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7/26/2007
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Apple Unlikely To Budge Anytime Soon On iPhone Pricing

Apple expects to sell 1 million iPhones by the end of September, and 10 million by next June.

Apple appears unlikely in the short term to offer less expensive models of the popular iPhone.

That was the indication the company gave on Wednesday in its fiscal third quarter earnings report. After the close of the U.S. markets, Apple executives showed profits and revenues soaring on strong sales of Mac computers and iPod media players. Available only the last 30 hours of the quarter that ended June 30, the iPhone had no significant impact.

But the handset was an important topic during a conference call with financial analysts, who wanted to know whether Apple planned to expand the product line and offer models substantially less expensive than the current $500 and $600 products. Timothy D. Cook, chief operating officer for Apple, refused to discuss future plans. Instead, the executive defended the current prices, an indication that no cuts were planned, at least for awhile.

"We believe the iPhone offers tremendous value that customers couldn't have even imagined before," Cook said. That value amounted to a device that was three products in one: a mobile phone, music and video player, and a handheld computer for accessing the Web.

Apple did say that it sold 270,000 iPhones, including those through U.S. carrier AT&T, during the last day and a quarter in June. While the sales number was very high in comparison to debuts of other mobile phones, it didn't come close to the estimated 700,000 units once predicted by Goldman Sachs for the iPhone's first weekend of sales.

Nevertheless, Cook said the company was pleased with the iPhone's performance. "In our view the starting gun has been fired, and we've gotten off to a great start," Cook told analysts. Apple expects to sell 1 million iPhones by the end of September, and 10 million by next June.

While iPhone sales are strong, they could never reach the expectations built by Apple before launching the device. "Sales of the iPhone were very brisk, but I think Apple in some ways was a victim of the high expectations driven by its own marketing machine," Charles Smulders, analyst for Gartner, told InformationWeek.

On Tuesday, for example, Apple stock fell 6% after AT&T disappointed Apple investors by reporting that it had activated 146,000 iPhones in the first two days of sale.

Apple net profits in the third quarter rose to $818 million, or 92 cents a share, from $472 million, or 54 cents a share, during the same period a year ago. Revenues for the quarter were $5.41 billion, up from $4.37 billion a year ago.

Quarterly sales of the Mac were the highest ever for the company. Apple shipped 1.76 million Macs, representing a 33% increase over a year ago. "It was an overall blowout quarter for the Mac," Cook said.

IPod sales rose by only 21% to 9.82 million units, an indication that sales may be slowing. Year-to-year sales for iPods increased 50% in the first fiscal quarter, and 24% in the second. "There have been concerns voiced on whether the market has passed its growth peak for the time being," Smulders said.

Apple plans to launch the iPhone in a couple of countries in Europe during the next quarter, expanding to more countries in 2008. The company also plans to launch the device in Asia next year.

Apple Chief Financial Officer Peter Oppenheimer told analysts that the gross margin was forecast to drop from 36.9% in the third quarter to 29.5% in the fourth, due to the high cost of marketing for the back-to-school season and higher costs for components, such as the solid-state flash drives used in many Apple products, and the LCD screens in its notebooks and desktops. "(In addition), we've got some product transition that I can't get into," Oppenheimer said.

For the fourth quarter, Apple forecast revenue of about $5.7 billion and earnings of 65 cents a share.

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