FINANCIAL ANALYSIS: PERSONAL COMPUTERS Apple Computers has a rapid growth, with sales and earnings expanding at a faster rate than firms in other industries. Apple participates in several highly competitive markets, including personal computers with its Macintosh line of computers, consumer electronics with its iPod lines of digital music and distribution of third party music through its new iTunes Music Store. Apple is widely known for its innovation in personal computing as well as an emerging leader in the market for distribution of digital music. In 1976, Steve Jobs, Steve Wozniak and Ronald G. Wayne founded the Apple Computer company. Their first formal business plan set a goal to grow to $ 500 million in ten years. First step was completion of preassembled circuit board named Apple 1.It didn’t worked for Apple. Apple II came out at a local tradeshow with easy to use floppy drive concept. Apple III, The Lisa, The early Macintosh came into existence but Apple II was a big success and covered mass consumer market. Rise in sales, led to increase in company size and by 1980, Apple had several thousand employees and a market share of 50 %.In the first six years of business, Apple earnings grew from $793,000 to $ 76,714,000. During 1980, public offering of share was decided by Apple. On the first day the offered share price of $22 increased to $29. During 1982 and 1985 Apple’s annual sales growth was an impressive 69%, 54% and 27% but in the final years of Jobs’ tenure EBIT fell from $130m in 1983 to $91m in 1984 and ROCE was down from 93% in 1982 to 31% and 36% in 1984 and 1985. However, the five years from 1986 to 1990 was apparently a financial golden age at Apple. From 1987, sales continued to grow at a compound rate of 31% and ROCE only dipped once below 100%. In 1987, ROCE was a 191%. By 1990 Apple had $1bn of cash. Return on equity at Apple consequently ranged more modestly between 25% and 44%. Apple’s return on capital at that time was much remarked. It was one of the most profitable corporations in the US. Apple would compete against Microsoft in operating systems and HP in imaging, but its Apple Computer 2 rival in the PC market in the early days was Compaq. Compaq was acquired by Hewlett-Packard. After comparing Apple with Compaq in 1987, we can certainly say that Apple’s 191% ROCE is much higher than Compaq’s ROCE of 55%. Apple was selling its products at a significant premium over competitors; even including Compaq at the top end of the IBM-PC range i.e. firm with very strong competitive advantage in its market correspondingly delivers a much better return on capital. In 1987, Apple's inventory was just 6% of sales whereas Compaq’s was 23%. Since both firms were selling through similar channels, this is evidence of much more efficient inventory management at Apple. Apple had a tendency to launch new products when they had inadequate inventory available. Apple was selling their products at a premium price but ending with lower EBIT margins. Apple was ahead in terms of gross margin. A rapidly deteriorating gross margin in the final year was reversed in 1986 when gross margin rose 10 percentage points to 53.1%. It stayed at around this level throughout the period 1986 to 1990. Compaq's gross margin was 10 percentage points lower. This gross margin advantage at Apple does not fully reflect its price premium, i.e. some of the price advantage had already been spent in higher production costs. Apple then proceeded to spend much more than Compaq on R&D. In 1987 Apple was spending 37.3% of sales on R&D costs compared to Compaq’s 22.3%. BY 1987, Mac II was a solid hit, but Current CEO Sculley’s style of getting things done made the company more and more inflexible and slow-moving. Key decisions were postponed, reversed or avoided completely. Also, various executives tried their own agenda. In 1991, Apple released its first generation of PowerBooks, which were an instant success. In 1994, Apple announced the PowerMac family, the first Macs to be based on the PowerPC chip. Apple took its worst plunge ever in the winter of 1995/96. Misjudging the market Apple pushed low cost PCs over mid range PowerMacs and failed to make a profit at all. Apple posted $68 million loss a quarter. ROCE shows a negative return of 11%, 28 % and 16% during 1996/98. In late 1996, Apple made an industry shocking announcement of acquiring NeXT and return of Steven Jobs. He announced an alliance with Microsoft, one of the Apple’s greatest rivals. The company reached new heights financially. Till 1990 the company focused its attention on hardware and software but later in the years it also focused on operating its own operating system (OS) bundled with Mac, and many peripherals. This proved to be the add on to the financial profit for the company as it allowed Apple to sell its premium products at a competitive price making around 50% profit in this. Today, Apple designs, manufactures and sells personal computers, mobile communication devices, portable music players, accessories, and software & networking solutions. In addition, Apple sells many peripheral products including printers, storage devices, computer memory, digital music and videos, and still cameras. The company also provides application and internet software. Apple became leading worldwide PC client vendor in Q4 2011. They shipped over 15 million iPads and 5 million Macs representing 17 % of the total 120 million client PC shipped globally. Among the top five PC vendors, only Lenovo managed to increase its market share by relatively two points comparing to Apple with six points gain. Apple announced its earnings for its first fiscal quarter of 2012. Its revenue amounted to $46.33B in Q1 with earnings of $13.87 per share. The company’s net profit in Q1 was $13.06B. 37 million iPhones and 15 million iPads were sold in the first fiscal quarter of 2012, making this quarter Apple’s most successful one ever. Apple also saw Mac sales climb to 5.2 million. The only decline in sales was the iPod, which declined 21% year-over-year to 15.4 million units sold. APPLE TABLET BUSINESS Apple released the first iPad in April 2010, selling 300,000 units on the first day and selling 3 million in 80 days. During 2010, Apple sold 14.8 million iPads worldwide, representing 75% of tablet PC sales at the end of 2010. By the release of the iPad 2 in March 2011, more than 15 million iPads had been sold—selling more than all other tablet PCs combined since the iPad's release. In 2011, it took approximately 73% of the tablet computing market share in the United States. During the fourth quarter of 2011, Apple sold 15.4 million iPads. Apple's CEO Steve Jobs unveiled the iPad 2, the second generation of the device, at a March 2, 2011, press conference, despite being on medical leave at the time. About 33% thinner than its predecessor and 15% lighter, the iPad 2 has a better processor; a dual core Apple A5 that Apple says is twice as fast as its predecessor for CPU operations and up to nine times as fast for GPU operations. The iPad 2 includes front and back cameras that support the FaceTime video calling application, as well as a three-axis gyroscope. It retains the original's 10-hour battery life and has a similar pricing scheme. Total iPad units sold in the recently concluded first quarter of 2011 were 7.3 million, up from the previous quarter’s sale of 3.0 million units. We believe that the international roll-out will lead to increased revenues and higher margins from additional sales. Financial results for its fiscal 2011 third quarter ended June 25, 2011. The Company posted record quarterly revenue of $28.57 billion and record quarterly net profit of $7.31 billion, or $7.79 per diluted share. These results compare to revenue of $15.70 billion and net quarterly profit of $3.25 billion, or $3.51 per diluted share, in the year-ago quarter. Gross margin was 41.7 percent compared to 39.1 percent in the year-ago quarter. International sales accounted for 62 percent of the quarter’s revenue. The company reported revenues of $28.27 billion, up almost $7 billion from the year-ago quarter. Earnings per share came in at $7.05. Gross margin was 40.3 percent, versus 36.9 percent in the year-ago quarter. The results represent the best-ever September quarter for Apple. Mac sales in the quarter were 4.89 million; iPads were 11.12 million and iPhones came in at 17.07 million, even noting that the iPhone 4S did not arrive in time to impact the Q4 results. For the full fiscal year 2011, revenues were $108B and earnings were $26B. Apple's stock closed today at $422.24, and is currently down to $404.50 in after-hours trading. iPad 2 has been available for purchase, depending on stock availability, since March 11, 2011, at Apple retail stores in the United States, as well as to American customers shopping online at Apple's retail website. The iPad 2 was released internationally in 25 other countries, including Australia, Canada, France, Germany, Mexico and the United Kingdom, but not Japan as originally scheduled due to the earthquake and tsunami. The successor to the iPad 2 was unveiled on March 7, 2012 by Apple CEO Tim Cook at the Yerba Buena Center for the Arts. The new iPad sports the new dual core A5X processor with quad-core graphics and a Retina Display with a resolution of 2048 by 1536 pixels. As with previous iPads, there are two models, in this case a Wi-Fi only model and a Wi- Fi + 4G LTE model. Apple sold 15.4 million iPods, a 21 percent unit decline from the year-ago quarter. MUSIC BUSINESS: In November 2001, Apple launched its first iPod, a portable digital music player based on the MP3 compression standard. Five years later, it offered a full line of MP3 player from the iPod shuffle (starting $69) which randomly played up to 240 songs, to the iPod Nano (starting at $149), which stored up to 1000 songs: to the video iPod, whose 60 GB version ($399) could hold 15000 songs, 2500 photos, or 150 hrs of video. As a result it became an icon of Digital age. In the fiscal year September 2005, Apple reported revenues of US$13,931M, an increase of 68.3% over the preceding year. The Operating Income in FY2005 was US$1650M, an increase of 406.1% over the 2004 figure. Net Income also similarly increased by 383.7% in FY2005 to US$1335M. Total Assets increased by 43.49% to US$11,551M. Total Liabilities increased by 37.36% to US$4,085M, but Total Debt remained at US$0. Shareholders benefited in FY2005, as Shareholder's Equity increased by 47.08% to US$7,466M. Several factors to explain the upward financial trend were the increase in net sales of iPods by US$3.2B, which was a 248% increase. Other music related products and services also had an increase in net sales of 223%. The company also experienced smaller increases in the net sales n retail, peripherals and other hardware, Macintosh computers, and software, services and other sales. There were no decreases in the net sales of all products, but Net sales per Macintosh and iPod fell. In the quarter ending Dec 31, 2005 the company reported the largest earnings and revenue total in its history. This result was due to sale of more than 14 million iPods which marked a 207% increase from the previous year. During that time, Apple had sold 42 million iPods and the device claimed a 75% share of U.S market for portable music player. In 2006, major rivals were Creative technologies, iRiver, Samsung, and Sony but none of them had a couple percent of market share. Apple reported nearly $900 million in sales of iPod-related services and accessories in 2005. It also announces that 30 % of all the new U.S cars would come with iPod- compatible audio systems. The key element of iPod system was iTunes Music store. The first legal site that allowed music downloads on a pay-per song basis; iTunes became the dominant online stores of its kind. Early in 2006, it held around 83 % share of the market and as of February of that year I sold more than 1 billion songs. Before the advent of iTunes Apple sold an average of 113,000 iPods per quarter by Dec 2003, but launch sales shot up to 733,000 units and continued to rise. In 2007 combined iPod and iTunes sales accounted for 45 % of total revenue of Apple. The direct impact of iTunes on Apple’s profitability was far less impressive. In 2008, music purchased in the US has jumped to 18% of the total, and they expect it to go up to 41% of total sales over the next five years i.e. about 20% of all the music sold in the US is bought digitally. And distorted-loop.com is doing a little reasoning from those numbers, since Apple's iTunes accounts for 70% of US digital sales; distorted-loop.com has decided that Apple accounts for 12.6% of all music sold in the US. Fiscal Year Q1 Q2 Q3 Q4 Total (iTunes & iPods) 2002 125,000 57,000 54,000 140,000 376,000 2003 219,000 78,000 304,000 336,000 937,000 2004 733,000 807,000 860,000 2,016,000 4,416,000 2005 4,580,000 5,311,000 6,155,000 6,451,000 22,497,000 2006 14,043,000 8,526,000 8,111,000 8,729,000 39,409,000 2007 21,066,000 10,549,000 9,815,000 10,200,000 51,630,000 2008 22,121,000 10,644,000 11,011,000 11,052,000 54,828,000 ] 2009 22,727,000 11,013,000 10,215,000 10,177,000 54,132,000 2010 20,970,000 10,885,000 9,410,000 9,050,000 50,315,000 2011 19,446,000 9,020,000 7,540,000 6,622,000 42,628,000 Fiscal Year Q1 Q2 Q3 Q4 321,168,000 During FY 2012 first quarter which spanned 14 weeks the Company posted record quarterly revenue of $46.33 billion and record quarterly net profit of $13.06 billion, or $13.87 per diluted share. These results compare to revenue of $26.74 billion and net quarterly profit of $6 billion, or $6.43 per diluted share, in the year-ago quarter. Gross margin was 44.7 percent compared to 38.5 percent in the year-ago quarter. International sales accounted for 58 percent of the quarter’s revenue. The Company sold 37.04 million iPhones in the quarter, representing 128 percent unit growth over the year-ago quarter. Apple sold 15.43 million iPads during the quarter, a 111 percent unit increase over the year-ago quarter. The Company sold 5.2 million Macs during the quarter, a 26 percent unit increase over the year-ago quarter. Apple sold 15.4 million iPods, a 21 percent unit decline from the year-ago quarter. MOBILE PHONE BUSINESS Apple and its distribution partner AT & T mobility began selling the iPhone in late June 2007. This was Apple’s bid to unite the iPod with a mobile phone service but the company real goal was to reinvent the phone. The iPhone was multifunctional communication device – “the internet in your pocket” in Job’s word that shared many qualities with smartphones. It featured e-mail capability, web access and text messaging, a calendar, an address book and other PDA function with 2-MP camera. The entire system ran on a specially adapted version of Apple’s OS X platform. Buyers of the iPhone during the first year of availability, paid $399 for an 8 GB model and $ 499 for 16 GB model. Jobs aimed to sell 10 million units of the device by the end of 2008. By June 2008, consumer had bought about 6 million iPhones. iPhone gained a 19.5 % share of the U.S Smartphone market during its first quarter of availability. Worldwide users bought about 120 million smartphones in 2007. In July 2008, Apple invented iPhone 3G in 22 markets. Key difference was it supported 3G network coverage. Apple Inc. in the ﬁrst quarter achieved double-digit percentage growth in iPhone shipments and posted the best performance among the Top 5 competitors. No. 2-ranked Apple in the first quarter of 2011 shipped 18.6 million iPhones, up 14.9 percent from 16.2 million in the fourth quarter of 2010. Apple’s increase represented the highest percentage growth among the world’s Top 5 smart phone brands, with No. 5-ranked HTC coming in a distant second given its 6.2 percent growth. Apple’s results also marked a standout performance in a smart phone market that suffered a 1.5 percent sequential decline in shipments during the first quarter. The smart phone market share of Apple in the first quarter was boosted by the introduction of its first iPhone model with code division multiple access (CDMA) as well as by the addition of Verizon Wireless as a carrier in the United States. Not only did this allow Apple to expand its target market and boost shipments, it also placed additional pressure on rival smart phone brands—including Motorola, Samsung, LG and HTC—that focus on Verizon Wireless as a major customer. With its concentration on the U.S. market, Motorola was the one most impacted by Verizon’s addition of the iPhone, a factor contributing to Motorola’s 16.3 percent decline in shipments in the first quarter. With shipments declining 14.5 percent during the first quarter from Nokia, the No. 1 smart phone brand, Apple made major strides toward achieving market leadership. Apple in the first quarter trailed Nokia by just 5.7 percentage points, compared to 12.2 points in the fourth quarter of 2010. Nokia’s smart phone shipments fell to 24.2 million units in the first quarter, down from 28.3 million in the fourth quarter. The company’s agreement with Microsoft Corp. to make Windows Phone 7 its principal operating system over the long term is having a negative near-term impact on its smart phone shipments. With the announcement of the deal, Nokia eliminated the incentive for consumers to buy its existing smart phone products, which are based on its Symbian and MeeGo operating systems. Meanwhile, the Microsoft deal is unlikely to yield any products for nearly one year. The decline in smart phone shipments in the first quarter represents the first sequential decrease since the beginning of 2009. While many electronic products typically suffer a sales slump during the beginning of the year following the peak selling sales season of the fourth quarter in the previous year, the fast-growing smart phone has been immune to this phenomenon during most years. The reduction of shipments reflects inventory control efforts in the smart phone market, rather than weakening consumer demand. This decline does not change the IHS iSuppli forecast of 60 percent growth in worldwide smart phone shipments for the entire year of 2011. Apple announced fiscal Q4 2011 earnings, which disappointed investors as Apple could only sell 17 million iPhones compared to more than 20 million iPhones that it sold in the previous quarter. Although the company posted 54% year over year increase in profits and 39% increase in revenues, investors shrugged off this positive, with the stock going down by more than 5%. Apple announced its earnings for Q1 2012. Apple disclosed record profits of $13 billion, much of it credited to sales of the iPhone 4S launched in October.