6. Mini case: Apple Inc. (NASDAQ: AAPL) is a company that has evolved and adapted over time. In its 1994 Prospectus (Form 42485) filed with the US SEC, Apple identified itself as "one of the world's leading personal computer technology companies." At that time, most of its revenue was generated by computer sales. In the prospectus, however, Apple stated, "The Company's strategy is to expand its market share in the personal computing industry while developing and expanding into new related business such as Personal Interactive Electronics and Apple Business Systems." Over time, products other than computers became significant generators of revenue and profit. In its 2010 Annual Report (Form 10-K) filed with the SEC, Apple stated in Part 1, Item 1, under Business Strategy, "The Company is committed to bringing the best user experience to its customers through its innovative hardware, software, peripherals, services, and Internet offerings. The Company's business strategy verages its unique ability to design and develop... to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative industrial designs The Company is therefore uniquely positioned to offer superior and well-integrated digital lifestyle and productivity solutions." Clearly, the company is no longer simply a personal computer technology company. In analyzing the historical performance of Apple as of the beginning of 2011, an analyst might refer to the information presented in Exhibit 1. Panel A presents selected financial data for the company from 2007 to 2010. Panels B and C present excerpts from the segment note. Panel B reports the net sales by product, in millions of dollars, and Panel C reports the unit sales by product, in thousands. [Because Apple manages its business on the basis of geographical segments, the more complete data required in segment reporting (i.e., segment operating income and segment assets) is available only by geographical segment, not by product.] In 2005, an article in Barron's said, "In the last year, the iPod has become Apple's best-selling product, bringing in a third of revenues for the Cupertino, Calif. firm... Little noticed by these iPod zealots, however is a looming threat... Wireless phone companies are teaming up with the music industry to make most mobile phones into music players" (Barron's 27 June 2005, p. 19). The threat noted by Barron's was not unnoticed or ignored by Apple. In June 2007, Apple itself entered the mobile phone market with the launch of the original iPhone, followed in June 2008 by the second-generation iPhone 3G (a handheld device combining the features of a mobile phone, an iPod, and an internet connection device). Soon after, the company launched the iTunes App Store, which allows users to download third-party applications onto their iPhones. As noted in a 2009 Business Week article, Apple'is the world's largest music distributor, having passed Wal- Mart Stores in early 2008. Apple sells around 90% of song downloads and 75% of digital music players in be United States" (Business Week, 28 September 2009, p. 34). Product innovations continue as evidenced by the introduction of the iPad in January 2010. Pane A. Data for Apple Inc. Fiscal Year (dollars in millions) 2010 2009 2008 2007 Net sales 565,225 542.905 537.491 $24.578 Gross margin 25,684 17.222 13.192 8,152 Net income 14.013 8.235 6.119 3,495 Cash and marketable securities 51,011 33,992 24.490 15.386 Total current assets 41,678 31.555 30,006 21.956 Totalausets 75,183 47.501 36,171 24,878 Total current liabilities 20.722 11.506 11.361 9.280 O Panel B: Net Sales by Product (dollars in millions) 2010 2009 2008 2007 Desktops $6,201 $4,324 $5,622 $4.023 Portables 11,278 9.535 8,732 6,313 Total Mac nct sales 17,479 13,859 14,354 10,336 iPod 8,274 8.091 9.153 8.305 Other music related products and services 4.945 4,036 3.3-60 2.496 iPhone and related products and services 25,179 13.033 6,742 630 iPad and related products and services 4,958 0 0 0 Peripherals and other hardware 1,814 1.475 1.694 12303 Software, service and other sales 2.573 2,411 2.205 1.508 Total net sales $65 225 $42.905 537.491 524 575 Panel C: Unit Sales by Product 2010 (units in thousands) 2009 2008 2007 Desktops 4,627 3.182 3,712 2.714 Portables 9,035 7.214 6,003 4,337 Total Macunt ales 13,662 10,396 9,715 7,051 Net sales per Mac unit sold 51.279 $1,333 $1.478 51,466 iPod unit sales 50,312 54.132 54,828 51.630 Net sales $164 5149 per iPod unit sold $167 5161 iPhone units sold 39.989 20,731 11,627 1.389 iPad units sold 7.458 0 Using the information provided, address the following: 1. Typically, products that are differentiated either through recognizable brand names, proprietary technology, unique styling, or some combination of these features can be sold at a higher price than commodity products. a. In general, would the selling prices of differentiated products be more directly reflected in a company's operating profit margin or gross profit margin? b. Does Apple's financial data (Panel A) reflect a successful differentiation strategy? 2. How liquid is Apple at the end of fiscal 2009 and 2010? In general, what are some of the considerations that a company makes in managing its liquidity? 3. Based on the product segment data for 2007 (Panels B and C). Apple's primary source of revenue was from sales of computers (the $10,336 million in sales of Mac computers represented 42 percent of total net sales) and its secondary source of revenue was from iPods. How has the company's product mix changed since 2007, and what might this change suggest for an analyst examining Apple relative to its competitors