10-QPeriod: Q3 FY2007

Apple Inc. Quarterly Report for Q3 Ended Jun 30, 2007

Filed August 8, 2007For Securities:AAPL

Summary

Apple Inc. reported strong financial performance for the quarter ended June 30, 2007, with net sales increasing by 24% year-over-year to $5.41 billion and net income growing significantly to $818 million, translating to diluted earnings per share of $0.92. This growth was driven by robust sales across its product lines, particularly Macintosh computers and iPods. The company also saw a substantial increase in its cash and short-term investments, reaching $13.8 billion, indicating strong liquidity and financial health. The launch of the iPhone in June 2007 is a key event, with initial sales contributing $5 million in revenue, recognized under subscription accounting. While the iPhone's revenue impact is currently modest, its introduction signifies Apple's expansion into the mobile communications market. The company continues to invest in research and development and expanding its retail presence, demonstrating a commitment to innovation and future growth.

Key Highlights

  • 1Net sales surged by 24% to $5.41 billion in the third quarter of fiscal year 2007, demonstrating continued strong top-line growth.
  • 2Net income increased substantially to $818 million, with diluted earnings per share reaching $0.92, indicating improved profitability.
  • 3Gross margin percentage improved significantly to 36.9% from 30.3% in the prior year's comparable quarter, driven by favorable component costs and product mix.
  • 4The company reported a substantial cash and short-term investment balance of $13.8 billion, underscoring its strong liquidity position.
  • 5The iPhone officially launched in June 2007, contributing $5 million in net sales, signaling entry into the mobile phone market.
  • 6Macintosh sales showed impressive growth, with net sales up 36% and unit sales up 33%, outperforming the broader PC industry growth rate.
  • 7iPod sales continued to grow, with net sales up 5% and unit sales up 21%, though average selling prices decreased due to product mix and price reductions.

Frequently Asked Questions

The primary driver of Apple's revenue growth in this quarter was the strong performance of its Macintosh computer line, which saw net sales increase by 36% and unit sales by 33%. iPod sales also contributed significantly, with net sales up 5% and unit sales up 21%. The company also benefited from favorable component costs and product mix, which boosted gross margin percentage.

Revenue from iPhone sales is being recognized under subscription accounting, in accordance with SOP No. 97-2, due to the potential for future unspecified features and software updates to be provided free of charge. Associated revenue and cost of goods sold are recognized on a straight-line basis over the estimated 24-month economic life of the product.

Apple's financial position is very strong, with cash, cash equivalents, and short-term investments totaling $13.8 billion as of June 30, 2007. This represents a significant increase from the previous fiscal year-end and indicates robust liquidity.

The report highlights several risks, including intense competition in the PC, consumer electronics, and mobile phone markets, dependence on key component suppliers (like microprocessors and NAND flash memory), potential disruptions to supply chains, and risks associated with new product introductions and transitions. Legal proceedings, including patent disputes and shareholder derivative lawsuits related to stock options, are also noted as potential risks.