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AAPL AT A GLANCE

P/E ► 31.0 AVG EV/EBITDA ► 21.0 AVG ROA ► 12.2% AVG ROE ► 23.3% AVG Debt to Equity ► 0.935 AVG Current Ratio ► 1.88 AVG

 

 

 

 

 

 

Apple (NASDAQ:AAPL) is the high technology consumer electronics company behind the Macintosh (Mac) family of personal computers, the iconic iPod portable music player, and, most recently, the iPhone. It is known for its sophisticated, high-end products and its innovative promotion and distribution strategies. The company has introduced a stream of highly successful leading-edge products. Under the leadership of Steve Jobs, Apple's co-founder who returned to head the company in 1996, Apple once again demonstrated considerable acumen in product design and marketing, generating sustained enthusiasm in the technology marketplace and substantial growth in market share.

In October 2009, Apple reported a net quarterly profit of $1.7 billion, the company's most profitable non-holiday quarter ever.^[1] Apple Inc. said Monday that record sales of Macintosh computers and iPhones lifted its quarterly profit and revenue, which trounced Wall Street's forecasts.^[2][3]

Business Overview

Apple modifed its corporate identity in early 2007 to more closely reflect its increasing transition toward a broad-based consumer electronics company, removing the "Computer" from its corporate name. Concurrent with this intriguing revision of their identification to one as a company with a broadened product offering and maturing corporate mission, Apple launched key products geared towards the high-end mobile market (the iPhone) and the home entertainment industry (Apple TV). On June 9, 2008, Apple announced the iPhone 3G, which featured increased speed, improved design, and lower pricing (although the sole US network provider, AT&T, absorbed any savings with increases in subscriber prices over the two-year contract). Other key new products include movie rentals on iTunes and the ultra-thin MacBook Air laptop.

Apple has used its powerful brand and end-to-end control of the design and manufacturing of hardware, software, and peripherals to create a business model with substantial synergies. The iPod has grown faster than any other music player in consumer electronics history and accounts for half of the company's revenue from the sales of hardware and content; it has also generated a "halo effect" contributing to increases in sales of Mac desktops and laptops. The company has opened a growing number of retail stores in major cities, featuring distinctive and fresh store design, hands-on product "test drives", customer education, and easily available technical help, resulting in a user-friendly experience. As a result of these initiatives, the company has generated more revenue per square foot ($4000) than perhaps any other major retailer in the world, including Tiffany's ($2500), Best Buy (sub-$1000) and Neiman Marcus ($600) in fiscal 2006, hugely distinguishing itself from its peers.

Unlike many other technology companies, Apple has historically not evinced as strong a commitment to increasing its presence abroad. The Americas has accounted for a hefty 48% of total revenues, while Europe rings in second, contributing just 21%. Apple is especially weak in Asia, where its Japanese revenues have dropped 10% from 4Q06 levels (the rest of Apple's Asia/Pacific sales have grown by a few percentage points.) However, strong revenue growth in Apple's retail division (nearly 42%) and its iPhone partnerships with wireless telecoms around the world offsets this imbalance and provides a framework for growing the company's worldwide presence in the future. The company's success in the mobile phone and personal media player markets may carry over into other consumer devices, with the company using its brand to gain significant market share.

Business and Financial Metrics

Apple had fiscal 2009 fourth quarter revenues of $9.87 billion, up from $7.9 billion in the year-ago quarter, resulting in a net profit of $1.67 billion, compared to $1.14 billion in the same period last year; this is Apple’s most profitable quarter ever, and it is a result of record high Mac and iPhone sales. Apple sold 3.05 million Macintosh computers during the quarter, representing a 17% unit increase over the year-ago quarter. The company sold 10.2 million iPods during the quarter, representing 8% unit decline over the year-ago quarter; iPhone units sold were 7.4 million, a 7% unit growth over the year-ago quarter. Apple sold more Macs and iPhones than in any previous quarter. This resulted in a 12% revenue growth and an 18% net income growth for 2009 fiscal year. ^[4]

Apple, on the strength of its product line achieved an increase by 75% of its net income between the fiscal years of 2006 and 2007 (FY07's Net Income = $3,496M from FY06's Net Income = $1,989 M). However such a high percentage increase wasn't seen between FY07 and FY08, with the increase being only $1.33 B (about 35%).^[5]

Business Segments and Product Portfolio

After a decade of stagnant sales at Apple, co-founder Steve Jobs returned as CEO in 1997 and began a period of reinvention, resulting in the release of several highly innovative products, notably the all-in-one iMac PC (1998) and the iPod (2001). An aggressive subsequent advertising campaign put Apple squarely into the public eye, and today Apple remains known for its catchy, clever ads.

Apple builds its product portfolio with vertical integration to provide seamless compatibility between hardware, software and peripheral products. The company's ecosystem of products--closely related by design and functionality--has allowed it build significant brand equity, and Apple products are especially popular with middle- to high-end consumers as well as the graphics/design industry. Apple's current products can be divided into two main categories:

• Computers and Software: Macintosh (Mac) brand desktops, laptops and related hardware/software are a traditional mainstay of Apple's business. While these products accounted for about 50% of revenue and two-thirds of operating profit in 2007, their contribution ratios have declined in recent years. Mac hardware products include the iMac, MacBook and PowerBook notebook computers, and a number of peripherals. Its software offerings include its OS X operating system, built on top of a UNIX-based platform which can be separately accessed. OS X is known for its ease of use and sleek, intuitive design.
  • Apple's computers boast unusually high profit margins, especially when compared to companies like Dell and Toshiba. Fewer sales can generate significantly more profit for Apple than the same number would for its big-business competitors, both because of Apple's carefully monitored stiff pricing and the extra revenue captured from the sale of accessories in Apple's retail stores.

• Music: Apple's music offerings include the iPod and its variations (i.e., Nano, Shuffle, Video) as well as the iTunes media player and distribution system. Though not the first entrant into this market segment, the iPod accelerated the growth of the PMP market since its 2001 introduction and now holds a dominant market share of approximately 70%. Over 150 million units have been sold worldwide as of April 2008, making it the fastest selling music player ever marketed.

Apple Inc. has transcended corporate boundaries to become a powerful cultural phenomenon.

iPods were the primary growth engine for FY05 and FY06, responsible for roughly 58% of Apple’s total revenue growth for both years. In FY07, iPod segment generated only 14% of overall sales growth. As a percentage of total revenue, iPod accounted for 33% (FY05), 40% (FY06), and 35% (FY07).

Despite the common view, Apple's revenue has not shifted away from its traditional Mac hardware and software towards iPod, iTunes, or other Music-related products. As demonstrated in the table above, while the sales of Music-related products has fluctuated unstably (and dropped) from around 50% to 40%, the sales from Computer-related products have actually risen from low 50s to 60% by the third Quarter of 2007. Apple is vigorously working to expand its portfolio outside the Computer-related business, however, and two of its most recent products were launched in two unexplored categories:

• Mobile Communication: Apple launched its iPhone in June 2007. Touted as a device converging communications and media playback, the iPhone combines EDGE mobile technology with widescreen PMP ability as well as internet browsing.

• Home Entertainment: In 2007, Apple introduced its Apple TV product for the home entertainment center. Apple TV allows digital media from a user's computer to be played on entertainment systems and digital televisions such as high-definition LCDs and plasmas.

Trends and Forces

Apple's current primary strategy is a shift away from computers towards diversified consumer electronics. The company's intention to move from a Mac/iPod-driven business model to one that includes many different product lines puts a spotlight on Apple's forays into several new markets.

Product Cannibalization

The iPod has been the leading MP3 player since its introduction. Each new generation of the iPod not only increased the features available but also confirmed its position as the industry standard. Apple took a giant leap with the Touch. The display is much larger than other iPods and includes touch screen navigation. Touch iPods also include WiFi, users can access the web, e-mail, and utilize the widgets to grab updated weather, stock prices, maps, as well as watching YouTube Videos. It also has PDA applications, such as calendar and notes, as do other iPods, but the Touch’s qwerty keyboard significantly enhances functionality. The evolution of the iPod line creates a higher possibility that an iPod owner would want more than one model. For example: Touch for PDA/internet, Classic as repository to store all content, Nano (or more likely a Shuffle) for carrying a small device (during exercise).

However, the iPhone will cannibalize a sizable amount of iPod sales, specifically the Touch. As per the first quarter results for FY09, the growth in the iPhone unit sales compared to Q1 for FY08 is exponential (123% growth) compared to the iPod (3% growth) for the same comparison making the point for a future cannibalization between products.^[6] However, this is a few years away since a single carrier in the US offers the iPhone and it is only available in few foreign markets, the Touch provides most of the iPhone features to consumers who can’t feasibly buy an iPhone. This is especially beneficial for consumers who are locked in a wireless contract with a carrier other than AT&T, or for someone working at a business that doesn’t support iPhone. The Touch lets them become acquainted with a device similar to the iPhone, and when conditions permit, enhances the likelihood that they will purchase an iPhone.

Dependence on new products

Apple's maintains an aggressive product innovation cycle which permits the company to maintain its unusual but highly profitable system of product pricing (not lowering prices until a new version is released). The company is notoriously tight-lipped about new products, carefully controlling the release of new product announcements.

Among the new products released at the 2009 Macworld conference, is the new MacBook Pro that Apple claims is the thinnest and lightest 17-inch notebook computer available. Its new battery can run for up to eight hours on a charge and can be recharged up to 1,000 times, the company said.^[7] However, being the first Mac laptop with a non-user serviceable battery, when the battery eventually fails, users will be submitted to a service intervention which may be costly; a fact that may deter sales to a broader consumer base.

Contrary to expectations, no news of an upgrade or a replacement for the MacMini, Apple's only headless consumer model (sold without a monitor, as opposed to the traditional Apple concept of 'all-in-one' computers); the extremely powerful 8-core MacPro is designed exclusively for the professional user, and Apple shows no signs of intending to bridge this gap.

The iPhone Craze

The subject of intense media scrutiny and hype, Apple's iPhone is the newest home run of its product lineup. Apple first dipped its toe into the immense mobile phone market in 2005 with the ROKR, a Motorola-made phone that licensed Apple's iTunes and yielded disappointing sales. This time, Apple designed and produced the iPhone hardware and software in-house in its second attempt at tackling the massive $300 billion global market for mobile phones. A company known for deep integration across its own products, Apple launched the iPhone with AT&T, the largest mobile phone service provider in the U.S, on June 29th, 2007.

iPhone

The iPhone includes a touch-screen system, wireless Internet browsing capability, and iPod functionality. A new version of the phone (3G S) was launched on the 19th of June, 2009. At a price of $199 it was much reduced from the original launching price of $400 (in 2007). Apple reduced the price of the existing 3G phone to $99 with a two year contract at this launch, giving them two products in the market currently. Some of the key points that can affect the future of the iPhone and Apple's revenues are listed below:

• Apple's strength lies in marketing to end-consumers rather than business users, a segment with a much higher penetration into smart phones and expensive data plans.
• The iPhone may "cannibalize" some sales of iPods.
• The iPhone completely utilizes touch screen technology. This could be a potential problem for the less tech savvy phone user.
• "Apps Store" which is on the homescreen of every iPhone, where new applications are showcased and ready for wireless download by iPhone users. Apple shares % of the revenue with third party developers. These independent apps are a major attractive feature for the iPhone and their development is key to future success of the iPhone.
• iPhone be fully compatible with Microsoft Exchange Server allowing push email, calendar and contacts.
• iPhone is being offered in international markets, with the new 3G S phone going to be offered in 48 other international countries and territories (besides the ones where 3G is already being sold) soon. Apple's ability of capturing the international market and being a global brand is essential for its long-term survival.

Apple TV: Slow Adoption

Touted as the future of digital entertainment, the Apple TV nevertheless faces significant competition from on-demand and traditional TV/video offerings. At a price of US $229 (US $329 for 160GB model), Apple TV targets a consumer group that probably already has access to either cable TV, on-demand, or a DVR/TiVo. The limited video selections (fewer than 1500 titles (est) were available on iTunes as of April 2008) could be significant downsides for many buyers. Movies may be rented or purchased via the Apple TV using the infrared remote and an iTunes account. Music and TV shows may be purchased as well. When the user runs the iTunes application on his/her PC, content bought and downloaded to the Apple TV is synced to the PC. Alternatively, content downloaded from the PC itunes store is synced to the Apple TV hard drive. (through iTunes or YouTube).^[8]

Despite numerous comparisons between Apple TV and the iPod, a number of vital differences cast doubt on any anticipation of iPod-like success. For one, Apple TV lacks portability, a defining feature of and reason for iPod's success. For another, most consumers do not have a large pre-existing collection of high-quality digital movies/shows, while in the iPod's case, digital music use had been prominent and widespread for a number of years (illegal file sharing with p2p platforms such as Napster) before launch--thus Apple TV's market is not primed for success as the iPod's was. Finally, although Apple TV can support HD technology and actually requires a widescreen TV.^[8]

The "Apple Halo"

Apple's self-reinforcing virtuous business model takes advantage of the technological integration of its products to transform new buyers into loyal Apple fans across the broader product line. End-to-end control over the design and manufacture of hardware, software, and peripherals alike makes high compatibility between products possible, and high-quality customer support ensures satisfaction and loyalty. Apple's differentiation between product designs and the secrecy surrounding new product launches also reinforces the Apple mystique. These factors combine to create the Apple "halo effect," where a buyer of one Apple product has a high probability of returning to Apple for other products as well.

Public image

• Apple's reception in the marketplace (more sales = higher profits) has always been closely intertwined with its perception as user-friendly, sleek, and simply "cool." Apple enjoys copious amounts of free advertising from staunch loyalists and media buzz that generate "word of mouth". Apple's customer satisfaction ratings repeatedly top the charts. This is beneficial since many highly satisfied users, in effect, become quasi-Apple salespeople as they recommend products to friends. If this level of high customer satisfaction and/or Apple's brand image start to suffer, it would unquestionably dramatically undermine sales.
• In the public eye, Steve Jobs' role in Apple is absolutely integral. This means that if Jobs is no longer available to lead the company, is implicated in legal proceedings, or even experiences substantial health issues, Apple would in all likelihood be negatively impacted. Certainly that would be the initial effect on the stock price. On January 14, 2009, Apple announce that Mr Jobs was taking a medical leave of absence until June to deal with health issues which were more complex than originally described. He plans to remain involved in major strategic decisions as CEO. How this all plays out is problematic, given Mr Jobs reputation as a hands-on manager as well as the real possibility of serious health complications.
• To the extent that it is a part of his overall public personality, Steve Jobs' perceived reputation as a "competitive deal-broker" may also prove to be a company liability, however. Many of Apple's previous partners are increasingly reluctant to sign on, often holding out for a better deal (if any) or, like Universal Music Group, are seeking alterations to agreed terms. The Motorola (MOT) partnership to develop the flopped ROKR is perhaps the most notorious example of Apple's questionable partnering behavior--critics accuse Apple of burying ROKR's launch to reduce cannibalization of iPod sales, and worse yet, using the ROKR collaboration as a front to gain much of the technology now used in the iPhone.
• It is worth noting that these very factors which have the potential to hurt Apple fortunes, exist precisely because the company has been so successful in differentiating themselves in the marketplace in precisely these ways, having brilliantly translated these dynamics to market share and bottom line profitability as no other technology company in recent memory.

Competition

Against the Mac: Apple's position is improving in the worldwide PC market, growing 40% in 2007, compared to 13% global growth during the same period. ^[9] Gartner stated, as part of their annual "Key Predictions" in January of 2008, that Apple is expected to double their market share in the PC industry by 2011 ^[10]. However, the Mac still represents a small fraction of the overall PC market; their market share of US domestic PC sales was 6.6%^[11] for the first three months of 2008.

Apple's main competitors remain HP and Dell, both of which have experienced significantly lower growth rates than Apple recently. Apple enjoys a unique advantage of having something of a niche market without needing to compete directly with Hewlett-Packard Company (HPQ) and Dell (DELL) and Microsoft (MSFT) operating systems for enterprise endorsement.

Microsoft's forthcoming Windows 7 operating system is represented to contain many of the features which currently differentiate Apple's OS X from Windows operating systems. Windows 7 is currently in prerelease testing. It remains to be seen how that new version of Windows will compare with Apple's release of its new OS version, 'Snow Leopard.' While some of the hand gestures may be replicated in the new Windows system and other screen presentation features from Apple may also be borrowed, Apple's underlying operating system, built upon a version of Unix, may still prove considerably superior. The superior physical and electrical design of the Apple products must also be given consideration.

In June of 2006 Apple announced that it would begin shipping its computers with Intel processors. Since the switch Apple has, on two occasions, announced new computer specs that include processors that haven't been officially released by Intel. The first of these announcements came in April 2007 when Apple announced that its Mac Pro would be available with two quad-core processors that were not on Intel's price sheet or website.^[12] About a year later Apple again announced a new model that would ship with a previously unreleased Intel processor, this time for the iMac. In both cases Intel has said that the processors shipping in the new Apple models are available in limited quantities. Furthermore, competitors like Dell and HP have been left without access to these processors in their early stages.^[13] Apple's ability to get exclusive access to new products, like Intel's processors, could provide a significant advantage over their competition in the future.

Against the iPod: Although Apple remains the industry leader in PMPs, the competition is making significant gains. The popularity of flash-based PMPs is problematic for Apple, which has much stronger market presence in hard-drive based (HDD) players. To combat this, Apple may release a new flash-based line of players, in addition to a souped-up and rehauled version of HDD iPods. Apple's main competitors in this area include:

• SanDisk's Sansa players, one model of which beat the Nano to market, with more GB and a lower price point.
• Creative's Zen, which has a strong grounding in flash-based players--including the first true widescreen video PMP with the Zen Vision W.
• Microsoft's Zune, currently uninspiring, but with the potential for significant growth and the ability to leverage unique file transfer technology.

Against iTunes and Apple TV iTunes' main competitors are Napster and Rhapsody/Real Player, but the service far outstrips both of these in market share. To combat the rise of a wave of new subscription music services, iTunes may launch one of its own in the near future.

Apple TV, on the other hand, may face much stiffer competition. While the concept of digital media played on the TV initially seems very promising, Apple TV actually has rather limited functionality--especially against established and well-received sources of media, from Video On-Demand to Netflix to recordable cable programming. All three of these distribution channels offer significantly higher image quality than much of what is available on Apple TV.

Against the iPhone Apple's iPhone must compete with established mobile phone and PDA companies, including the likes of Motorola, Nokia, and Sony, many of which have significantly larger R&D budgets than Apple. The company also experiences challenges from BlackBerry and similar high-end PDA-phone combinations. Because it is unlikely that the iPhone will be issued by corporations as a productivity tool, the BlackBerry and similar devices may enjoy a significant edge in the corporate markets.

Google's Android operating system aims to provide a competitive application platform for rival handsets. Although Apple has a huge head-start with their app-store, Android is expected to provide rivals with a leg-up in their quest to catch the iPhone.

The announcement of the Palm Pre at the 2009 Consumer Electronics Show at Las Vegas suggests the aura surrounding the iPhone is likely to dim, at least somewhat. Although the availability of the Pre is not currently scheduled until mid-2009, it will offer a number of important features such as a slide-out physical keyboard, a removable battery, and many software enhancements which are not available in the current incarnation of the iPhone. The screen size and the form factor do not however match that of the iPhone nor does Palm have the financial or marketing resources to match Apple. Apple can readily respond to the software enhancements. Perhaps it will require the introduction of the iPhone 3 for a separate keyboard and removable battery to become available.

Apple iPhone's Five Forces of Competition

Competitive Strategies to upscale globally.

Applization_Strategic Moves to upscale Apple's iPhone globally

References

1. ↑ David Goldman (October 19, 2009). Apple shares soar on earnings report. cnn.com.
2. ↑ AAPL 2008 10-K pg. 42  
3. ↑ AAPL 2008 10-K pg. 46  
4. ↑ Apple Reports Fourth Quarter Results (October 19. 2009).
5. ↑ ^{5.0 5.1} AAPL 2008 10-K pg. 55  
6. ↑ ^{6.0 6.1 6.2} AAPL 2009 10-Q1 pg. 29  
7. ↑ Apple updates iTunes, iLife, unveils 17-inch MacBook. New Mexico Business Weekly (01-07-2009). Retrieved on 2009-06-27.
8. ↑ ^{8.0 8.1} http://www.apple.com/appletv/specs.html
9. ↑ Apple 2007 Annual Report. Section 7 pg. 43 www.sec.gov, "Gartner Says Worldwide PC Market Grew 13 Percent in 2007." http://www.gartner.com/it/page.jsp?id=584210
10. ↑ "Gartner Highlights Key Predictions for IT Organisations and Users in 2008 and Beyond." http://gartner.com/it/page.jsp?id=593207
11. ↑ "Mac sales core to Apple earnings." http://www.australianit.news.com.au/story/0,24897,23591373-15306,00.html
12. ↑ "Update: Apple Mac Pro gets a special Clovertown processor", www.tgdaily.com, retrieved April 29, 2008.
13. ↑ "Update: Apple upgrades iMac, gets Intel’s Montevina CPU early, sort of", www.tgdaily.com, retrieved April 29, 2008.