Apple's rising costs won't slow future product launches

Apple on Monday reported a 31% increase in profits in its fiscal third quarter, driven by strong demand for Macintosh computers and iPods. But the company acknowledged that costs were rising as it prepared for new product launches.

During a conference call with financial analysts, Apple executives were grilled on the reason for a drop in gross margin to 34.8% from 36.9% a year ago. In addition, the company said the margin would be "about 30%" in the next fiscal year. Gross margin is the percent of total sales revenue a company keeps after incurring direct costs of producing goods.

In explaining the drop, Peter Oppenheimer, senior VP and chief financial officer, said costs have risen in part because of "product transition" to state of the art technology. "We've got some investments coming that I can't go into right now," he said, later adding, "We're very excited about what we have in our new product pipeline."

On the new 3G iPhone, Apple executives said they were confident they would meet the sales target they previously set for the smartphone. "We're very confident in achieving the 10 million in calendar year '08," Timothy Cook, chief operating officer said. Apple sold more than a million of the devices the first weekend of its launch this month

In the meantime, executives declined to comment on the health of co-founder and chief executive Steve Jobs. Speculation of Jobs' health has been running high since his appearance at the company's Worldwide Developers Conference in San Francisco last month. Jobs, who has been successfully treated for cancer, looked thin.

Oppenheimer said Jobs "loves Apple" and does not intend to leave. Beyond that, "his health is a private matter," the CFO said.

Analysts also questioned executives whether Apple could meet expected demand for the iPhone, which launched in 22 countries and is expected to be available in more than 40 in August.

During the launch of the new iPhone, technical problems forced Apple to abandon its requirement that the phones be activated in the stores. In addition, Apple stumbled in the launch of MobileMe, a software companion to the iPhone.

Nevertheless, executives expected Apple could keep up with demand. "We do have confidence in the supply," Cook said.

Oppenheimer added, "We expect to sell more iPhones this quarter and in the future than we ever have."

In comparison, the Apple TV, a device that delivers content either stored locally on a Mac or taken from the Web and displays it on a digital TV, remained a "hobby" for Apple, Cook said. Nevertheless, the company expected its investment in the device to pay off in the future. "We are very excited about the potential of it and plan to keep investing in it," Cook said.

The company reported that revenue rose 38% to $7.46 billion in the quarter ended June 28, and profits reached $1.07 billion, or $1.19 a share. During the same quarter a year ago, profits were $818 million on revenue of $5.41 billion. International sales accounted for 42% of the most recent quarter's revenue.

"We're proud to report the best June quarter for both revenue and earnings in Apple's history," Jobs said in a statement. "We set a new record for Mac sales, we think we have a real winner with our new iPhone 3G, and we're busy finishing several more wonderful new products to launch in the coming months."

Apple shipped 2.5 million Macs during the quarter, a 41% increase from a year ago. Revenue rose by 43%. The company sold 11 million iPods, 12% more than a year ago. Revenue from the portable media players was up 7%.

Apple sold 717,000 iPhones in the quarter, compared to 270,000 a year ago. Also, more than 25 million applications for the iPhone and iPod Touch have been downloaded from Apple's new online App Store, which now offers more than 900 paid and free applications, Oppenheimer said.

Apple predicted that revenue in the fiscal fourth quarter would reach $7.8 billion and earnings would be about $1 a share. The forecast was short of analysts' expectations, which contributed to a nearly 10% drop in Apple's stock price in after-hours trading. Apple, however, is typically conservative in its forecasts.

Gartner this month reported that Apple in the second quarter of this year was the third largest PC maker in the United States, with shipments increasing slightly more than 38%.

Dell was the market leader in the U.S. in terms of shipments, and Hewlett-Packard was second.

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