How did Apple's revenue and profitability trend in fiscal 2003?

Net sales grew 8% to $6.207 billion and net income rose slightly to $69 million from $65 million, or $0.19 per diluted share. Profit growth was minimal because gross margin fell and operating income was essentially zero, so the bottom line depended on interest and other income.

What drove growth in fiscal 2003 given that Mac unit sales declined?

Growth came from non-Mac sources. Peripherals and other hardware rose 57%, led by iPod sales. Retail store sales more than doubled to $621 million, and software and services also increased. PowerBook sales rose 56%, partly offsetting declines in desktops.

What are the main risks to Apple's margins and demand?

Key risks include continued industry price competition from Windows PCs, component cost increases, and the high fixed costs of the Retail segment. Demand is also weak in U.S. education, Japan, and professional desktop segments. Management expects gross margin pressure to persist into fiscal 2004 and has noted the possibility of required stock option expensing.

Is Apple financially able to meet its near-term obligations?

Yes. Cash and short-term investments of $4.566 billion far exceed the $304 million of 6.5% notes due February 2004, which management plans to repay from existing cash. Management believes existing balances will fund working capital, capital expenditures, and other needs for at least the next 12 months.

What is the outlook for the Retail initiative?

Retail sales reached $621 million with 65 U.S. stores, and the first international store opened in Tokyo in early fiscal 2004. Average revenue per store rose to about $11.5 million, and the segment's operating loss narrowed to $5 million from $22 million. However, the filing cautions that Retail carries substantial fixed lease and construction costs, so a sales decline could create significant losses.

AAPL 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed December 19, 2003. Cited figures are marked; the original filing is the authoritative source.

Apple Computer, Inc.'s fiscal 2003 10-K (fiscal year ended September 27, 2003) shows a company in a transitional, low-growth period: net sales rose 8% to $6.207 billion^a, but net income was only $69 million, or $0.19 per diluted share, versus $65 million a year earlier.

Macintosh unit sales fell 3% to about 3.0 million, so growth came mainly from non-Mac sources. iPod net sales reached $345 million^b on 939,000 units, peripherals and other hardware grew 57%, and Retail segment sales more than doubled to $621 million across 65 stores. Operating income was essentially break-even at a loss of $1 million, and the favorable pre-tax result of $92 million came largely from interest and other income, which is shrinking as yields fall. Profitability pressures are significant.

Gross margin slipped to 27.5%^c from 27.9% due to aggressive Macintosh pricing, component cost increases, and air freight for the new Power Mac G5 and 15-inch PowerBook. Management expects margin pressure to continue into fiscal 2004. U.S. education sales declined 4% in dollar terms and 6% in units, Power Macintosh unit sales fell 13%, and Japan was the weakest geographic segment.

Operating expenses rose 8%^d as R&D (about 8% of sales) and SG&A (20% of sales) grew, with SG&A increasing partly from Retail expansion. Management also flagged the risk of required expensing of employee stock options, which the FASB is expected to address. Balance-sheet strength is a key positive.

Cash, cash equivalents, and short-term investments total $4.566 billion against $304 million of debt, which matures in February 2004 and will be repaid from cash. Shareholders' equity is $4.223 billion. However, operating cash flow of $289 million was modest, and receivables and payables grew.

Working capital fell $200 million largely because the debt was reclassified as current. Investors should weigh the cash cushion and the iPod and Retail momentum against thin margins, weak core Mac demand, and persistent competitive pricing pressure.

02—Key points

Key Highlights

Net sales rose 8% to $6.207 billion, but net income was just $69 million ($0.19 per diluted share), reflecting thin margins.
Gross margin declined to 27.5% from 27.9%, pressured by Macintosh price cuts, rising component costs, and air freight for new products.
iPod net sales grew 141% to $345 million on 939,000 units, and Retail segment sales more than doubled to $621 million across 65 stores.
Macintosh unit sales fell 3% to about 3.0 million, with Power Macintosh units down 13% and U.S. education sales down 4%.
Cash, cash equivalents, and short-term investments of $4.566 billion comfortably exceed $304 million in debt due February 2004.
Operating income was roughly break-even at a $1 million loss; pre-tax income of $92 million relied on other income, which is declining as interest rates fall.
Management warned that required expensing of employee stock options could materially affect future earnings, and that the company faces ongoing litigation including Apple Corps and several reseller lawsuits.

03—Questions

Frequently Asked Questions

How did Apple's revenue and profitability trend in fiscal 2003?
Net sales grew 8% to $6.207 billion and net income rose slightly to $69 million from $65 million, or $0.19 per diluted share. Profit growth was minimal because gross margin fell and operating income was essentially zero, so the bottom line depended on interest and other income.
What drove growth in fiscal 2003 given that Mac unit sales declined?
Growth came from non-Mac sources. Peripherals and other hardware rose 57%, led by iPod sales. Retail store sales more than doubled to $621 million, and software and services also increased. PowerBook sales rose 56%, partly offsetting declines in desktops.
What are the main risks to Apple's margins and demand?
Key risks include continued industry price competition from Windows PCs, component cost increases, and the high fixed costs of the Retail segment. Demand is also weak in U.S. education, Japan, and professional desktop segments. Management expects gross margin pressure to persist into fiscal 2004 and has noted the possibility of required stock option expensing.
Is Apple financially able to meet its near-term obligations?
Yes. Cash and short-term investments of $4.566 billion far exceed the $304 million of 6.5% notes due February 2004, which management plans to repay from existing cash. Management believes existing balances will fund working capital, capital expenditures, and other needs for at least the next 12 months.
What is the outlook for the Retail initiative?
Retail sales reached $621 million with 65 U.S. stores, and the first international store opened in Tokyo in early fiscal 2004. Average revenue per store rose to about $11.5 million, and the segment's operating loss narrowed to $5 million from $22 million. However, the filing cautions that Retail carries substantial fixed lease and construction costs, so a sales decline could create significant losses.

04—Continue

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