Apple 2003 Annual Report Download - page 23

Offsetting the favorable factors discussed above, the Company's net sales during 2003 were negatively impacted by the following factors:
•
Total unit sales of desktop systems fell 15% during 2003 compared to 2002. iMac systems unit sales declined 16% from 2003 to
2002 resulting from a shift in sales away from desktop systems in favor of portables. Also, the current flat panel iMac form
factor was in the eighth quarter of its life cycle by the end of 2003 and did not experience significant enhancements until the
release of the 20-inch flat-panel iMac in November 2003.
• Unit sales of Power Macintosh systems fell 13% during 2003 compared to 2002. For the first nine months of 2003 compared to
the same period in 2002, unit sales of Power Macintosh systems decreased 24%, which is representative of the decline of Power
Macintosh systems sales experienced by the Company during recent years and is also believed to be attributable to delays in
purchasing pending the release of the Power Mac G5. As expected, this trend reversed in the fourth quarter of 2003 with unit
sales increasing 26% during the quarter as compared to the same period in the prior year due largely to the new Power Mac G5,
which the Company introduced in June 2003 and began shipping at the end of fiscal 2003. The decline in Power Macintosh sales
over the last several years also reflects the shift in sales to portable systems, particularly PowerBooks. In addition, 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. Additionally, some of the Company's professional and creative customers may have
delayed upgrades of their systems in anticipation of certain software vendors transitioning their professionally oriented
Macintosh software applications to run natively on Mac OS X. Currently there are many applications that run natively on Mac
OS X, including Adobe's PhotoShop 7 and QuarkXPress 6; however, there is no assurance that this will result in additional sales
of Macintosh systems, particularly Power Macintosh units.
•
The Company has continued to experience ongoing weakness in its U.S. education channel during 2003. Net sales and unit sales
in U.S. education during 2003 were down 4% and 6%, respectively, as compared to 2002. This decline was due to a decrease in
K-12 sales, partially offset by an increase in higher education sales. Net sales declined primarily as a result of a continued shift
in mix away from higher priced Power Macintosh and iMac systems towards lower priced eMac and iBook systems, although
the Company did experience a significant increase in sales of its PowerBook systems primarily to higher education customers.
Portable systems accounted for approximately 43% of total unit sales in the education channel during 2003, as compared to
approximately 34% in 2002.
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The Company's one-to-one (1:1) learning solutions are a complete solution consisting of an iBook portable system for every
student and teacher along with a wireless network connected to a central server. The Company has experienced significant
competition in 1:1 learning solutions and, accordingly, has experienced a lower sales price per unit, on average, in these
transactions.
The Company believes weakness in its U.S. education channel, particularly K-12, has been caused by multiple factors including
funding pressures due to weak economic conditions, large budget deficits in many states, and increased competition particularly
for desktop computers. Although the Company has taken steps, and will continue to take steps, to address weakness in the U.S.
education channel, it remains difficult to anticipate when and if this negative trend will reverse.
• The personal computer industry in general, and the Company specifically, continue to see relatively soft demand for their
products. Sales of professional and consumer oriented Macintosh systems remain far below levels experienced in fiscal 2000
and earlier. Difficult global economic conditions during the past several 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 the Company's products in virtually all of its markets. Further, growth in the overall personal
computer industry has slowed due to the high market penetration of personal computers and a lengthening of consumer, creative,
and business personal computer upgrade cycles.
Fiscal Year 2002 versus 2001
Net sales increased $379 million or 7% during 2002 compared to 2001, while Macintosh unit sales were relatively flat year
-over-year at
approximately 3.1 million units. On a geographic basis, performance in the domestic market was relatively strong, especially when considering
the performance of the Company's Retail segment, which operated during 2002 exclusively in the United States. However, the European and
Japanese markets remained sluggish throughout 2002. The Company's net sales in 2002 were positively influenced by a number of factors.
• First, net sales from software, service, peripherals, 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-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
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branded software titles.