3 Apple Inc. company overview DESIGNSMANUFACTURESMARKETSApple Inc. designs, manufactures, and markets a range of personal computers, mobile communication and media devices, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications.
4 Products and Services Macintosh “Mac” computers iPhone iPad iPod Apple TVXserveA portfolio of consumer/professional software applicationsMac OS X and iOS operating systemThird-party digital content and applications through the iTunes StoreVariety of accessory, service, and support offerings
5 Business Channels Retail Stores Online Stores Direct sales force and third-party cellular network carriers, wholesalers, retailers, and value-added resellers
6 Business StrategyApple Inc is committed to bringing the best user experience to its customers through its innovative hardware, software, peripherals, services, and Internet offeringsApple’s business strategy takes advantage of its unique ability to design and develop its own operating systems, hardware, application software, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial design. The Company believes continual investment in research and development is critical to the development and enhancement of innovative products and technologies.
7 Financial AnalysisFiscal years 2010, 2009 and 2008 each spanned 52 weeks. An additional week is included in the first fiscal quarter approximately every six years to realign fiscal quarters with calendar quarters.The following table summarizes net sales and Mac unit sales by operating segment and net sales and unit sales by product during the three years ended September 25, 2010 (in millions, except unit sales in thousands and per unit amounts):
9 Financial Analysis Mac Unit Sales by Operating Segment: 2010 Change 20092008Americas Mac unit sales$4,97621%$4,1204%$3,980Europe Mac unit sales3,85936%2,84013%2,519Japan Mac unit sales48122%3952%389Asia-Pacific Mac unit sales1,50062%92617%793Retail Mac unit sales2,84635%2,1152,034Total Mac unit sales$13,66231%$10,3967%$9,715
10 Financial Analysis Net Sales by Product: 2010 Change 2009 2008 Desktops (a)$6,20143%$4,324(23)%$5,622Portables (b)11,27818%9,5359%8,732Total Mac net sales17,47926%13,859(3)%14,354iPod8,2742%8,091(12)%9,153Other music related products and services (c)4,94823%4,03621%3,340iPhone and related products and services (d)25,17993%13,0336,742iPad and related products and services (e)4,958NMPeripherals and other hardware (f)1,8141,475(13)1,694Software, services, and other sales (g)2,5737%2,4112,208Total net sales$65,22552%$42,90514%$37,491Net sales during 2010 increased $22.3 billion or 52% compared to Several factors contributed positively to these increases, including the following:Net sales of iPhone and related products and services were $25.2 billion in 2010 representing an increase of $12.1 billion or 93% compared to iPhone unit sales totaled 40 million in 2010, which represents an increase of 19.3 million or 93% compared to 2009.Net sales of iPad and related products and services were $5.0 billion and unit sales of iPad were 7.5 million during 2010.Mac net sales increased by $3.6 billion or 26% in 2010 compared to 2009, and Mac unit sales increased by 3.3 million or 31% in 2010 compared to 2009.Net sales of other music related products and services increased $912 million or 23% during 2010 compared to This increase was due primarily to growth of the iTunes Store which generated total net sales of $4.1 billion for 2010.Net sales of iPods increased $183 million or 2% during 2010, while iPod unit sales declined by 7% during 2010 compared to 2009.Net sales during 2009 increased $5.4 billion or 14% compared to Several factors contributed positively to these increases, including the following:iPhone revenue and net sales of related products and services amounted to $13.0 billion in 2009, an increase of $6.3 billion or 93% compared to 2008.Net sales of other music-related products and services increased $696 million or 21% during 2009 compared to The increase was due predominantly to increased net sales of third-party digital content and applications from the iTunes Store, which experienced double-digit growth in each of the Company’s geographic segments during 2009 compared to the same period in 2008.(a) Includes iMac, Mac mini, Mac Pro and Xserve product lines.(b) Includes MacBook, MacBook Air and MacBook Pro product lines.(c) Includes iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.(d) Includes revenue recognized from iPhone sales, carrier agreements, services, and Apple-branded and third-party iPhone accessories.(e) Includes revenue recognized from iPad sales, services and Apple-branded and third-party iPad accessories.(f) Includes sales of displays, wireless connectivity and networking solutions, and other hardware accessories.(g) Includes sales of Apple-branded operating system and application software, third-party software, Mac and Internet services.(h) Derived by dividing total product-related net sales by total product-related unit sales.NM = Not Meaningful
11 Financial Analysis Unit Sales by Product: 2010 Change 2009 2008 Desktops (a)$4,6277%$3,182(14)%$3,712Portables (b)9,03525%7,21420%6,003Total Mac unit sales13,66231%10,3969,715Net sales per Mac unit sold (h)$1,279(4)$1,333(10)%$1,478iPod unit sales50,312(7)%54,132(1)%54,828Net sales per iPod unit sold (h)$16410%$149(11)%$167iPhone units sold39,98993%20,73178%11,627iPad units sold7,458NMPartially offsetting the favorable factors discussed above, net sales during 2009 were negatively impacted by certain factors, including the following:Net sales of iPods decreased $1.1 billion or 12% during 2009 compared to iPod unit sales decreased by 1% during 2009 compared to Net sales per iPod unit sold decreased 11% to $149 in 2009 compared to 2008, resulting from lower average selling prices across all of the iPod product lines, due primarily to price reductions taken with the introduction of new iPods in September 2009 and September 2008 and a stronger U.S. dollar, offset partially by a higher mix of iPod touch sales.Mac net sales declined 3% during 2009 compared to 2008, while Mac unit sales increased by 7% over the same period. Net sales per Mac unit sold decreased by 10% during 2009 compared to 2008, due primarily to lower average selling prices across all Mac portable and desktop systems and a stronger U.S. dollar.(a) Includes iMac, Mac mini, Mac Pro and Xserve product lines.(b) Includes MacBook, MacBook Air and MacBook Pro product lines.(c) Includes iTunes Store sales, iPod services, and Apple-branded and third-party iPod accessories.(d) Includes revenue recognized from iPhone sales, carrier agreements, services, and Apple-branded and third-party iPhone accessories.(e) Includes revenue recognized from iPad sales, services and Apple-branded and third-party iPad accessories.(f) Includes sales of displays, wireless connectivity and networking solutions, and other hardware accessories.(g) Includes sales of Apple-branded operating system and application software, third-party software, Mac and Internet services.(h) Derived by dividing total product-related net sales by total product-related unit sales.NM = Not Meaningful
12 Gross Margin 2010 2009 2008 Net Sales $65,225 $42,905 $37,491 Cost of Sales39,54125,68324,294Gross Margin$25,684$17,222$13,197Gross Margin Percentage39.4%40.1%35.2%The gross margin percentage in 2010 was 39.4% compared to 40.1% in This decline in gross margin is primarily attributable to new products that have higher cost structures, including iPad, partially offset by a more favorable sales mix of iPhone, which has a higher gross margin than the Company average.The gross margin percentage in 2009 was 40.1% compared to 35.2% in The primary contributors to the increase in 2009 as compared to 2008 were a favorable sales mix toward products with higher gross margins and lower commodity and other product costs, which were partially offset by product price reductions.The Company expects its gross margin percentage to decrease in future periods compared to levels achieved during 2010 and anticipates gross margin levels of about 36% in the first quarter of This expected decline is largely due to a higher mix of new and innovative products that have higher cost structures and deliver greater value to customers, and expected and potential future component cost and other cost increases.
13 Operating Expenses 2010 2009 2008 Research & development $1,782 $1,333 $1,109Percentage of net sales2.7%3.1%3.0%Selling, general, & administrative$5,517$4,149$3,7618.5%9.7%10.0%Research and Development Expense (“R&D”)R&D expense increased 34% or $449 million to $1.8 billion in 2010 compared to This increase was due primarily to an increase in headcount and related expenses in the current year to support expanded R&D activities. Also contributing to this increase in R&D expense in 2010 was the capitalization in 2009 of software development costs of $71 million related to Mac OS X Snow Leopard. Although total R&D expense increased 34% during 2010, it declined as a percentage of net sales given the 52% year-over-year increase in net sales in R&D expense increased 20% or $224 million to $1.3 billion in 2009 compared to This increase was due primarily to an increase in headcount in 2009 to support expanded R&D activities and higher stock-based compensation expenses.Selling, General and Administrative Expense (“SG&A”)SG&A expense increased $1.4 billion or 33% to $5.5 billion in 2010 compared to This increase was due primarily to the Company’s continued expansion of its Retail segment, higher spending on marketing and advertising programs, increased stock-based compensation expenses and variable costs associated with the overall growth of the Company’s net sales.SG&A expenses increased $388 million or 10% to $4.1 billion in 2009 compared to This increase was due primarily to the Company’s continued expansion of its Retail segment in both domestic and international markets, higher stock-based compensation expense and higher spending on marketing and advertising.
14 Other Income and Expenses 201020092008Interest Income$311$407$653Other income (expense), net(156)(81)(33)Total other income & expense$155$326$620Total other income and expense decreased $171 million or 52% to $155 million during 2010 compared to $326 million and $620 million in 2009 and 2008, respectively.
16 Apple Inc. History Formerly Apple Computer Inc Established in Cupertino, California on April 1, 1976As of September 2007, the company operates about 200 retail stores in five countries and an online store where hardware and software products are sold.The company, incorporated January 3, 1977, was known as "Apple Computer, Inc." for its first 30 years. On January 9, 2007, the company dropped "Computer" from its corporate name, reflecting the company's ongoing expansion into the consumer electronics market in addition to its traditional focus on personal computers.Apple employs over 20,000 permanent and temporary workers worldwide and had worldwide annual sales in its fiscal year 2007 (ending September 29, 2007) of US$24.01 billion.For a variety of reasons, ranging from its philosophy of comprehensive aesthetic design to their advertising campaigns, Apple has engendered a distinct reputation in the consumer electronics industry and has cultivated a customer base that is unusually devoted to the company and its brand, particularly in the United States.
17 1976 to 1980: The early yearsApple was founded on April 1, 1976 by Steve Jobs, Steve Wozniak, and Ronald Wayne (and later incorporated January 3, 1977 without Wayne, who sold his share of the company back to Jobs and Wozniak) to sell the Apple I personal computer kit.The Apple I, Apple's first product. Sold as an assembled circuit board, it lacked basic features such as a keyboard, monitor, and case. The owner of this unit added a keyboard and a wooden case.The Apple II was introduced on April 16, 1977 at the first West Coast Computer Faire. It differed from its major rivals, the TRS-80 and Commodore PET, because it came with color graphics and an open architecture. While early models used ordinary cassette tapes as storage devices, this was quickly superseded by the introduction of a 5 1/4 inch floppy disk drive and interface, the Disk II.Another key to business for Apple was software. The Apple II was chosen by programmers Dan Bricklin and Bob Frankston to be the desktop platform for the first "killer app" of the business world—the VisiCalc spreadsheet program. VisiCalc created a business market for the Apple II, and the corporate market attracted many more software and hardware developers to the machine, as well as giving home users an additional reason to buy one—compatibility with the office. (See the timeline for dates of Apple II family model releases—the 1977 Apple II and its younger siblings the II+, IIe, IIc, and IIGS.)By the end of the 1970s, Jobs and his partners had a staff of computer designers and a production line. The Apple II was succeeded by the Apple III in May 1980 as the company struggled to compete against IBM and Microsoft in the lucrative business and corporate computing market. The designers of the Apple III were forced to comply with Jobs' request to omit the cooling fan, and this ultimately resulted in thousands of recalled units due to overheating. An updated version, the Apple III+, was introduced in 1983, but it was also a failure due to bad press and wary buyers.Apple's sustained growth during the early 1980s was partly due to its leadership in the education sector, attributed to their adaptation of the programming language LOGO, used in many schools with the Apple II. The drive into education was accentuated in California with the donation of one Apple II and one Apple LOGO software package to each public school in the state. The deal concluded between Steve Jobs and Jim Baroux of LCSI, and having required the support of Sacramento, established a strong and pervasive presence for Apple in all schools throughout California. The initial conquest of education environments was critical to Apple's acceptance in the home where the earliest purchases of computers by parents was in support of children's continued learning experience.
18 1981 to 1989: Lisa and MacintoshThe rebel from Apple's 1984 ad, set in a dystopian future modeled after the Orwell novel Nineteen Eighty-Four, set the tone for the introduction of the MacintoshThe Macintosh 128K was the first Macintosh computer.In 1984, drawing upon its experience with the Lisa, Apple next launched the Macintosh. Its debut was announced by a single national broadcast of the now famous US$1.5 million television commercial, "1984", based on George Orwell's novel Nineteen Eighty-Four. The commercial was directed by Ridley Scott and aired during Super Bowl XVIII on January 22, Jobs' intention with the ad was to represent the IBM PC as Big Brother, and the Macintosh as a nameless female action hero portrayed by Anya Major. While the Macintosh initially sold well, follow-up sales were not particularly strong. The machine's fortunes changed with the introduction of the LaserWriter, the first laser printer to be offered at a reasonable price point, and PageMaker, an early desktop publishing (DTP) package. The Mac was particularly powerful in this market due to its advanced graphics capabilities.
19 1989 to 1991: The Golden AgeThe Macintosh Portable was Apple's first "portable" Macintosh computer, released in 1989.Apple introduced the PowerBook in 1991, which established the modern form and ergonomic layout of the laptop computer.In 1991, Apple introduced System 7, a major upgrade to the operating system which added color to the interface, and introduced a number of new networking capabilities. It would remain the architectural basis for Mac OS until 2001.The success of the PowerBook and several other Apple products during this period led to increasing revenue. For some time, it appeared that Apple could do no wrong, introducing fresh new products and generating increasing profits in the process. The magazine MacAddict named the period between 1989 to 1991 the "first golden age" of the Macintosh. However, the continuing development of Microsoft Windows had given birth to an interface that was competitive with Apple's. Combined with a huge base of low-cost computers and peripherals and an improving software suite, an increasing number of potential customers turned to the "Wintel" standard.Apple, relying on high profit margins to maintain their massive R&D budget, never developed a clear response. Instead they sued Microsoft for theft of intellectual property, in Apple Computer, Inc. v. Microsoft Corporation. The lawsuit dragged on for years before finally being thrown out of court. A series of major product flops and missed deadlines destroyed Apple's reputation of invincibility, and consequently their market share dropped, particularly after the release of Windows 95. During this time, Apple branched out into consumer electronics.
20 1994 to 1997: Attempts at reinvention The Apple Newton was Apple's first foray into the PDA markets, as well as one of the first in the industry.In 1994 Apple allied with long-time competitor IBM and CPU maker Motorola in the so-called AIM alliance.Throughout the mid to late 1990s, Apple tried to improve its operating system's multitasking and memory management.In 1997, Apple would entered into a partnership with Microsoft to release new versions of Microsoft Office for the Macintosh as well as a US$150 million investment in non-voting Apple stock.On November 10, 1997, Apple introduced the Apple Store, an online retail store based upon the WebObjects application server the company had acquired in its purchase of NeXT.
21 1998 to 2005: New beginningsOn August 15, 1998, Apple introduced a new all-in-one Mac computer reminiscent of the original Macintosh 128K: the iMac.In 1998, Apple announced the purchase of Macromedia's Final Cut software, signaling its expansion into the digital video editing market.In 2002 Apple purchased Nothing Real for their advanced digital compositing application Shake, as well as Emagic for their music productivity application Logic. which led to the development of their consumer-level GarageBand application.On May 19, 2001, Apple opened its first official Apple Retail Stores in Virginia and California, and has since continued to open more stores in the United States and other countries.In 2003, Apple's iTunes Store was introduced, offering online music downloads for US 99¢ a song and integration with the iPod.
22 2005-2007: The Intel partnership Apple would begin producing Intel-based Mac computers beginning in 2006.Targeted at a professional audience, the MacBook Pro (15.4" widescreen) was Apple's first laptop with an Intel microprocessor.On January 10, 2006, Apple released its first Intel chip computers, a new notebook computer known as the MacBook Pro (with a 15.4" screen) and a new (though cosmetically identical) iMac with purportedly two to three times faster performance compared with its predecessor. Both used Intel's Core Duo chip technology.On January 9, 2007 Apple Computer Inc. changed its name to Apple Inc.Through 2006, Apple transitioned the entire Mac product line to Intel chips, retaining the enclosure design while replacing its internal components. The Power Mac brand was retired, with Mac Pro being its successor. Apple also introduced a new piece of software called Boot Camp that helps users install Windows XP on their Intel Mac alongside Mac OS X.
23 As of September 2007, Apple sells four variants of the iPod: the iPod shuffle, iPod nano, iPod classic and iPod touch.The iPod is the market leader in portable music players by a significant margin.Apple has partnered with Nike to introduce the Nike+iPod Sports Kit enabling runners to sync and monitor their runs with iTunes and the Nike+ website.iPhone is Apple's multi-touch smartphone, released on June 29, 2007 for AT&T Mobility.Apple TV, (previously known as the iTV), a set-top video device intended to bridge the sale of content from iTunes with high-definition televisions was introduced in 2007.
24 2007–present: Post-PC eraIn 2008 Apple presented trackpad, which is based on the multi-touch technology.On April 3, 2010, the iPad was launched in the US and sold more than 300,000 units on that day and reaching 500,000 by the end of the first week.Apple released the fourth generation iPhone, which introduced video calling, multitasking, and a new insulated stainless steel design, which acts as the phone's antenna.Later in 2010 Apple refreshed its iPod line of MP3 players which introduced a multi-touch iPod Nano, iPod Touch with FaceTime, and iPod Shuffle with buttons which brought back the buttons of earlier generations.On January 6, 2011, the company opened their Mac App Store, a digital software distribution platform, similar to the existing iOS App Store