Apple Inc. Financial Analysis

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Accounting and Financial Profile



Sachitanand Karnakote
Choong Chee Lai
Lei Qiu
Alcides Santopietro
Denisa Voicu

September 2008


The company and its activities2
Industry & Competition2
Accounting choices and Quality of Earnings4
Ratios analysis6
Relevant Disclosures9
Analysis of Apple Inc. corporate strategy10


Our group decided to analyse the company Apple Inc., listed on Nasdaq Market as AAPL. The analysis was mainly based on the annual financial report of the company for the fiscal year ended on September 29th 2007. Apple Inc. is today one of the most innovative, creative and admired companies worldwide. Our choice was based on a simple motto that one should know the business of a company to have a better understanding of its financials. Four of us in the group have worked in the IT industry and the other person has owned Apple stock in the past. All of us have used or are using products made by Apple inc.

The company and its activities

Apple Inc. and its subsidiaries design, manufacture and market personal computers, consumer electronics and software products. The company’s best-known hardware products include Macintosh line of PCs (43% of the company’s sales), iPod line of portable media players (34.6% of sales) and iPhone, a multimedia smart phone. Apple’s software products include Unix-based Mac OS X operating system, iTunes, iLife suite of multimedia and creativity software, and Final Cut Studio. As of June, 2008, the company operated 215 retail stores. The company’s earnings profile has changed in the recent years: iPod is a product that may be reaching its maturity, so important growth rates should not be expected for the future. Macintosh computers (desktop + portables) are steadily growing and we can project the same pace in the near future (market shift to portables is noted). Therefore, revenues coming from these items can be fairly considered as permanent revenues.

Industry & Competition

Apple’s core business is personal computers, and on this type of market many players are operating, such as Hewlett-Packard and Dell. Apple’s market share stands at 2.6% for 2007 (about 95% of the computers shipped in 2007 run on Windows platform). Some of company’s advantages in this segment are the shift to the use of Intel chips, Windows on Mac, Mac OS X and aesthetics/design. The target customers for the company in this segment are based on the developed world where the industry competition from low cost computer producers has a limited impact. However, for the company to keep its market share or even expand it, it needs to continue to innovate and, at the same time, reduce costs. Apple’s share of the portable media player segment is estimated to be 72.7 % in 2007, making it a close monopoly. iPod’s sleek design combined with its ease of use and affordable pricing makes it a difficult product to replace by the competitors. iTunes support system for iPods cannot be understated; after all, iTunes makes Apple the number one music shop in the world. The company’s challenges in this field include the market saturation in North America and the fact that Apple deals with media content owners and related regulations (DRM). Apple is a relatively new player in the smart phone segment. Surprisingly, it has entered this market with a revolutionary product which maintained media attention for a long time. It faces intense competition from RIM and Nokia, to mention a couple, who have deep cash reserves, an excellent R&D body and big market shares in this segment. The biggest challenge Apple faces here is to allure the business customers. iPhone, being a multi-functional device with a touch interface has many technological advantages for it to be a success, but the strategy of the company to work with individual carriers limits its growth...
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