Apple 2006 Annual Report Download - page 31

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corresponding growth in higher margin product sales could also reduce 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. 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, or
new product announcements, including the transition to Intel-based Macintosh computers. In addition, the Company generally sells more
product during the third month of each quarter than it does during either of the first two months, a pattern typical in the personal computer and
consumer electronics industries. 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. Furthermore, the Company has typically
experienced greater net sales in the first and fourth fiscal quarters compared to other quarters in the fiscal year due to seasonal demand related
to the holiday season and the beginning of the school year. 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, could have significant adverse impacts on the Company and its results of operations and financial condition.
The Company has higher research and development and selling, general and administrative costs, as a percentage of revenue, than many of its
competitors.
The Company’s ability to compete successfully and maintain attractive gross margins and revenue growth is heavily dependent upon its ability
to ensure a continuing and timely flow of innovative and competitive products and technologies to the marketplace. As a result, the Company
generally incurs higher research and development costs as a percentage of revenue than its competitors who sell personal computers based on
other operating systems. Many of these competitors seek to compete aggressively on price and maintain very low cost structures. Further, as a
result of the expansion of the Company’s Retail segment and costs associated with marketing the Company’s brand including its unique
operating system, the Company incurs higher selling costs as a percentage of revenue than many of its competitors. If the Company is unable to
continue to develop and sell innovative new products with attractive gross margins, its results of operations may be materially adversely
affected by its operating cost structure.
The Company is exposed to credit risk on its accounts receivable and prepayments related to long-term supply agreements. This risk is
heightened during periods when economic conditions worsen.
The Company distributes its products through third-party computer resellers and retailers and directly to certain educational institutions and
commercial customers. A substantial majority of the Company’s outstanding trade receivables are not covered by collateral or credit insurance.
The Company also has unsecured non-trade receivables from certain of its manufacturing vendors resulting from the sale by the Company of
raw material components to these manufacturing vendors who manufacture sub-assemblies or assemble final products for the Company. In
addition, the Company has entered into long-term supply agreements to secure supply of NAND flash-memory and has prepaid a total of $1.25
billion under these agreements. While the Company has procedures in place to monitor and limit exposure to credit risk on its trade and non-
trade receivables as well as long-term prepayments, there can be no assurance such procedures will be effective in limiting its credit risk and
avoiding losses. Additionally, if the global economy or regional economies deteriorate, the Company would be more likely to incur a material
loss or losses as a result of the weakening financial condition of one or more of its customers or manufacturing vendors.
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