Apple 2007 Annual Report Download - page 21

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aggregate have a material adverse effect on its financial condition and operating results. However, the results of such legal proceedings cannot be
predicted with certainty. Should the Company fail to prevail in any of the matters related to infringement of patent or other intellectual property
rights of others described in Part I, Item 3, "Legal Proceedings," or should several of these matters be resolved against the Company in the same
reporting period, the Company's financial condition and operating results could be materially adversely affected.
With the June 2007 introduction of iPhone, the Company has begun to compete with mobile communication device companies that hold
significant patent portfolios. Regardless of the scope or validity of such patents or the merits of any potential patent claims by competitors, the
Company may have to engage in protracted litigation, enter into expensive agreements or settlements and/or modify its products. Any of these
events could have a material adverse impact on the Company's financial condition and operating results.
The Company's products experience quality problems from time to time that can result in decreased sales and operating margin.
The Company sells highly complex hardware and software products that can contain defects in design and manufacture. Sophisticated operating
system software and applications, such as those sold by the Company, often contain "bugs" that can unexpectedly interfere with the software's
operation. Defects may also occur in components and products the Company purchases from third parties. There can be no assurance that the
Company will be able to detect and fix all defects in the hardware and software it sells. Failure to do so could result in lost revenue, harm to
reputation, and significant warranty and other expenses, and could have a material adverse impact on the Company's financial condition and
operating results.
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 software, accessories, and service and
support contracts generally have higher gross margins than certain of the Company's other products, including third-party content from the
iTunes Store. Gross margins on the Company's hardware products vary across product lines and can change over time as a result of product
transitions, pricing and configuration changes, and component, warranty, and other cost fluctuations. The Company's direct sales generally have
higher associated gross margins than its indirect sales through its channel partners. In addition, the Company's gross margin and operating
margin percentages, as well as overall profitability, may be materially adversely impacted as a result of a shift in product, geographic or channel
mix, or new product announcements. The Company generally sells more products during the third month of each quarter than it does during
either of the first two months. This sales pattern can produce pressure on the Company's internal infrastructure during the third month of a
quarter and may adversely affect 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 supply, or manufacturing partners,
could have a material adverse impact on the Company's financial condition and operating results.
The Company currently relies on a single cellular network carrier for iPhone in each of the U.S., U.K., Germany and France.
AT&T, O2, T-
Mobile and Orange are the Company's cellular network carriers for iPhone in the U.S., U.K., Germany and France, respectively. If
these carriers cannot successfully compete with other carriers in their markets for any reason, including but not limited to the quality and
coverage of wireless voice and data services, performance and timely build-out of advanced wireless networks, and pricing and terms of
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