Apple 2004 Annual Report Download - page 56

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in managing retail operations outside the U.S.; costs associated with unanticipated fluctuations in the value of Apple-branded and third-party
retail inventory; and inability to obtain quality retail locations at reasonable cost.
Investment in new business strategies and initiatives could disrupt the Company's ongoing business and may present risks not originally
contemplated.
The Company may decide to invest in new business strategies or engage in acquisitions that complement the Company's strategic direction and
product roadmap. Such endeavors may involve significant risks and uncertainties, including distraction of management's attention away from
normal business operations; insufficient revenue generation to offset liabilities assumed and expenses associated with the strategy; and
unidentified issues not discovered in the Company's due diligence process. Because these new ventures are inherently risky, no assurance can be
given that such strategies and initiatives will be successful and will not materially adversely affect the Company's business, operating results or
financial condition.
Declines in the sales of the Company's professional products or increases in sales of consumer products, including iPods, may negatively impact
the Company's gross margin and operating margin percentages
Unit sales of the Company's professional products, including Power Macintosh and PowerBook systems, generally have higher gross margins
than the Company's consumer products, including iMacs, iBooks, iPods, and content from the iTunes Music Store. A shift in sales mix away
from higher margin professional products towards lower margin consumer products could adversely affect the Company's future gross margin
and operating margin percentages. The Company's traditional professional customers may choose to buy consumer products, specifically the
iMac G5 and iBook, instead of professional products. Professional users may choose to buy the iMac G5 due to its relative price performance,
use of the same PowerPC G5 processor used in the Company's Power Macs, and unique design featuring a flat panel screen. Potential
PowerBook customers may also choose to purchase iBooks instead due to their price performance and screen size. Additionally, significant
future growth in iPod sales without corresponding growth in higher margin product sales could also reduce gross margin and operating margin
percentages.
The Company believes that weak economic conditions over the past several years are having a pronounced negative impact on its professional
and creative customers who are significant users of its professional systems. Also, it is likely that many of the Company's current and potential
professional, creative, and small business customers, who are most likely to utilize professional systems, believe that the relatively slower MHz
rating or clock speed of the microprocessors the Company utilizes in its Macintosh systems compares unfavorably to those utilized by other
computer manufacturers and translates to slower overall system performance. These factors may result in an adverse impact to sales of the
Company's professional products as well as to gross margin and operating margin percentages.
The Company expects its quarterly revenue and operating results to fluctuate for a variety of reasons.
The Company's profit margins vary among its products and its distribution channels. The Company's direct sales, primarily through its retail and
online stores, generally have higher associated profitability than its indirect sales. Additionally, the Company's direct channels have traditionally
had more sales of software and higher priced hardware products, which generally have higher gross margins, than through its indirect channels.
As a result, the Company's gross margin and operating margin percentages as well as overall profitability may be adversely impacted as a result
of a shift in product, geographic or channel mix. In addition, the Company generally sells more products during the third month of each quarter
than it does during either of the first two months, a pattern typical in the personal computer industry. This sales pattern can produce pressure on
the Company's internal infrastructure during the third month of a quarter and may adversely impact the Company's ability to predict its financial
results accurately. Developments late in a quarter, such as lower-than-anticipated demand for the Company's products, an internal systems
failure, or failure of one of the Company's key logistics, components suppliers, or manufacturing partners, can have significant adverse impacts
on the Company and its results of operations and financial condition.
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