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AAPL > SEC Filings for AAPL > Form 10-Q on 23-Jul-2014All Recent SEC Filings

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Form 10-Q for APPLE INC


23-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This section and other parts of this Form 10-Q contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements also can be identified by words such as "future," "anticipates," "believes," "estimates," "expects," "intends," "will," "would," "could," "can," "may," and similar terms. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Form 10-Q under the heading "Risk Factors," which are incorporated herein by reference. The following discussion should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended September 28, 2013 (the "2013 Form 10-K") filed with the U.S. Securities and Exchange Commission (the "SEC") and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. All information presented herein is based on the Company's fiscal calendar. Unless otherwise stated, references in this report to particular years, quarters, months or periods refer to the Company's fiscal years ended in September and the associated quarters, months, or periods of those fiscal years. Each of the terms the "Company" and "Apple" as used herein refers collectively to Apple Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Available Information

The Company's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), are filed with the SEC. The Company is subject to the informational requirements of the Exchange Act and files or furnishes reports, proxy statements, and other information with the SEC. Such reports and other information filed by the Company with the SEC are available free of charge on the Company's website at investor.apple.com/sec.cfm when such reports are available on the SEC's website. The public may read and copy any materials filed by the Company with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing. Further, the Company's references to the URLs for these websites are intended to be inactive textual references only.

Overview and Highlights

Company Background

The Company designs, manufactures, and markets mobile communication and media devices, personal computers, and portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. The Company's products and services include iPhone®, iPad®, Mac®, iPod®, Apple TV®, a portfolio of consumer and professional software applications, the iOS and OS X® operating systems, iCloud®, and a variety of accessory, service and support offerings. The Company also sells and delivers digital content and applications through the iTunes Store®, App Store™, iBooks Store™, and Mac App Store. The Company sells its products worldwide through its retail stores, online stores, and direct sales force, as well as through third-party cellular network carriers, wholesalers, retailers, and value-added resellers. In addition, the Company sells a variety of third-party iPhone, iPad, Mac and iPod compatible products, including application software, and various accessories, through its online and retail stores. The Company sells to consumers; small and mid-sized businesses; and education, enterprise and government customers.

Business Strategy

The Company is committed to bringing the best user experience to its customers through its innovative hardware, software and services. The Company's business strategy leverages 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 design. The Company believes continual investment in research and development, marketing and advertising is critical to the development and sale of innovative products and technologies. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of third-party digital content and applications through the iTunes Store. As part of the iTunes Store, the Company's App Store and iBooks Store allow customers to discover and download applications and books through either a Mac or Windows-based computer or through "iOS devices," namely iPhone, iPad and iPod touch®. The Company's Mac App Store allows customers to easily discover, download and install Mac applications. The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company's offerings. The Company believes a high-quality buying experience with knowledgeable salespersons who can convey the value of the Company's products and services greatly enhances its ability to attract and retain customers. Therefore, the Company's strategy also includes enhancing and expanding its own retail and online stores and its third-party distribution network to effectively reach more customers and provide them with a high-quality sales and post-sales support experience.


Table of Contents

Business Seasonality and Product Introductions

The Company has historically experienced higher net sales in its first quarter compared to other quarters in its fiscal year due in part to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Product introductions can also impact the Company's net sales to its indirect distribution channels as these channels are filled with new product inventory following a product introduction, and often, channel inventory of a particular product declines as the next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of the Company's future pattern of product introductions, future net sales or financial performance.

Third Quarter Fiscal 2014 Highlights

Net sales rose $2.1 billion in the third quarter of 2014 compared to the same period in 2013, representing growth of 6%. Net sales and unit sales increased for iPhone resulting primarily from the successful introduction of new iPhones in the latter half of calendar year 2013 and expanded distribution. Net sales and unit sales increased for Mac due to strong demand for MacBook Air® which was updated with faster processors and lower prices in April 2014 and due to sales of the new Mac Pro® which became available in December 2013. Net sales of iTunes®, Software and Services grew primarily due to increased revenue from sales of iOS Apps, AppleCare® and licensing. Net sales and unit sales for iPad declined in the third quarter of 2014 compared to the same period in 2013 due to lower unit sales in many markets. Growth in total net sales during the third quarter of 2014 was also negatively impacted by the continuing decline of iPod sales. Growth in net sales was particularly strong in Greater China where revenue grew 28% in the third quarter of 2014 compared to the same period in 2013.

At its Worldwide Developers Conference in June 2014, the Company announced new versions of its operating systems, iOS 8 and OS X Yosemite, both of which are expected to be available in the fall of 2014.

During the third quarter of 2014, the Company utilized $5 billion to repurchase its common stock and paid dividends and dividend equivalents of $2.9 billion. Additionally, the Company issued $12.0 billion of long-term debt and $2.0 billion of commercial paper during the third quarter of 2014.


Table of Contents

Sales Data

The following table shows net sales by operating segment and net sales and unit
sales by product during the three- and nine-month periods ended June 28, 2014
and June 29, 2013 (dollars in millions and units in thousands):




                                                                     Three Months Ended                                       Nine Months Ended
                                                       June 28,           June 29,                              June 28,           June 29,
                                                         2014               2013              Change              2014               2013              Change
Net Sales by Operating Segment:
Americas                                            $       14,577     $       14,405                 1%     $       48,985     $       48,798                 0%
Europe                                                       8,091              7,614                 6%             31,394             29,878                 5%
Greater China (a)                                            5,935              4,641                28%             24,068             19,684                22%
Japan                                                        2,564              2,543                 1%             11,475             10,121                13%
Rest of Asia Pacific                                         2,161              2,046                 6%              8,421              9,201               (8)%
Retail                                                       4,104              4,074                 1%             16,329             15,756                 4%

Total net sales                                     $       37,432     $       35,323                 6%     $      140,672     $      133,438                 5%

Net Sales by Product:
iPhone (b)                                          $       19,751     $       18,154                 9%     $       78,313     $       71,769                 9%
iPad (b)                                                     5,889              6,374               (8)%             24,967             25,794               (3)%
Mac (b)                                                      5,540              4,893                13%             17,454             15,859                10%
iPod (b)                                                       442                733              (40)%              1,876              3,838              (51)%
iTunes, Software and Services (c)                            4,485              3,990                12%             13,455             11,791                14%
Accessories (d)                                              1,325              1,179                12%              4,607              4,387                 5%

Total net sales                                     $       37,432     $       35,323                 6%     $      140,672     $      133,438                 5%

Unit Sales by Product:
iPhone                                                      35,203             31,241                13%            129,947            116,460                12%
iPad                                                        13,276             14,617               (9)%             55,661             56,954               (2)%
Mac                                                          4,413              3,754                18%             13,386             11,767                14%
iPod                                                         2,926              4,569              (36)%             11,736             22,881              (49)%

(a) Greater China includes China, Hong Kong and Taiwan.

(b) Includes deferrals and amortization of related non-software services and software upgrade rights.

(c) Includes revenue from sales on the iTunes Store, the App Store, the Mac App Store, and the iBooks Store, and revenue from sales of AppleCare, licensing and other services.

(d) Includes sales of hardware peripherals and Apple-branded and third-party accessories for iPhone, iPad, Mac and iPod.


Table of Contents

Product Performance

iPhone

The following table presents iPhone net sales and unit sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions and units in thousands):

                                                                    Three Months Ended                                       Nine Months Ended
                                                      June 28,           June 29,                              June 28,           June 29,
                                                        2014               2013              Change              2014               2013              Change
Net sales                                          $       19,751     $       18,154                 9%     $       78,313     $       71,769                 9%
Percentage of total net sales                                 53%                51%                                   56%                54%
Unit sales                                                 35,203             31,241                13%            129,947            116,460                12%

The year-over-year growth in iPhone net sales and unit sales in the third quarter and first nine months of 2014 resulted primarily from the successful introduction of new iPhones in the latter half of calendar year 2013 and expanded distribution. Compared to the same periods in 2013, iPhone net sales and unit sales growth were particularly strong in the Greater China and Rest of Asia Pacific segments in the third quarter of 2014, and in the Greater China and Japan segments in the first nine months of 2014. Overall average selling prices ("ASPs") for iPhone were down during the third quarter and first nine months of 2014 compared to the same periods in 2013, primarily due to a shift in product mix and to weakening of foreign currencies relative to the U.S. dollar.

iPad

The following table presents iPad net sales and unit sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions and units in thousands):

                                                                    Three Months Ended                                       Nine Months Ended
                                                      June 28,           June 29,                              June 28,           June 29,
                                                        2014               2013              Change              2014               2013              Change
Net sales                                          $        5,889     $        6,374               (8)%     $       24,967     $       25,794               (3)%
Percentage of total net sales                                 16%                18%                                   18%                19%
Unit sales                                                 13,276             14,617               (9)%             55,661             56,954               (2)%

Net sales and unit sales for iPad declined in the third quarter and first nine months of 2014 compared to the same periods in 2013. iPad net sales and unit sales grew overall in developing markets in the third quarter and first nine months of 2014, but this growth was more than offset by a decline in overall iPad net sales and unit sales in mature markets. iPad ASPs increased in the third quarter of 2014 compared to the same period in 2013 primarily as a result of a shift in mix toward higher priced iPads, while iPad ASPs declined in the first nine months of 2014 compared to the first nine months of 2013 with a shift in iPad product mix being more than offset by the October 2013 price reduction of iPad mini.


Table of Contents

Mac

The following table presents Mac net sales and unit sales information for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions and units in thousands):

                                                                    Three Months Ended                                       Nine Months Ended
                                                      June 28,           June 29,                              June 28,           June 29,
                                                        2014               2013              Change              2014               2013              Change
Net sales                                          $        5,540     $        4,893                13%     $       17,454     $       15,859                10%
Percentage of total net sales                                 15%                14%                                   12%                12%
Unit sales                                                  4,413              3,754                18%             13,386             11,767                14%

The year-over-year growth in Mac net sales and unit sales for the third quarter and first nine months of 2014 was primarily driven by increased sales of MacBook Air and Mac Pro. Mac ASPs decreased during the third quarter and first nine months of 2014 compared to the same periods in 2013 primarily due to price reductions on certain Mac models and a shift in mix towards Mac portable systems.

iTunes, Software and Services

The following table presents net sales information of iTunes, Software and Services for the three- and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):

                                                                    Three Months Ended                                       Nine Months Ended
                                                      June 28,           June 29,                              June 28,           June 29,
                                                        2014               2013              Change              2014               2013              Change
Net sales                                          $        4,485     $        3,990                12%     $       13,455     $       11,791                14%
Percentage of total net sales                                 12%                11%                                   10%                 9%

The increase in net sales of iTunes, Software and Services in the third quarter and first nine months of 2014 compared to the same periods in 2013 was primarily due to growth in net sales from the iTunes Store, AppleCare and licensing. The iTunes Store generated a total of $2.6 billion and $7.6 billion in net sales during the third quarter and first nine months of 2014, respectively, compared to $2.4 billion and $6.9 billion during the third quarter and first nine months of 2013, respectively. Growth in net sales from the iTunes Store was driven by increases in revenue from App sales reflecting continued growth in the installed base of iOS devices and the expansion in the number of third-party iOS Apps available. This was partially offset by a decline in sales of digital music.

Segment Operating Performance

The Company manages its business primarily on a geographic basis. Accordingly, the Company determined its reportable operating segments, which are generally based on the nature and location of its customers, to be the Americas, Europe, Greater China, Japan, Rest of Asia Pacific and Retail. The Americas segment includes both North and South America. The Europe segment includes European countries, as well as India, the Middle East and Africa. The Greater China segment includes China, Hong Kong and Taiwan. The Rest of Asia Pacific segment includes Australia and Asian countries, other than those countries included in the Company's other operating segments. The results of the Company's geographic segments do not include results of the Retail segment. Each operating segment provides similar hardware and software products and similar services. Further information regarding the Company's operating segments may be found in Note 11, "Segment Information and Geographic Data" in Notes to Condensed Consolidated Financial Statements of this Form 10-Q.


Table of Contents

Americas

The following table presents Americas net sales information for the three- and
nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):




                                                                    Three Months Ended                                       Nine Months Ended
                                                      June 28,           June 29,                              June 28,           June 29,
                                                        2014               2013              Change              2014               2013              Change
Net sales                                          $       14,577     $       14,405                 1%     $       48,985     $       48,798                 0%
Percentage of total net sales                                 39%                41%                                   35%                36%

Americas experienced increases in net sales of Mac and iTunes, Software and Services that were largely offset by a decline in net sales of both iPod and iPad and weakness in foreign currencies relative to the U.S. dollar in the third quarter and first nine months of 2014 compared to the same periods in 2013. Mac growth was driven by increased net sales and unit sales of MacBook Air and Mac Pro. Net sales of iPhone were relatively flat in the third quarter of 2014 and were up only slightly in the first nine months of 2014 compared to the same periods in 2013.

Europe

The following table presents Europe net sales information for the three- and
nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):




                                                                    Three Months Ended                                       Nine Months Ended
                                                      June 28,           June 29,                              June 28,           June 29,
                                                        2014               2013              Change              2014               2013              Change
Net sales                                          $        8,091     $        7,614                 6%     $       31,394     $       29,878                 5%
Percentage of total net sales                                 22%                21%                                   22%                22%

The increase in Europe net sales during the third quarter and first nine months of 2014 compared to the same periods in 2013 reflects increases in net sales of iPhone, Mac and iTunes, Software and Services, partially offset by a decline in net sales of iPod and iPad. Net sales growth in the third quarter and first nine months of 2014 was most pronounced in developing markets within Europe. Strength of foreign currencies relative to the U.S. dollar also contributed to net sales growth in the third quarter and first nine months of 2014.

Greater China

The following table presents Greater China net sales information for the three-
and nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in
millions):




                                                                    Three Months Ended                                       Nine Months Ended
                                                      June 28,           June 29,                              June 28,           June 29,
                                                        2014               2013              Change              2014               2013              Change
Net sales                                          $        5,935     $        4,641                28%     $       24,068     $       19,684                22%
Percentage of total net sales                                 16%                13%                                   17%                15%

During the third quarter and first nine months of 2014, Greater China experienced year-over-year increases in net sales that were significantly higher than those experienced by the Company overall. The growth in 2014 compared to 2013 was driven by higher unit sales and net sales of all major product categories, except iPod, in addition to higher net sales of iTunes, Software and Services. Growth in net sales and unit sales of iPhone was especially strong, driven by the successful launch of new iPhones in Greater China at the end of 2013, increased demand for the Company's entry-priced iPhones and the addition of a significant new carrier in the second quarter of 2014.


Table of Contents

Japan

The following table presents Japan net sales information for the three- and
nine-month periods ended June 28, 2014 and June 29, 2013 (dollars in millions):




                                                                    Three Months Ended                                       Nine Months Ended
                                                      June 28,           June 29,                              June 28,           June 29,
                                                        2014               2013              Change              2014               2013              Change
Net sales                                          $        2,564     $        2,543                 1%     $       11,475     $       10,121                13%
Percentage of total net sales                                  7%                 7%                                    8%                 8%

In the third quarter of 2014, Japan generated increases in net sales of iPad, Mac, and iTunes, Software and Services that were largely offset by a decline in net sales of iPhone and iPod in addition to the weakening of the Japanese Yen relative to the U.S. dollar. iPhone net sales and unit sales declined in the third quarter of 2014 compared to the same period in 2013 as changes in the regulatory environment negatively impacted growth of the Japan smartphone . . .

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