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COMPANY PROFILE

Apple Inc

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Apple Inc TABLE OF CONTENTS

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TABLE OF CONTENTS

Company Overview …………………………………………………………………………………………..3 Key Facts………………………………………………………………………………………………………….3 SWOT Analysis …………………………………………………………………………………………………4

Apple Inc Company Overview

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Company Overview

COMPANY OVERVIEW

Apple Inc (Apple) designs, manufactures, and markets mobile communication and media devices, personal computers (PCs), and portable digital music players, and sells a variety of related software, services, accessories, networking solutions, and third-party digital content and applications. Apple’s product portfolio includes iPhone, iPad, Mac, iPod, Apple Watch, Apple TV. Its portfolio of consumer and professional software applications include iOS, macOS, watchOS and tvOS operating systems, iCloud, Apple Pay and a variety of accessory, service and support offerings. Apple sells and delivers digital content and applications through the iTunes Store, App Store, Mac App Store, TV App Store, iBooks Store and Apple Music. The company conducts business operations in the US, Europe and Asia-Pacific. Apple is headquartered in Cupertino, California, the US.

The company reported revenues of (US Dollars) US$265,595 million for the fiscal year ended September 2018 (FY2018), an increase of 15.9% over FY2017. In FY2018, the company’s operating margin was 26.7%, compared to an operating margin of 26.8% in FY2017. In FY2018, the company recorded a net margin of 22.4%, compared to a net margin of 21.1% in FY2017.

Key Facts

KEY FACTS

Head Office Apple Inc One Apple Park Way Cupertino California Cupertino California USA

Phone 1 408 9961010 Fax Web Address www.apple.com Revenue / turnover (USD Mn) 265,595.0 Financial Year End September Employees 132,000 NASDAQ Ticker AAPL

Apple Inc SWOT Analysis

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SWOT Analysis

SWOT ANALYSIS

Apple Inc (Apple) designs, manufactures, and markets mobile communication and media devices, and personal computers (PCs). Technological innovation, financial performance and distribution channels are the company’s major strengths, whereas dependence on the iPhone and iPad product lines and legal proceedings remain cause for concern. Focus on HealthTech business, Exploring AI technology, and focus on services sector to lessen reliance on iPhone product line are likely to provide growth opportunities to the company. However, intensifying rivalry, ongoing trade war between China and the US, and foreign exchange risk could impact its business operations.

Strength

Technological Innovation Distribution Channels Financial Performance

Weakness

Legal Proceedings High Dependence on iPhone and iPad Product Lines

Opportunity

Focus on Services Sector to Lessen Reliance on iPhone Product Line Exploring AI Technology Investment in HealthTech

Threat

Risks Associated with Trade War between the US and China Foreign Exchange Risks Intensifying Rivalry

Strength

Technological Innovation

Apple continues to focus on innovation to strengthen its R&D capabilities, which enables it to remain at the forefront of its respective businesses and differentiate its offerings in a highly competitive market. It strives to develop new technologies to enhance existing products and to expand the range of its product offerings through R&D, licensing of intellectual property and acquisition of third-party businesses and technology. Its R&D emphasizes on designing new chips for the new version of Mac Pro notebook. Apple’s ResearchKit, HealthKit are open source framework which allows researchers and developers to create powerful apps for medical research. Through this app, researchers can easily create visual consent flows, manage real-time dynamic active tasks and conduct patient surveys by using a number of customized modules. The company works towards transforming features of its smartphone portfolio by integrating AI and AR innovations. Its R&D targets to enhance iCloud software platform for the delivery of digital content and applications and allow customers to discover, download or stream digital content, iOS, Mac, Apple Watch and Apple TV applications. In FY2018, it spent US$14,236 million on R&D, which as a percentage of revenue, stood at 5.4%.

Distribution Channels

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Apple uses both direct and indirect distribution channels to effectively reach its customers in the consumer, small and mid-sized business, and education, enterprise, and government markets. The company sells its products and resells third-party products in most of its major markets directly to consumers and small-and mid-sized businesses through its retail and online stores and direct sales force. The company’s retail stores are typically located at high-traffic locations in quality shopping malls and urban shopping districts. By operating its own stores and locating them in desirable high-traffic locations, the company is better positioned to ensure improved customer buying experience and attract new customers. The stores are designed to simplify and enhance the presentation and marketing of the company’s products and related solutions. Apple also employs a variety of indirect distribution channels such as third-party cellular network carriers, wholesalers, retailers and value-added resellers. The company invested in programs to enhance reseller sales by placing quality Apple fixtures, merchandising materials and other resources within selected third-party reseller locations. Through the Apple Premium Reseller Program, certain third-party resellers focus on the Apple platform by providing a high level of product expertise, integration and support services. Its iTunes U platform also facilitates in mobile learning and real-time distribution of various education related materials. Apple sells its hardware and software products to enterprise and government customers in each of its reportable operating segments. Thus, the robust and extensive distribution capabilities of Apple enhance its customer reach and provide incremental growth opportunities. In FY2018, its direct and indirect distribution channels contributed for 29% and 71%, respectively, of the company’s sales.

Financial Performance

In FY2018, Apple’s revenue increased to US$265,595 million from US$229,234 million in FY2017. Revenue growth resulted from the higher sales of iPhone, Services and Other Products categories. Increase in revenue of iPhone product category was due to higher sales of total number of smartphone units compared to the previous fiscal and higher selling prices associated with different categories of iPhones. Increase in Services revenue was due to rise in sales of licensing, App Store and AppleCare fees. Services revenue growth also supported by a gain of US$236 million associated with the resolution of various lawsuit. Other Products revenue increased due to rise in revenue of software upgrade rights and non-software services and the sales of AirPods, Apple TV, and other Apple-branded and third-party accessories. Apple’s operating margin was 26.7% for the last fiscal year and was higher than the technology and communications industry’s operating margin average of 5% for the same year. The strong operating margin of the company could be attributed to an optimal pricing strategy and operational efficiency. It also showcases company’s ability to create value for shareholders with positive operating cash and fulfill obligations towards the creditors. The company’s return on equity was 55.5% for the last fiscal year and was higher than the industry’s average ROE of 6.1% for the same year. The strong ROE shows that the company is efficient in utilizing its equity base in delivering better results to its shareholders.

Weakness

Legal Proceedings

Recent legal proceedings initiated against the company could hamper its prospective of ease of doing business. In December 2018, a Chinese court imposed a ban on the sale of various Apple iPhone models

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in China for infringing two patents of Qualcomm Inc. The specific iPhone models which could be affected by the ban in China were the iPhone 6S, iPhone 6S Plus, iPhone 7, iPhone 7 Plus, iPhone 8, iPhone 8 Plus and iPhone X. This ban could shatter the company’s smartphone business as China is its third largest revenue generating market and the company also witnesses a decline in demand of its specific iphones. In November 2017, Wi-LAN filed a patent infringement suit against the company in the US District Court for the Southern District of California. The company alleged Apple of infringing its two US patents 8311040 and 8315640 which used voice-over LTE technology (VoLTE). The court ruled in favor of Wi-LAN and ordered it to pay a compensation of US$145 million as part of the damages. In August 2018, Apple was ordered to pay a compensation of US$502.6 million for infringing iPhone, iPad and Mac products, pre-judgment and post-judgment interest and costs for infringing VirnetX Inc’s four Virtual Private Networks (VPN) and Domain Name Services (DNS) technologies.

High Dependence on iPhone and iPad Product Lines

Apple’s revenue and growth are largely dependent on the iPhone and iPad product lines. In FY2018, iPhone and iPad product lines together accounted for 70% of the total revenue. Although, these product lines have been the growth drivers for the company, any future decline in the growth rates could impact the company's performance. Apple witnessed decline in sales of iPhone, Mac, and iPad categories in Greater China market due to uncertainty prevailing in financial markets, saturation in demand of products and drop in number of retail stores and channel partners. Dependence on few product lines increases business risk, especially in an industry characterized by fast paced technological changes. Any market share losses of key products could have a material adverse impact on the company's growth prospects.

Opportunity

Focus on Services Sector to Lessen Reliance on iPhone Product Line

Apple continues to expand its services to derive growth from more sources and decrease dependence on the iPhone business. The company aims to double its sales in all geographic markets by 2020. Over the years, it has introduced several new services including Apple Music, Apple Pay and HealthKit. In October 2018, Apple acquired Asaii, a digital music startup for artist managers. This acquisition could enable the smartphone users to find new musical acts and tracks from unsigned artists on platforms such as SoundCloud and YouTube. In September 2018, the company acquired Shazam, an online music provider company. This acquisition could enable Apple’s customers to listen various songs without advertisements and interruption. Apple strives to expand its iCloud business for enterprises, which could help explore opportunities available in cloud market. As most of the enterprise activities occur in iCloud, Apple targets to expand cloud-based accounts, project-focused accounts, and other APIs to improve productivity of customers. In September 2018, the company collaborated with Salesforce to incorporate new capabilities to its existing iOS. Through this partnership, the two companies aim to design tools and resources for developers to build their own apps with a new Salesforce Mobile SDK for iOS on Trailhead, Salesforce’s web-based learning platform.

Exploring AI Technology

Apple seems to benefit from the persuasive drive of adoption of AI in its various smartphones. The

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company’s AI-enabled app Apple Siri decodes commands from users automatically and performs operations accordingly. Siri brings core ML, computer vision capabilities in photos, face ID biometric authentication features and offers dual camera system which shoots portrait mode photos with Smart HDR and makes face recognition faster compared to other smartphones. These techniques could enhance automatic speech recognition in conferencing applications and other synthetic speech mixtures where voice signal is extracted and transcribed. In November 2018, the company acquired an AI-based startup company Silk Labs. This acquisition could allow Apple incorporating AI enabled personal assistant technology in smartphones and other smart homes devices. In the review year, Apple injected first 7- nanometer A12 Bionic chip with an 8-core neural engine in its smarphones that could execute 5 trillion operations per second.

Investment in HealthTech

Apple’s increasing focus on wearable devices penetration in emerging healthcare infrastructure could drive its revenue stream. Through investments in HealthTech, the company primarily targets to deliver consumer understanding of health and transforming expectations of the marketplace, enable a predictive personalized, preventive health and engagement ecosystem. The company plans to launch new healthcare services in 2019. In November 2018, it collaborated with Stanford Medicine to launch Apple Heart study to determine the use of optical sensor by mobile app for analyzing pulse rate and identify atrial fibrillation. In September 2018, Apple launched Series 4 Watch that captures blood glucose level, heart rate, capabilities and help people managing better health. In October 2018, Apple collaborated with Zimmer Biomet to help knee and hip replacement surgery patients through Apple Watch and iPhone. As part of this alliance, patients could utilize Zimmer Biomet’s mymobility app in iPhone to effectively communicate between surgical care teams. The mymobility app could further leverage Apple Watch and iPhone to allow surgeons to send education and therapy reminders directly to the patients and monitor patient activity levels. In April 2018, the company collaborated with Partners HealthCare, under which it will display patients’ medical records from various organizations in iPhone and also update, and send notifications. In January 2018, the company partnered with 12 Hospitals, under which it will display patients medical records in their iPhone. Apple also collaborated with Cisco to deliver superior mobility solutions for healthcare. The alliance focuses on optimizing Wi-Fi connectivity, develop real-time, insight- driven user experience, enhance security and draw analytics solution for highly functional healthcare. In March 2018, the company entered into partnership with IBM to incorporate advanced in-app machine learning capabilities through Apple's Core ML and IBM's Watson technology. By incorporating Watson tech into iOS customers could build machine learning model with Watson, which taps into an offsite data repository and then converted into Core ML and distributed through IBM's MobileFirst platform.

Threat

Risks Associated with Trade War between the US and China

According to International Monetary Fund Outlook 2018 report, the US imposed high tariff on US$200 billion of Chinese imports. Retaliating to this, China levied higher average tariff on US$60 billion of goods imported from the US. Due to the ongoing trade war IMF slashed China’s GDP to 6.2 in FY2019 from 6.6 in 2018. Apple imports various components of its iPhones through a number of contract manufacturers from China. Its total landed costs could increase in case tariffs are imposed since the finished goods are

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shipped directly from China. In order to overcome the duties, the company could be compelled to shift its production facilities to the US or other countries. This could impact disruption in the company’s established supply chain and forcing the company to redesign its logistics and supply channels. Due to the US sanctions, the exports from China to the US could also decline. Rising financial stress could affect Apple’s new investment in China. As China is Apple’s third largest revenue generator, any change in Chinese economy could affect the company’s profitability.

Foreign Exchange Risks

Apple operates in various countries and is exposed to fluctuations in foreign exchange rates. The company reports financials in the US dollar and as a result, its revenue is exposed to the volatility of the US dollar against other functional currencies such as Chinese yuan, Mexican peso, Swedish krona, Swiss franc, British pound and euro. The major elements exposed to exchange rate risks include the company’s investments in overseas subsidiaries and affiliates and monetary assets and liabilities arising from business transactions in foreign currencies. In FY2018, the company registered loss of US$525 million from foreign currency translation adjustment compared to a gain of US$224 million in FY2017 and US$75 million in FY2016. To minimize risks from currency fluctuations, the company could involve in foreign exchange hedging by entering into foreign exchange forward contracts. However, there could be no assurance that such hedging or measures would limit the impact of movements in exchange rates on the company’s results of operations.

Intensifying Rivalry

Apple’s products and services compete in highly competitive global markets characterized by aggressive price cutting and resulting downward pressure on gross margins, continual improvement in product price/performance characteristics, frequent introduction of new products, evolving industry standards, rapid adoption of technological and product advancements by competitors, short product life cycles and price sensitivity of consumers. Apple continuously and timely introduces innovative new products and technologies including the operating system, hardware, numerous software applications and related services, whereas many of its competitors seek to compete primarily through aggressive pricing and very low cost structures. The globalized nature of mobile communication, media devices, personal computers and other digital electronic devices market increases intensity of rivalry with regard to cost reduction, thereby exerting greater pressure on profit margins of organizations within the industry. Cloud technology, ML and AI applications in smartphones have been significant trends in the recent years. Along with Samsung, Alphabet Inc, IBM, HP, Dell are the leading organizations dominating PC market. Apple also competes exclusively with Huawei, Samsung, OnePlus and Alphabet in the premium smartphones category. Competitors selling Windows-based PCs have cut prices and lowered product margins. Apple’s performance in this market depends on its ability to continually improve the Mac platform to maintain its perceived functional and design advantages.

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