazine publishers, have had to tighten their belts as ad revenues continue to stagnate.

"Of course, it would help to see Quark XPress on the Mac OS X platform," Anderson said. "Hopefully, this will happen soon. And as the performance improves in the Power Mac line, we think a convergence of factors will drive an upgrade cycle."

The education market also continues to be a weak point. Hardware sales were down 14 percent from the previous quarter. Anderson said that the problem was budget deficits in many states, including California, that's curtailing education funds.

On the bright spot, Apple's iBooks continue to be popular in schools. They tallied 39 percent of Apple's education hardware sales, well above the industry average. Also doing well is Apple's "X for Teachers" program; over 400,000 copies of Mac OS X are now in hands of K-12 teachers.

"In terms of our overall education marketshare, we don't have any data yet," he said. "We'll know when IDC publishes its market share information. But looking forward to the June quarter, we're expecting a tough time, though there'll be some seasonal improvement, as there always is. But year-over-year we're expecting a decline."

Asked several times during the conference call about rumors of Apple looking to buy Universal Music, planning an online music service, and moving to Intel processors, Anderson declined to comment. He, as always, reiterated the company line that Apple "doesn't comment on future products or product strategies."

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