Apple CFO Fred Anderson said it has been investing heavily in research & development and more control over direct sales with its retail initiative. Investments in these two key areas are driving growth for Apple. Anderson said that Apple had 76 stores open. Last quarter's $2B revenue, the first in 4 years, was driven by three different areas: portable product sales (iBook and PowerBook), significant growth in software revenues, and iPod/iTunes Music store.



Software revenue helps drive revenue, sales



Apple said it doesn't calculate all revenue generated by its software, since some of its software is bundled for free with Macs. However, in the December quarter was $238M, up 50% year-over-year. Apple said its R&D spending is $500M per year. 50% on hardware; 30% on OS, and 20% on application development. Sales of software on a standalone are much like other software companies, although it declined to mention specifics. In response to cross-platform development, Anderson mentioned AppleWorks, QuickTime, and FileMaker software as examples of



Anderson said it is strategically making a broad market play in music and believed that iTunes, when combined with the iPod, was the key application. The iTunes Music Store has 70% market, while the iPod has 30% unit marketshare (including flash MP3 players) and 50% of revenue marketshare. Apple said it does not have plans to move other iLife application



Apple said its relationship with Microsoft is "excellent," in response to questions about the future of MS applications for the Mac. Oppenheimer said that Keynote and Safari have not interfered with its relationship with Microsoft and that Microsoft has reallocated its resources to Office, Entourage, and Virtual PC. Apple also said that it considered third-party software vendors very important and used Adobe as an example a vendor with which it cooperates and also competes.





Apple targets 80 stores by September



Apple said it has 76 stores since it launched in May 2001 with 75 in the US (and one store in Tokyo, Japan). Apple noted its upcoming flagship San Francisco launch (this weekend) and 1 in Osaka, Japan by the end of the year. Apple is targeting around 80 stores by September 2004.



Apple said its stores are creating significant growth for the company--somewhere between 40% and 50% of sales are to non-Mac users, according to Anderson, who reiterated that the stores are definitely converting users to the Mac platform. Apple said it has developed a model (via regression analysis) that can predict the sales of a store location based on a historical analysis of the Mac user base in a 10-15 mile radius.



Anderson said that Apple doesn't plan to open any store that it doesn't have a "really good chance of at least break even in the first year of operations. So, unlike some other companies that have retail stores, Apple is not in this to have 300 stores. We're in this to only open profitable stores and to create an enhancement of our brand--to the point where half to two-thirds of our sales--at least through our retails stores are incremental business and switching customers to our platform and that we actually enhance the performance of our independent retailer and channel partners." Apple said that all the broad array other channels (Internet store, independent resellers, VARs/Specialists, and computer stores such as CompUSA).



In December quarter, Apple's retail segment had a 3.3% operating margin, earning $9M on $273M in revenue. Apple does not include the $52M associated manufacturing profit that Apple made as a result of its retail segment operations. Apple said that its most profitable segment is the online store, followed by its retail stores and sales channel. Apple is focused on driving improvements in same-store sales moving forward.



In response to questions about improving retail profitability, Apple said though it was initially "piloting" different stores in different locations, there was no particular store that turn out to be successful. Anderson said that Apple began with a 7,000 square-foot model store and subsequently, developed a 4,000 sq ft store small store format. Anderson that in hindsight, Apple maybe would have used a smaller store format in some locations because the "markets were not large enough" to justify the larger format store.



Apple said that it must keep innovating to stay ahead of its competitors. When one analyst said that other products were "getting closer, Anderson responded: "We are always alert to what our competitors are doing, but I will tell you that nobody has been able to put the total solution together like Apple has... We have great hardware, including industrial design, etc. Secondly, we have combined that with iTunes software (There isn't anything even close in the market place). Then we have the music store itself. As objective we I can be, I said that we have a significantly lead and that's why HP has decided to with Apple." Anderson said the HP alliance will help drive the AAC standard into marketplace.




Education sales driven by portables




In the 2003 calendar year, Apple saw 1% improvement to 14% in the US education marketplace and a 2% increase to 22% marketshare in portable sales to education. The December quarter was the best quarter for Apple Higher Education sales in 9 years, main attributed to Mac OS X, portable, and G5 sales. "K-12 has been a bit tougher mainly due to the funding environment." Apple is focused on the one-to-one initiatives as well as iBook, iLife, and wireless sales to education.



"We're focused on how technology is integrated into the learning environment and how it can advance learning outcomes. For schools that aren't interested in just buying the cheapest box, but really care about what the results will be," we tend to do very well." Apple also said the Virginia Tech Super Computer has opened doors for Apple and "demonstrated the scalability of Mac OS X." Anderson, however, said it was too early predict the sales growth opportunities.



Finally, Apple said its Pro model sales come from its core graphics market as well as small business, government, and science/technology institutions. The company is reaching out to each market through resellers and direct contact, including retail initiatives to small businesses via the retail segment and teams that are "calling on enterprise and government accounts," where it says it has seen good results, according to Oppenheimer.