Introduction
The purpose of this report was to analyse annual reports for Apple, Inc. for the past three fiscal years (2012 to 2014). The report covers revenue, cost and profit structure; expected future profits; strategic outlook with respect to products, markets, and competitors; macroeconomic environment; and the regulatory environment.
Steven Paul Jobs, Steve Wozniak and Ronald Gerald Wayne established Apple, Inc. in 1976. It is head office is based in Cupertino, CA.
Apple, Inc. designs, makes and markets mobile communication devices, computers, digital music players and sells other various related software and peripheral pieces of hardware components, services and networking solutions alongside third party products and services. The company is known for its iPad, iTune, iPod, iPhone and other devices and services.
Revenue, Cost and Profit Structure
Gross margin for 2014, 2013 and 2012 are as follows (dollars in millions) – source:
The gross profit margins for the last three financial years were 43.89%, 37.62 % and 38.6% for the year 2012 2013 and 2014 respectively. Although the margin for the year 2012 was slightly high, Apple, Inc. has recorded year-over-year decline in its gross profit margins. These fluctuations could have been occasioned by several factors.
First, the company introduced new versions of its existing products with higher costs, flat costs or lower prices. Second, consumers chose products with lower costs. Third, changes in the company’s service structures and warranty policies.
Fourth, foreign exchange fluctuations from overseas markets could have affected the margins. Finally, higher mix of products’ sales and improved net sales were responsible for the increased profit margin in the year 2012. At the same time, the US dollar became stable and stronger against other foreign currencies.
The gross profit margins for Apple, Inc. show that the company has effective ways of managing its costs of inventory and controlling other related costs. Hence, it can pass low costs to customers.
Net Profit Margin
= Net Income/Net Sales = _____
2012 41,733 /156,508 = 0.267 = 26.7 %
2013 37,037 /170,910 = 0.217 = 21.7 %
2014 39,510 / 182,795 = 0.2161 = 21.6%
Apple, Inc. makes profits from every dollar after paying all its expenses. The margin ranges from 26.7%, 21.7 % to 21.6%. This represents profits that Apple, Inc. makes from a dollar in terms of cents. However, the company’s profitability fluctuates because of several factors.
Apple, Inc. has increased and decreased prices of some of its iPhone and iPad products when it launched the new versions. These changes influenced the number of quantities sold, which have affected the firm’s profitability. Getting the perfect price for products is a major challenge for many entities.
Consumers consider Apple pricing strategy as premium. This is a challenge for the company because the mobile and electronic market has become highly competitive. Overall, Apple’s pricing strategy can either increase or decrease its net profit margin.
Apple, Inc. “inventory affected its net profit margin”. Apple may not be able to record the sales of its inventory until it realises the actual sales. Changes in the market affect the prices of inventory. The devaluation of some of the products have decreased the company’s net profit margin while “moving inventory, particularly the pre-orders have greatly increased the company’s sales”.
Variable costs also influence net profit margin of the company. These are costs associated with labour costs, taxes, costs of raw materials and changes in foreign exchange markets. While these costs may not change, they have significant impacts on the net profit margin of Apple, Inc.
Future profit prospects based on past performance
Today, Apple, Inc. appears to be performing well financially and this reflects the company’s ability to maintain upward trends and growths. The company’s CEO predicted all-time record sales for new products.
Apple, Inc. has adequate financial strength. For instance, in the fiscal year 2011, the company had over $81.6 billion in cash alongside other short-term assets. In the fiscal year 2012, the company used this cash to pay dividends of $2.65 per share. This is something, which Apple, Inc. had not done in several years.
Although the company’s past performances indicate that it would do well in the future, Apple maintains that past performances are “not necessarily indicative of results of future operations”. The company notes that its abilities to continue to develop and provide innovative products and services shall determine its future financial position and operating outcomes .
Apple, Inc., however, believes that it provides the best, innovative and integrated products and services for its customers. Currently, major competitors of the company have financial and human resources to develop more sophisticated products and services. Moreover, some of these competitors may be ready to offer their products and services at significantly lower profits or no profits at all in order to capture market shares and compete with Apple.
Apple, Inc. notes that it has traditionally noted significantly higher net sales during the “first quarter relative to other quarters in any financial year, probably because of increased demands during holiday periods” . At the same time, any new products or services in the market could affect the current offerings, earnings and expenses.
The company’s production capacity could also affect net sales, particularly when it cannot meet demands, distribution channels and keep adequate inventory . Many consumers tend to wait for the next big launch to purchase new gadgets, which affects the production of available products.
On this note, Apple, Inc. notes that no specific historical data or patterns could be used to predict or provide reliable indicators for its future production, sales or financial performances. Apple, however, must focus on profitability through innovative products and services.
Strategic outlook with respect to products, markets, and competitors
In the future, product introduction and transition could be a major hurdle for the company. Apple, Inc. competes in a highly volatile and competitive IT and telecommunication industry. The company, therefore, must continue to “introduce new products and services to enhance its growth and profitability”.
This stimulates the demand for new products and services. However, the introduction of new services and products depends on several other factors. Apple, Inc. must ensure timely and successful development of new products, consumer acceptance, risks management, immediate availability of the required components and effective management of orders and inventory based on the expected demands.
In addition, product availability, resources to support product for expected demands and risks related to defects or deficiency of such new products or services also affect product introduction. Apple, Inc., therefore, lacks the capacity to determine how its new products will influence the market. It is imperative to note that Apple, Inc. sells complicated, state-of-the-art hardware and software products and services.
Hence, there are possibilities that these devices could have design and manufacturing defects, as was the case of iPhone 6 Plus. After the release of iPhone 6 Plus, many fanatics discovered that the device had unexpected design flaw. These claims have also been linked to iPhone 5 and 5s alongside some of the Android devices.
In addition, sophisticated software that runs these devices normally have bugs, which could affect the expected operations. Its online services may also experience outage from time to time due to “maintenance, service slowdowns, outages or errors”. The company also deals with third parties to “supply product components, which could cause defects on final products and services”. Apple, Inc. acknowledges that it could be difficult to identify and fix all defects in its products in a timely fashion. Failure to fix these defects has significant impacts on the company’s revenues, brand, warranty and other expenses.
Apple, Inc. competes in “a more competitive global market”. The industry players are aggressive and involved in price cutting strategies. This would affect the company’s margins negatively as consumers opt for cheaper products and services. At the same time, “product short life cycles, frequent introduction of new products, changing industry standards, changes in product pricing, disruptive and adoption of new technologies and consumer price sensitivity” also affect the company’s margins.
The company’s ability to remain competitive in the global market depends on its abilities to “introduce new innovative solutions continuously”. Apple, Inc. believes in its uniqueness. Its products and services are uniquely designed. It also introduces new solutions to support existing products.
Consequently, Apple, Inc. aims to enhance its investment in R&D. Nevertheless, there is no assurance that Apple, Inc. will continue to “deliver quality products and services to its customers and compete effectively”. Given the diversified and fragmented nature of the IT industry, it is a challenge to identify the company’s major competitors. Nevertheless, one may look at the company’s competitors in terms of products. For instance, Samsung is a major competitor of Apple in the smartphone segment.
The company may not have any serious competitions in the tablet segment, but perhaps Microsoft and Amazon could be considered as possible competitors to the iPad’s dominance. On the other hand, Google has been viewed as Apple’s competitor from several aspects. For example, Google has unveiled Android-based smartphone through its Motorola subsidiary.
This may challenge Apple’s iPhone. The company also provides “cloud-based services through its Google Drive to compete with Apple’s iCloud”. Google has worked on some wearable technology products and Apple followed the trend with its iWatch. According to Dilger, many analysts fail to understand the competition between Apple and its major rivals.
Consequently, Dilger noted that “Google, Samsung and Microsoft were the companies in 2013 with sales problems and a lack of innovation, while Apple continued to remain the most profitable and successful in executing its strategies”. According to Jubak, Apple has hidden competitive advantage in its value chain. For instance, the company has been able to minimise its exposure to risks by investing “a big hunk of its $7.1 billion in capital spending to enhance its supply chain”.
Strategic outlook with respect to the macroeconomic environment
Apple, Inc. executives and managers must already have understood the influences of macroeconomic environment particularly after the global financial crisis and economic slowdown in the subsequent years.
Interest rates, trade deficits (balance of payment), exchange rates, inflation, the gross domestic product, unemployment, and income are elements of macroeconomic that could influence the company’s operations, revenues, services and goods. Macroeconomic factors could work against Apple, Inc. and make the business environment difficult. Conversely, they could provide better opportunities for business growth.
The national output (GDP) reflects all goods and services that a country produces, and it is an imperative economic indicator at any point in time. The GDP could change because of government policies, international economic environments or consumer behaviours among other factors. Apple, Inc. can use the GDP figures to determine the best performing economies for investments.
Past GDP trends could be used to predict future performances. Recently, the Federal Reserve has expressed that it may raise the interest rates any time next because of the confidence in the growing US economy (Schneider & Flaherty 2014). The US GDP has grown, which is a good indicator for the company’s domestic market. However, the same cannot be said of other overseas economies.
For instance, Russia economy is doomed while China’s economy has slowed down. Many observers believe that the US economy is most likely to grow between 2.6% and 3% in the year 2015. Apple, Inc. has been manufacturing most of its products outside the US. It has however relocated some factories in the US.
This has controlled trade deficit with other countries. Trade deficit could indicate higher standards of living, increased access to different types of goods and competitive prices and control inflation, but the country must watch negative impacts of trade deficit such as unemployment.
The US dollar has become stronger against other currencies as the economy recovers. At the same time, the US stock markets and bond yields have reflected investors’ confidence (consumer behaviours) in strong economies. The Fed may raise the interest rates at any point in the year 2015.
However, based on the current assessment results, the Fed has decided to be patient on normalization of the monetary policies. Apple, Inc. must observe, follow the Fed’s monetary policies, investors’ activities on stock markets and consumer purchasing behaviours and other vital indicators.
At the same time, Apple, Inc. must pay close attention to its Middle East and Russia markets. Given the sharp decline in oil prices globally, the governments’ policies are most likely to change in these regions. Consumers may not opt for premium Apple products and services. Instead, they may go for cheaper alternatives.
There is notable turbulence in the global financial markets. For instance, Russia, Euro zone and Japan have shown economic distress, but these could have limited impacts on the company’s domestic markets. Certainly, such financial challenges will hurt the company’s major international markets.
Unemployment certainly reduces consumers spending patterns. The US unemployment rate is currently 5.8%, the lowest rate in the last six years. Many analysts believe that it would further decline to an average of between 5.2% and 5.3% in the year 2015.
This would be lower than the previous forecast. Hence, it is most likely to revert in full employment. This is good news for Apple, Inc. because many consumers will have disposable incomes. The rate of inflation in the US is also likely to decline to between 1% and 1.6% because of falling global oil prices. However, the volatile energy and food prices could result in higher rates of inflation towards the end of the year 2016. This situation will create uncertainties for Apple, Inc.
Strategic outlook with respect to the regulatory environment
Apple operates in different regions. As a result, it subjected to different law and regulations globally. These laws and regulations are subjected to “change and could affect the company’s costs of doing business”. These regulations are both in domestic and international markets.
Apple, Inc. must understand both the US and other countries’ laws and regulations on labour, advertisements and promotion, digital contents, intellectual property rights and infringement, consumer protection, real estate, e-commerce, billing and quality of services.
In addition, the company must also account for laws and regulations on “telecommunications, mobile communications and media, television, tax, import and export requirements, anti-corruption, foreign exchange controls and cash repatriation restrictions, data privacy requirements, anti-competition, environmental, health and safety”.
Currently, Apple Inc. is facing antitrust lawsuit at the U.S. District Court in Oakland, CA. According to plaintiffs, the company’ anticompetitive tendencies resulted into higher prices for iPods between the year 2006 and 2009. As a result, they want $350 million for compensation for damages.
There are possibilities that this sum could be increased threefold if subjected to antitrust laws. The lawsuit is linked to an open letter to the world written by Steve Jobs and an academic, The Many Facades of DRM written in 2012 by Schultz, which covered the concept of DRM. Apple, however, used this technology to “lock the majority of music downloads to its devices”, which created iPod monopoly in the music industry.
From this lawsuit, one can observe that lawsuits may arise from any of the company practices even if they seem lawful. There are several extensive laws and regulations, which guide “communication services and related devices and these laws are subject to change in any country”. Notably, changes may include restrictions on production, distribution, purchasing and use of Apple products.
For instance, political tension between the US and China has made China to ban “government officials from buying Apple gadgets, amid fears that America could hijack the company’s iPads and iPhones to spy on Beijing”. Further, laws and regulations may lock devices to a specific carrier’s network or several carriers’ network. Apple products and services are also subjected to various standardisation and certification by various agencies.
Obtaining these certificates or approvals could be difficult and time-consuming. They are also most likely to subject the company’s product to further tests, product modifications and possibly delays in delivery. In some instances, such laws and regulations could preclude Apple from selling some products and services in certain countries.
The company faces significant challenges with regard to compliance. It is an arduous and expensive affair. Moreover, laws are inconsistent from country to country. They all increase “the company’s operating costs and costs of compliance”. The subsequent costs associated with changes in regulations eventually affect the company’s products and service.
For instance, they could cause delays in product deliver and result in high costs, which may make Apple’s products less appealing to the target markets. In addition, such changes in laws and regulations may restrict or force Apple to alter its business practices.
Apple has ensured that it has policies and procedures on laws and regulations to support its businesses globally. Although the company strives for complete compliance with the required regulations, there can never be absolute guarantee that Apple’s stakeholders and employees will ensure adherence and fail to violate established standards.
Conclusion
Analysis of Apple, Inc. major financial reports has shown that the company is financially stable. Apple, Inc. will continue to record higher net sales year-over-year. On the other hand, its gross and operation margins have continued to decline, and the company has attributed such declines to several factors, including competition and increased costs of operations and labour.
The analysis shows that Apple, Inc. finally approved payment of dividends to stakeholders in the fiscal year 2012, nearly after two decades. Today, the company has adequate cash for expansion and investment and future activities could be marvellous.
Apple, Inc., however, continues to face critical risk factors, which have abilities to affect its product and service sales adversely and ultimately profitability. These are mainly external factors, which the company may not be able to control. As a result, Apple, Inc. has continued to seek for beneficial partnerships to meet its production and distribution needs.
Reference List
Apple, Inc. 2012, Annual Report on Form 10-K. Web.
Apple, Inc. 10-K. Annual Reports 2013. Web.
Apple, Inc. Form 10-K For the Fiscal Year Ended September 27, 2014, Apple, Inc, Cupertino, CA.
Arnold, N. 2013, ‘Who are Apple’s 3 Biggest Competitors?’, The Cheat Sheet. Web.
Dilger, D. E., ‘Editorial: 2013 was a terrible year for both Apple’s competitors and its media critics‘, AppleInsider. Web.
Elder, J. 2014. ‘Former iTunes Engineer Tells Court He Worked to Block Competitors‘, The Wall Street Journal. Web.
Jinjin, T. 2013, ‘A Strategic Analysis of Apple Computer Inc. & Recommendations for the Future Direction’, Management Science and Engineering, vol. 7, no. 2, pp. 94-103.
Jubak, J. 2014, Apple’s hidden competitive advantage. Web.
Kieso, D., Weygandt, J. & Warfield, T. 2013, Intermediate Accounting, Wiley, New York.
Rushton, K. 2014, ‘China bans officials from buying Apple products‘, The Telegraph. Web.
Schneider, H. & Flaherty, M. 2014, ‘Fed confident in US growth outlook, opens door wider to rate hike‘, Reuters. Web.
Schultz, R. 2012, The Many Facades of DRM. Web.
Silverthorne, S. 2010, ‘A Macroeconomic View of the Current Economy‘, HBS Working Knowledge. Web.
Stone, A. 2014, ‘If You Put An iPhone 6 In Your Pocket, It May Not Come Out The Same Shape‘, The Huffington Post. Web.
Sullivan, A. & Sheffrin, S. 2003, Economics: Principles in action, Pearson Prentice Hall, Upper Saddle River, NJ.
Walters, H. 2008, ‘Apple’s design process’, Bloomberg BusinessWeek. Web.