Apple 2007 Annual Report Download - page 51

Capital asset purchases associated with the Retail segment were $294 million in 2007, bringing the total capital asset purchases since inception
of the Retail segment to $1.0 billion. As of September 29, 2007, the Retail segment had approximately 7,900 employees and had outstanding
operating lease commitments associated with retail store space and related facilities of $1.1 billion. The Company would incur substantial costs
if it were to close multiple retail stores. Such costs could adversely affect the Company's financial condition and operating results.
Other Segments
The Company's Other Segments, which consists of its Asia Pacific and FileMaker operations, experienced an increase in net sales of
$406 million, or 30% during 2007 compared to 2006. This increase related primarily to a 58% increase in sales of Mac portable products and
strong iPod sales in the Company's Asia Pacific region.
During 2006, net sales in Other Segments increased 35% compared to 2005 primarily due to an increase in sales of iPod and Mac portable
products. Strong sales growth was a result of the introduction of the updated iPods featuring video-playing capabilities and the new Intel-based
Mac portable products that translated to a 16% increase in Mac unit sales during 2006 compared to 2005.
Gross Margin
Gross margin for each of the last three fiscal years are as follows (in millions, except gross margin percentages):
Gross margin percentage of 34.0% in 2007 increased significantly from 29.0% in 2006. The primary drivers of this increase were more favorable
costs on certain commodity components, including NAND flash memory and DRAM memory, higher overall revenue that provided for more
leverage on fixed production costs and a higher percentage of revenue from the Company's direct sales channels.
The Company anticipates that its gross margin and the gross margins of the personal computer, consumer electronics and mobile communication
industries will be subject to pressure due to price competition. The Company expects gross margin percentage to decline sequentially in the first
quarter of 2008 primarily as a result of the full-quarter impact of product transitions and reduced pricing that were effected in the fourth quarter
of 2007, lower sales of iLife and iWork in their second quarter of availability, seasonally higher component costs, and a higher mix of indirect
sales. These factors are expected to be partially offset by higher sales of the Company's Mac OS X operating system due to the introduction of
Mac OS X Version 10.5 Leopard ("Mac OS X Leopard") that became available in October 2007.
The foregoing statements regarding the Company's expected gross margin percentage are forward-looking. There can be no assurance that
current gross margin percentage will be maintained or targeted gross margin percentage levels will be achieved. In general, gross margins and
margins on individual products will remain under downward pressure due to a variety of factors, including continued industry wide global
pricing pressures, increased competition, compressed product life cycles, potential increases in the cost and availability of raw material and
outside manufacturing services, and a potential shift in the Company's sales mix towards products with lower gross margins. In response to these
competitive pressures, the Company expects it will continue to take pricing actions with respect to its products. Gross margins could also be
affected by the Company's ability to effectively manage product quality and warranty costs and to stimulate
47
September 29,
2007
September 30,
2006
September 24,
2005
Net sales
$
24,006
$
19,315
$
13,931
Cost of sales
15,852
13,717
9,889
Gross margin
$
8,154
$
5,598
$
4,042
Gross margin percentage
34.0
%
29.0
%
29.0
%