In a conference call for analysts and the press regarding Apple's financial results, Fred Anderson, Apple's chief financial officer, said the company is hopeful for the future, but is not being overly optimistic.
Though Apple expects to make a slight profit in the December quarter, Anderson felt it safer not to offer too rosy a picture.
"With the state of the economy and the threat of war, we don't see any point in being overly optimistic," he said. "We're planning for the worst and hoping things will be better."
There are several reasons to be hopeful, however. Anderson said that revenues and gross margins should be up in the December quarter. And though operating expenses will also rise due to holiday advertising and a growing number of retail stores, Apple should still see a slight profit before non-recurring items. The cost of computer component prices, such as memory and flat panel displays, dipped during the September quarter and could again during the current one.
Expansion in store During the recent quarter, Apple opened nine new retail stores, with another 10 due to be up and running by the end of November. Store revenues increased over the last two quarters from US$63 million to $102. Though they're still losing money during the ongoing expansion phase, the loss has dropped from $6 million to $3 million, and the stores now open have achieved an average annual revenue rate of almost $12 million per store.
Anderson attributed the boost to a strong sales environment, a more friendly environment for newcomers to the Mac platform, and the "Switcher" ad campaign. Apple's research shows that over 40 per cent of the customers visiting Apple retail stores don't currently own a Mac.
"Our retail division knocked the cover off the ball this quarter," Anderson said. "The average conversion rate per store visitor has increased. And the stores are doing a great job in selling 'beyond the box' products such as the iPod and AppleCare services."
When the number of retail stores hit 50, 32 per cent of the US population will live within 15 miles of an Apple store, the company claims. Meanwhile, revenues in CompUSA's stores were purportedly up 80 per cent year over year.
iPod explosion Apple Japan is training 60 people to serve as Apple employees in some of the biggest stores that carry Apple products, just as Apple has done with CompUSA in the States. (Japan's four top-selling MP3 products in September were all iPod models.)
The company is also working with Best Buy; the retail chain is now carrying iPods. When asked if other chains might do this as well, Anderson said that Apple doesn't talk about future channel partners, but added "we're clearly very interested in gaining marketshare in the whole MP3 space, so if it becomes appropriate, we'll do it."
"We're pleased with the great reviews the product continues to receive, and we're excited about the expanded reach Best Buy can provide," he said. "We didn't really start shipping Windows units until September and didn't start the Best Buy initiative until September 15, so we're very optimistic about growth opportunities in the holiday quarter."
Inventory down Another positive development for the company is that it has reduced inventory levels from 6.5 weeks to 5 weeks. The company thought it would take two quarters to accomplish, but did it in one. Still, the normal range of inventory is 4-5 weeks, and Anderson said that the company hoped to reach the low end of the average rather than the high.
Sales of Mac OS X 10.2 (Jaguar) were better than expected. Anderson said that over 280,000 copies sold during the September quarter. Apple is forecasting that 20 per cent of its installed base, or about five million people, will be using Mac OS X as their primary operating system by year's end. Despite an outcry over the evolution of the free iTools to the subscription-only .Mac service, over 200,000 folks have subscribed so far. That's exceeded Apple's expectations, Anderson said.
Weak points The weak points in the big picture are education and pro sales. Education sales were up four per cent from the previous quarter, but down 12 per cent year over year. Apple is hoping to maintain its present share of the education pie, or perhaps even see it expand slightly, Anderson said. But it's an area in which Apple has seen serious decline in recent months. The company's top-selling education product is the iBook, which continues to sell "extremely well" to schools, he said.
Also, Power Mac and PowerBooks sales continue to be sluggish. Anderson attributed this to pro users not upgrading due to the tight economy. When asked, he said Apple didn't think pro sales were being cannibalized by the 17-inch iMac.
Overall, Anderson said that Apple expects gross margins to go up 100-150 base points in the December quarter. The company expects the mix of consumer and enterprise sales to be greater, and sees retail sales continuing to grow.