Apple’s Form 10-Q is a quarterly report the company is required to file with the U.S. Securities and Exchange Commission (SEC). The document provides a comprehensive overview of Apple’s current state of business for Apple’s first quarter of its fiscal year 2005, which ending December 25, 2004. Among the highlights of this quarter’s report are details about how new accounting procedures affect Apple’s net income and indications that interest in new consumer Macs may have cannibalized pro sales.
By the numbers
Apple noted that changes implemented by the Financial Accounting Standards Board (FASB) in December 2004 require it to account for stock-based compensation differently, and this will have an impact on the company’s net income. “Although the Company will continue to evaluate the application of [the FASB’s new rules], management expects adoption to have a material impact its results of operations,” said Apple.
In this case, the new rules force a $20 million downward result in the Apple’s net earnings for the period ending December 25, 2004 — from $295 million to $275 million. Similarly, this new accounting procedure knocked down Apple’s net income for the same quarter a year ago from $63 million to $34 million.
Apple spent a total of about $23 million in restructuring charges during the year ending September 25, 2004, according to the report, with $14.4 million spent in severance costs, $5.5 million in asset impairments and $3.5 million in charges related to the cancellation of leases. Apple also spent a total of $419,000 and $282,000 to reimburse CEO Steve Jobs for expenses related to his Gulfstream jet, during the first quarters of 2005 and 2004 respectively.
Are consumer sales cannibalizing Apple’s pro line?
In recapping its quarterly net sales performance, Apple noted that demand for its consumer systems is on an upswing. Apple moved 456,000 iMacs and 271,000 iBooks during the quarter, generating $620 million and $297 million in net sales, respectively. That’s a 147 percent and 34 percent year-over-year increase. Apple attributes this strong growth to the increased availability of the iMac G5, which saw constrained delivery in the previous quarter, as well as the introduction of upgraded iBooks paired with seasonal demand related to the Christmas holiday.
Bullish iBook and iMac G5 sales underscore disappointing results for Apple’s pro line. Power Mac G5 net sales and unit sales were off 4 percent and 19 percent respectively; PowerBook G4 net and unit sales were off 23 and 22 percent, respectively.
Apple thinks the Power Mac G5’s sales are suffering because people are turning towards the iMac G5, and Apple also pins the PowerBook’s laggard sales “in part to a shift to the new iBooks.” Apple said that such movement between its product lines “is typical after new product introductions,” however.
It’ll be interesting to see if this trend continues through the current quarter, which has thus far seen refreshed PowerBooks and Apple’s new Mac mini, its least expensive Macintosh model ever — another system squarely aimed at consumers.
Dramatic year-over-year improvements in Apple’s educational channel sales were also attributed to interest in the iMac G5 and iBook. First quarter sales yielded 20 percent and 11 percent increases in net sales and unit sales, respectively. This also helped Apple’s U.S. education channel sales yield their highest first quarter revenue in seven years.
Sales at Apple’s brick-and-mortar retail stores likewise saw strong growth — $561 million during the quarter, from $273 million for the same quarter in fiscal 2004, a 105 percent increase. Apple attributes that boost to the increase in the number of stores — up to 101, from 73 — as well as a concerted effort to improve revenue per store, which yielded a 48 percent increase.
Tiger R&D costs mount
Apple is readying a major new operating system release in 2005 — Mac OS X v10.4, code-named “Tiger,” is on track for a release in the first half of the calendar year. The new operating system release will debut a number of new technologies Apple has vaunted since first showing off the software at last year’s Worldwide Developer Conference (WWDC) in San Francisco, including a new search technology called Spotlight, a new interface called Dashboard, Core Image technology and much more.
Apple routinely spends more for research and development than its competition; it readily admits that in its 10-Q. Quarterly R&D costs bloomed to $123 million from $119 million for the same quarter a year ago. Because of Apple’s increased net sales, however, that was actually a smaller percentage: 4 percent versus 6 percent. Apple said that $14.8 million of those costs were associated with the development of Tiger, compared to none the year before (Tiger was announced in June, 2004). Apple attributes most of the increase in R&D costs to new personnel hires.
Perhaps no other part of Apple’s 10-Q draws more attention than the “Legal Proceedings” entry. In it, Apple offers summary descriptions of any outstanding and recently settled lawsuits it has been party to.
Apple noted that its defense continues against Apple Corps Ltd., the Beatles’ record company. Apple Corps filed suit against Apple Computer Inc. in July, 2003, alleging the computer maker breached a 1991 agreement by launching its iTunes Music Store. Apple said that it “filed a Defence” on December 23, 2004 after being served by Apple Corps with “an Amended Bill of Particulars” the preceding month.
Apple is also expecting a ruling soon on a class action suit called Cagney v. Apple Computer Inc. filed in January, 2004, which alleged the company improperly collected California state sales tax in transactions involving mail-in rebates. Litigation with Compression Labs Inc. over a patent involving JPEG image compression continues; the case isn’t expected to go to trial before October, 2005.
Apple also noted that litigation with five resellers, including Elite Computers and Macadam, continues. “One of the resellers, Macadam, was deauthorized as an Apple reseller. Macadam files a motion for a temporary order to reinstate it as a reseller, which the court denied,” said Apple. In an open letter to customers earlier this week, Macadam owner Tom Santos said he’s decided to close for good, partly because of what he describes as “The consistent bad behavior of our number one supplier, Apple Computer.”
Finally, Apple said that it will issue a response in February to
Slattery v Apple Computer Inc., a class action suit that alleges Apple has exercised “monopoly market power” to force iTunes Music Store users to buy an iPod and vice versa.