Apple 2002 Annual Report Download - page 20

Download and view the complete annual report

Please find page 20 of the 2002 Apple annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 90

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90

First, net sales from software, service, and other sources rose $248 million or 26% in 2002 versus 2001. This increase was driven by several
factors including a 28% increase in combined third-party and Apple-
22
branded software sales; $143 million in net sales of iPod, the Company's portable digital music player that was introduced in the first half of
2002; a 9% increase in the sale of computer accessories; and a 14% increase in service revenue caused primarily by increased revenue
associated with extended maintenance and support contracts. The growth in software revenue was primarily the result of increased sales of
third-party software in the Company's retail and online stores and expansion in recent years in the number of Apple-branded software titles.
Second, overall unit sales of Macintosh portable systems grew by 92,000 units or 10% in 2002 reflecting a general trend in the personal
computer market away from desktop systems towards portable systems. During 2002, portable Macintosh systems represented 33% of total
systems sales versus 31% in 2001 and 20% in 2000. Growth in this area has been most pronounced for iBook, the Company's education and
consumer oriented portable Macintosh system. iBook unit sales increased 14% in 2002 and 9% in 2001.
Third, the Company's Retail segment grew from 8 stores at the end of 2001 to 40 stores at the end of 2002. The Retail segment's net sales grew
from $19 million in 2001 to $283 million in 2002. While the Retail segment may cannibalize some net sales from the Company's preexisting
sales channels in the U.S., the Company does believe that a substantial portion of the Retail segment's net sales are incremental to the
Company's total net sales. See additional comments below related to the Retail segment under the heading "Segment Operating Performance."
Fourth, the Company's average unit pricing remained relatively stable during 2002 as a result of various changes in overall unit mix offset by
somewhat lower pricing year-over-year on comparative Macintosh systems. Net sales per Macintosh unit sold during 2002 of $1,462 per unit
reflects the shift in mix towards relatively higher-priced portable Macintosh systems and reflects the impact on net sales of the relatively
higher-
priced new iMac design introduced during 2002. The impact of these changes in mix were offset by the decline in unit sales of relatively
higher-priced Power Macintosh systems and by lower pricing on comparative Macintosh systems during 2002 for most of the Company's
Macintosh product lines in response to industry pricing pressure.
Fifth, any comparison of net sales in 2002 versus 2001 must consider the effect of unusually low net sales during the first quarter of 2001. As
discussed below, this was attributable to several factors at the beginning of 2001, including continuing deterioration in worldwide demand for
personal computers, rebate programs and price cuts instituted by the Company during that quarter that cost the Company approximately
$138 million, and a plan implemented by the Company during the first quarter of 2001 to reduce substantially the level of inventory in its
distribution channels that resulted in a decline in channel inventory of approximately 300,000 units during that quarter. Net sales during the
first quarter of 2001 are discussed in more detail below.
Offsetting the favorable factors discussed above, the Company's net sales in 2002 were negatively impacted by several notable factors. First,
unit sales of Power Macintosh systems fell 18% during 2002 as compared to 2001. This followed a 35% decline in Power Macintosh unit sales
in 2001 from 2000. The Company continues to believe that weak economic conditions over the past several years are having a pronounced
negative impact on its professional and creative customers and that many of these customers continue to delay upgrades of their Power
Macintosh systems due to the Company's ongoing transition to Mac OS X, its new operating system, and in anticipation of certain software
vendors transitioning their Macintosh applications to run natively in Mac OS X. Further, the Company did not experience the anticipated
increase in Power Macintosh sales that it expected following the introduction of Adobe's PhotoShop 7 during 2002. Additionally, many
professional users may have postponed upgrading their systems until after the introduction of Mac OS X Jaguar released in the fourth quarter
of 2002. Others may have delayed upgrading until after the availability of other professionally oriented software applications for Mac OS X
such as QuarkXpress.
23
Second, despite the overall increase in net sales during 2002 in the Americas, the Company continues to see weakness in its U.S. education
channel. Total net sales in this channel fell 15% in 2002 and 4% in 2001. These declines are consistent with industry data that shows the
Company losing market share in the U.S. education market in each of the last two fiscal years. The Company believes this weakness has been
caused by multiple factors, including increased price competition in this price sensitive market from the Company's competitors who sell
Windows-based personal computers. Additionally, some of the Company's education customers appear to be delaying technology purchases
due to concerns about the overall impact of the weaker economy on their available funding. The Company continues to take steps to address
weakness in the U.S. education channel. However, it is difficult to anticipate how this trend will affect fiscal 2003 and to anticipate when and if
this trend will reverse.
Third, the personal computer industry in general and the Company specifically continue to see relatively soft demand for its products. Despite
an overall increase in unit sales of consumer oriented Macintosh systems during 2002, consumer sales remain far below levels experienced in
2000 and earlier. Worsening global economic conditions over the past three years exacerbated by the economic and political uncertainties
caused by terrorist activities and the associated international responses have clearly had a pronounced negative effect on the overall demand for