Apple reported better-than-expected fourth-quarter 2014 results,
beating the Zacks Consensus Estimate for both earnings and
revenues. Going by its standards, revenue growth (12.4% year over
year) was modest, as iPhone sales suffered in China on account of
postponements there. However, strong Macintosh sales came as a
pleasant surprise. We believe that a refreshed product portfolio,
Apple Pay and the upcoming Apple Watch will drive the company's
top-line over the next several quarters. These should also improve
Apple's competitive position in the near term. The partnership with
China Mobile is a key positive in Greater China despite
pricing-related issues. Moreover, the availability of Microsoft
Office and the partnership with IBM will likely boost iPad adoption
among enterprises over the long haul. We upgrade our recommendation
from Neutral to Outperform and set a price target of $131.00.
Founded in 1977, Apple Inc. (AAPL) is headquartered in
Cupertino, CA. Formerly known as Apple Computer, Inc., the company
changed its name in Jan 2007. Apple designs, manufactures and sells
mobile communication devices (iPhone and iPad), media devices
(iPod, Apple TV) personal computers (Mac), and related software,
services, peripherals and networking solutions, worldwide.
iPhone remains Apple's flagship product and generated 55.8% of
net sales in fiscal 2014. In Sep 2014, the company introduced
iPhone 6 and iPhone 6 Plus featuring larger 4.7-inch and 5.5-inch
Retina HD displays.
There was still no respite for the tablet computer iPad in
fiscal 2014, with net sales down 5%. In Oct 2014, the company
introduced iPad Air 2 and iPad Mini 3 with Retina display. The iPod
line (iPod Touch, Shuffle and Nano) continued to report weak
results throughout the year (net sales down 48%).
Apple's mobile devices run on iOS operating system. In Sep 2014,
Apple released iOS 8 with new features for Messages and Photos,
predictive typing for Apple's QuickType keyboard and a new Health
In September, the company unveiled Apple Watch, which is set to
hit stores in early 2015. Apple's mobile payment system, Apple Pay,
was launched in Oct 2014. Apple Pay is available on iPhone 6,
iPhone 6 Plus, iPad Air 2, iPad mini 3 and the upcoming Apple
Apple's Macintosh product line (iMac, Mac mini, Mac Pro, MacBook
Air, MacBook Pro and MacBook pro with Retina Display) is supported
by OS X, its latest version being Yosemite (October 2014).
Macintosh net sales increased 12% in 2014.
As part of its overall product ecosystem, Apple launched iCloud
service in Oct 2011. iCloud storing and updating music, photos,
applications and much more is available on multiple iOS devices,
Mac and Windows personal computers, and Apple TV. The company also
sells digital content and applications through its iTunes Store,
App Store, iBooks Store and Mac App Store.
Apple mainly reports revenues on a geographic basis, namely the
Americas (North & South America), Europe, Middle East and
Africa (includes India), Greater China (China, Hong Kong &
Taiwan), Rest of Asia Pacific (Australia & other Asian
Countries) and Retail.
International markets contributed 62% to revenues in 2014.
Greater China was the fastest growing segment (up 17% from 2013),
which accounted for 16% of the top line. Apple opened 21 new retail
stores during 2014, of which 5 were in the United States.
No single customer accounted for more than 10% of revenues in
2014. Apple faces significant competition in most of its markets
such as smartphone and tablet, in particular from Asian equipment
manufacturers such as HTC and Samsung. In the personal computer
segment, its competitors are Hewlett Packard and Dell. Apple's
digital music and cloud services business is rivaled by Pandora,
Amazon and Google.
Beginning first-quarter 2015, Retail will no longer be reported
as a separate segment. Apple's product reporting categories will be
iPhone, iPad, Mac, Services and Other Products. iPod sales will be
included in the Other Products category along with sales of Apple
Watch and revenues from Apple Pay.
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