Apple 10-Q reveals operational, financial details

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Apple on Thursday offered its latest 10-Q, a standard quarterly filing with the United States Securities and Exchange Commission (SEC). The document offers a continuing view of Apple's financial condition, its operations and various risks and issues that could affect the company's plans for future business. One of the more interesting sections of the document outlines Apple's current legal woes, including details about the settlement of a case MacCentral first apprised readers of in 2003, and a new case concerning Apple's FairPlay technology.

Most of the information contained in the 10-Q recaps previously offered data about Apple's financial performance for the previous quarter: Apple reported a US$61 million profit, or $0.16 per diluted share for the quarter, based on $2.014 billion in worldwide revenue. Net income from the company's North American sales efforts were responsible for slightly more than half that at $1.018 billion, with Europe bringing in $408 million, Apple's retail efforts separately bringing $270 million in the door, and other segments -- including Apple's Asia/Pacific efforts and the revenue generated by its FileMaker Inc. subsidiary -- bringing in $146 million.

By the numbers

Apple's retail store efforts generated $7 million in operating income for the quarter, compared to a $2 million loss for the same quarter a year ago. Apple attributes this positive performance to an increased number of stores in 2004 -- 80 compared to 59 -- as well as a 31-percent year-over-year increase in average revenue per store.

Apple is as cautious as they can not to give away any unnecessary details about the performance of the iTunes Music Store -- the company lumps together music store sales with sales of iPod-related service and accessories. Still, that totalled $73 million for the quarter, compared to $12 million for same quarter a year ago -- a 508 percent increase. Since this time in 2003, Apple has released a Windows version of iTunes, and the company has also broken records for the number of iPods it has sold in that time.

Education appears to be on the rise. Apple said that its educational channel experienced 16 percent year-over-year growth in net sales during the third quarter, the company's highest U.S. educational channel revenue in three years. Apple attributes the strong performance to successful deployments of its iBook in "one to one" (one student to one iBook) initiatives across the U.S. It still cautions that "a weak funding environment" continues to hamper efforts to grow educational market sales, however.

iMac net sales were down 22 percent and unit sales were down 15 percent for the quarter -- as the company has previously stated in financial records, it believes iMac sales are off because of the more than two year old form factor. In July Apple discontinued the manufacture of flat-panel iMacs and said that it will bring out a G5-equipped system in September.

Apple recorded a modest increase in research and development (R&D) spending for this quarter -- 4 percent -- and attributed the increase to "expanded R&D activities and employee salary merit increases." As a percentage of net sales, however, R&D decreased about 6 percent.

Legal maneuvers

The 10-Q requires Apple to divulge legal proceedings it's involved with, as these activities could materially affect the company as it reaches settlements or unfavorable rulings. Much of what's in there is retreaded material covered in past 10-Q filings -- Apple's involvement in a legal dispute with Beatles management company Apple Corps Ltd., for example, class action suits and so on. Apple does provide new data about some recently filed litigation, however, including a new complaint about iPod battery life, entitled "Mosley v. Apple Computer Inc." Unlike another pending class action suit consolidated and filed in San Mateo County, Calif., this complaint was filed in late June in Westchester, New York.

Apple indicated that it has settled "Shipman Vs. Apple Computer Inc.," a claim filed in April over its use of illuminated keyboards -- a feature found on Apple's high-end 15-inch and 17-inch PowerBook G4 systems.

Apple also noted Teleshuttle Technologies LLC and BTG International Inc.'s recently filed lawsuit that alleges Apple and Microsoft are infringing a patent that covers online software updates. Apple said its response to the complaint is not yet due.

Following up from a story that first broke almost a year ago, Apple said it has settled a trademark infringement suit filed by TIBCO Software Inc. over the use of the word "Rendezvous." "The case has been settled and the complaint dismissed," said Apple.

Finally, Apple said that its French business unit is being sued by Virgin Mega and the French Competition Council, which allege that Apple has wrongfully refused to license its FairPlay Digital Rights Management (DRM) technology to competitors. "Virgin is seeking 'Interim Measures,' pending the determination of the merits of the case," said Apple. A hearing on Virgin's request for such measures will likely be heard in October or November 2004."

FairPlay has been a bone of contention in other operating areas as well -- the technology has thus far enabled Apple to have a virtual lock on the playback of iTunes Music Store-purchased songs with its iPod music player -- no other digital music players can play those songs, and no other online music services use FairPlay. Last month, however, competitor RealNetworks Inc. introduced Harmony, a technology that enables songs sold through RealNetworks' own RealPlayer Music Store to be played back on iPods while keeping their DRM intact.

This story, "Apple 10-Q reveals operational, financial details" was originally published by PCWorld.

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