Apple Corporate Analysis

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Apple Corporate Analysis

Introduction to Business

APPLE, Inc.
Nasdaq: APPL “Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork, and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App store, and is defining the future of mobile media and computing devices with iPad”. This is the mission statement of Apple. Apple Inc. designs, manufactures and markets personal computers and related personal computing and mobile communications devices. Apple provides the digital music revolution with its iPods and iTunes online store. It is engaged with designing MACS laptops, along with OS X, ilife, iWork, iCloud and professional software. The iPhone has greatly impacted the future of mobile media. The company operates through the Americas, Europe, Japan, Asia-pacific and retail segments. The Americas segment includes both North and South America operations. The Europe segment includes European countries, as well as the Middle East and Africa operations. The Asia-Pacific segment includes Australia and Asia operations, but does not include Japan. The retail segment operates Apple owned retail stores in the U.S. and in international markets. The company’s products and services include Macintosh computers, iPhone, iPad, iPod, Apple TV, Xserve, a portfolio of consumer and professional software applications, peripherals and IOS operating systems, third party digital content and applications through the iTunes store and a variety of accessory, service and support offerings. They also sell application software, printers, storage devices, speakers, headphones and various other accessories through its online and retail stores. It was founded in 1976 by Steven Paul Jobs, Steve Wozniak and Ronald Gerald Wayne and is headquartered in Cupertino, California. It has become the most highly valued publicly traded company. Apple is considered to be in the Computer hardware sector, according to the Wall Street Journal, in the Technology industry. Since Apple products also include telecommunications, I estimate that they have a multi-sector industrial profile. By that I mean that they are considered one of the leading companies in the computer peripherals industry, the computer manufacturing industry and the telecommunications industry. These three sectors account for $129 Billion dollars (9B, 75B, 45B respectively) and telecommunications accounts for exports of $280 Billion globally. With such a big universe of products and being a part of many sectors of the tech industry, Apple has many competitors. Microsoft, Google, Amazon, IBM, Hewlett-Packard, Intel, Dell, Nokia and Samsung are just some of the more well-known competitors. Apple 2011 Net Sales by Region is as follows (sales data in millions); Americas $38,315 35% Europe 27,778 26% Japan 5,437 5% Asia-Pacific 22,592 21%
Retail Net Sales 14,127 13% Total Sales $108,249 2011 Sales by segment are as follows (sales data in millions); Desktops $6,439 6% Portables 15,344 14% iPod 7,453 7% Other music products 6,314 6%
IPhone & services 47,057 43%
IPad & services 20,358 19%
Peripherals/hardware 2,330 2%
Software, service, other 2,954 3%
Here is a look at the Income Statement for the last four quarters ending June 29, 2012:

Income Statement

View: Annual Data | Quarterly Data
All numbers in thousands

Period Ending Jun 29, 2012 Mar 30, 2012 Dec 30, 2011 Sep 23, 2011
Total Revenue 35,023,000 39,186,000 46,333,000 28,270,000
Cost of Revenue 20,029,000 20,622,000 25,630,000 16,890,000

Gross Profit 14,994,000 18,564,000 20,703,000 11,380,000

Operating Expenses Research Development 876,000 841,000 758,000 645,000 Selling General and Administrative 2,545,000 2,339,000 2,605,000 2,025,000 Non Recurring - - - - Others - - - - Total Operating Expenses - - - -

Operating Income or Loss 11,573,000 15,384,000 17,340,000 8,710,000 Income from Continuing Operations Total Other Income/Expenses Net 288,000 148,000 137,000 81,000 Earnings Before Interest And Taxes 11,861,000 15,532,000 17,477,000 8,791,000 Interest Expense - - - - Income Before Tax 11,861,000 15,532,000 17,477,000 8,791,000 Income Tax Expense 3,037,000 3,910,000 4,413,000 2,168,000 Minority Interest - - - - Net Income From Continuing Ops 8,824,000 11,622,000 13,064,000 6,623,000 Non-recurring Events Discontinued Operations - - - - Extraordinary Items - - - - Effect Of Accounting Changes - - - - Other Items - - - -

Net Income 8,824,000 11,622,000 13,064,000 6,623,000
Preferred Stock And Other Adjustments - - - - Net Income Applicable To Common Shares 8,824,000 11,622,000 13,064,000 6,623,000

Besides the Income statement, there are many interesting ratios when looking at Apple. First, if we look at Earnings per Share we see it is a consensus projection of $8.99/sh. for the year ending Sept 30,2012 versus $7.05/sh. For the year ending Sept. 30, 2011, which reflects an increase of almost 28%. If we take a look at some growth rates over the last five years we will see some truly impressive numbers: Revenue up 70.48% Net Income up 128.30% Earnings/share up 120.80% Gross Margin up 38.37% Capital Spending up 131.16%.

Apple’s profit margin, or profit percentage per dollar, is 26.97% or almost 27 cents on every dollar they make. Two measures of management effectiveness, Return on Assets (ROA) and return on Equity (ROE) show very favorable numbers also; 24.57 and 44.32% respectively. One final number, being an accounting major, is the current ratio which measures Current Assets versus Current Liabilities (How much the assets cover the liabilities) and this is a 1.57. This shows that Apple can well afford to pay off its current liabilities with its current assets. Apple has many strengths, one of which is the fact that the company has no debt. Apple in fact has substantial liquid assets (cash included) which could be used for almost anything including acquisitions. Strength for Apple is the iPad and its market share in the tablet segment. The iPad, as of June 30, 2102 had a 64.4% market share vs. 9.9% of Samsung, their nearest competitor. One could say that Apple has held a competitive advantage in this segment up to this point. The iCloud is another strength of Apple. ICloud is a free storage and syncing service meant to simplify how millions of people gain access to music, photos and files across multiple devices. The late Steve Jobs said that the “iCloud would replace the personal computer as the central hub of people’s digital lives- storing music, documents and photos”. As with many companies, demand for Apple products& services depends on the income of both consumers and businesses. This is one of the weaknesses of Apple. The company must also produce efficiently to be profitable. The company must order components and build inventory in advance of product announcements and shipments. This creates a pressure on any organization that wants to thrive and can be a weakness for Apple. A recent weakness they have shown is the mistake of releasing a new product too soon. The iPhone 5 has many well publicized bugs including its maps application. Apple, in an effort to further distance itself from Google, replaced the popular Google maps with an inferior map application. I think one of the funnier errors is the story of the Washington Monument being ‘relocated’ to across the street from where it really is. Apple should have tried to remove all bugs from the app before it hit the streets. This weakness can hurt the sales of any product, which is the case with the iPhone 5. Being an international company, Apple is also subjected to interest rate and currency risks, which force the company to use derivatives to hedge possible currency fluctuations. This can also be a weakness, especially in uncertain or turbulent economic times. There are many opportunities for Apple to continue to be the industry leader. I feel one such opportunity is to continue to move away from being the industry high price leader. Since many competitors are coming out with cheaper alternatives to Apple products, the company must match them with their own lower priced options. One example of this would be in the tablet segment. Although Apple is currently the runaway leader, Google (Nexus), Microsoft (Surface) and Amazon Kindle are all around $200 dollars as compared $600 for the iPad. Another area of opportunity is Big Business. At first, Steve Jobs was more interested in the consumer segment than he was in Big Business. In a 2005 meeting, he referred to a group of Chief Operating Officers as “Orifices”. However the last few years have seen Apple cater to big business. For example, Lowe’s Corp. recently bought 42,000 iPhones for its personnel on the sales floor. Another promising statistic showed 92% of Fortune 500 Company’s testing iPads for its employees and 93% testing iPhones. Airlines have begun to use iPads to replace the printed aircraft flight manuals, navigation charts, and other materials that pilots are required to bring onboard. One final opportunity would be overseas, namely China. Demand for iPhones in China far exceeds supply. Just five of the company stores account for 1/6 of global sales. Google’s Android operating system is a major threat to Apple. Whereas the iPhone was once pre-eminent, now android phones and tablets have been stealing away Apple market share and revenue. Android phones and tablets are cheaper than their comparable Apple products therefore more customers seek to buy them. Another threat is looming in 2013 from Intel. In 2013, Intel plans to unveil an ‘ultrabook’ to compete with the Apple MacBook Air. Estimates say that the Intel ultrabook will drop Apple’s market share for ultrabooks from 40 to 28%. The speed at which technology advances is a threat to any company in the technology business. Apple must keep up with the newest and latest technology to remain competitive. Aggressive pricing policies in the industry are a constant threat to Apple as many of their competitors try to capture market share with lower priced goods. The worldwide economy is also a threat to Apple, its producers and its supplier’s .One final threat, which could be serious, is accidental infringement upon the intellectual property of another company and the lawsuit(s) and bad press that would surely follow. One current event in particular, mentioned previously, was the release of the iPhone 5 and the bad press and disappointing sales that followed. Apple stock has taken a serious hit from its all-time high of over $700 dollars/share and some analysts fear the stock is in correction mode with the latest disappointing rumors about the ‘mini- iPad’. Apple’s distancing itself from Google, by removing the Google Maps and Youtube App, is also a current event of interest. Not so current, but definitely noteworthy is the case of Apple vs. Samsung. In August 2012, Apple was awarded $1 Billion dollars in damages after the court found that Samsung infringed upon a series of Apple patents on smartphones and computers. After the lawsuit, Apple became the most valuable publicly traded company ever. One recommendation I would make to Apple would be to continue the movement toward digital textbooks. They recently released three free software programs which will help greatly to further digital textbooks. They are iBooks2, iBooksAuthor, and iTunesU. These programs enable the reading, creating and distributing of curriculum, all digitally. As of 2010, only 2.8 % of all textbooks were downloaded in an industry of $8 Billion dollars. I would also on a personal note like to see ‘Siri” incorporated into the iPad. My final recommendation would be an entry into (through acquisition) the videogame software industry. Although the company has purchased some smaller software companies that write gaming software, they should look to acquire a medium sized or larger company in this sector. Even though the sector has lost some of its luster from its high of around $8 Billion in 2008, projections are in the $5 Billion range for 2012. This is a sector which has grown greatly from the days of ‘Atari’ and should continue to grow with new technologies.