Profits made by apple

Apple’s 5 Most Profitable Lines of Business

Apple Inc. (AAPL), founded in 1976, became the first U.S. corporation to surpass $1 trillion in market capitalization in 2018. Apple’s spectacular growth in sales, profits, and its share price have historically been driven by solid sales of its iPhone products. However, as sales of their iPhone and other technology hardware devices have slowed down, the company has made aggressive efforts to transform itself into one of the world’s leading providers of digital services. Apple’s fiscal year 2019 was characterized by a series of ups and downs, but overall, they were successful in boosting their revenue from services, while their earnings from their most popular products, such as iPhones and MacBook laptops, fell somewhat below 2018 levels.

Key Takeaways

• Apple’s spectacular growth in sales, profits, and its share price have historically been driven by solid sales of its iPhone products.
• As sales of their iPhone and other technology hardware devices have slowed down, the company has made aggressive efforts to transform itself into one of the world’s leading providers of digital services.
• For the fiscal year 2019, the company’s iPhone business accounted for approximately 54.7% of total sales; the company’s Services segment made up approximately 17.7% of revenue; Mac sales generated 9.8% of total revenue; Wearables, Home and Accessories segment comprised 9.4% of the company’s sales; the iPad accounted for 8.1% of the company’s sales.
• For the first fiscal quarter of 2020, Apple experienced an all-time company record for both net income and revenue, at $91.8 billion and $22.2 billion respectively.

For the first fiscal quarter of 2020, Apple had forecast revenue between $85.5 billion and $89.5 billion. The company announced revenue of $91.8 billion and profit of $22.2 billion, an all-time record for both net income and revenue.

Apple’s New Profile

Apple’s services business is led by the App Store and Apple Music. In May 2019, Piper Jaffray analyst Michael Olson claimed that Apple had evolved its service business so much that it was worth $502 billion, using an analysis that assesses the value of each business unit and then combines them together for an overall valuation estimate. At the same time, Olson estimated that Apple’s hardware business was only worth $398.8 billion. This would make Apple’s services business worth more than its hardware business.

In fiscal year 2019, Apple posted sales of $260.17 billion on a net income of $55.25 billion. In the first quarter of 2019, earnings came in at $4.18 on a per share basis; at that time, this was a record high for the company. But in the first fiscal quarter of 2020, earnings per share were up to $4.99.

For fiscal year 2019, the company’s iPhone business accounted for approximately 54.7% of total sales. Apple’s growing services segment made up approximately 17.7% of revenue, ahead of the Mac, which generated 9.8% of total revenue. The wearables, home and accessories segment comprised 9.4% of sales and the iPad accounted for 8.1%.

Here is a more detailed look at Apple’s five most profitable business lines.

iPhone

Apple’s core product, the iPhone, has ranked amongst the top five smartphone vendors in the world since 2009. For the first fiscal quarter of 2020 ending on December 28, 2019, iPhone sales were $55.96 billion. Overall, Apple’s reported profit and revenue for the quarter were significantly higher than Wall Street analysts had predicted; this was partially due to the popularity of the new iPhone models. The first quarter of the fiscal year is a very important period for Apple because it covers the holiday season and the three most lucrative months of the year–October, November, and December.

In previous quarters, any decline in iPhone sales have been attributed to a slowdown in China, a longer iPhone replacement cycle, and heightened competition in the global smartphone market. Apple’s ‌iPhone 11‌ has become Apple’s best-selling smartphone since it launched.

Regarding Apple’s Q1 2020 holiday performance, CEO Tim Cook said, «We are thrilled to report Apple’s highest quarterly revenue ever, fueled by strong demand for our iPhone 11 and iPhone 11 Pro models, and all-time records for Services and Wearables.»

Services

Apple’s Services segment posted revenue of $46.3 billion in the fiscal year 2019 and $12.72 billion for the first quarter of the fiscal year 2020. In the fiscal year 2019, Apple’s services business posted gross margins of 63.7%, approaching double the 32.2% gross margin of the company’s product sector. As a whole, Apple’s subscription business (including subscription apps) grew 40% year-over-year. This revenue comes from selling a range of services, such as iCloud storage services, Apple Music subscriptions, and AppleCare warranties. According to Apple, there are over 450 million paid subscriptions on Apple’s platform.

In 2010, Apple’s services business revenue generated only $5.2 billion in revenue. Over the next two years, it nearly doubled to $10.2 billion. Quarterly services revenue has skyrocketed since then, and Apple’s CEO Tim Cook has made it a goal to speed up that growth. Recently, there have been several additions to Apple’s services business, including a streaming movie and TV service, a new video game subscription, and the Apple Card, which will compete against other financial payment giants.

The performance of some of these new services, such as Apple Arcade and Apple TV+, are reflected for the first time in the financial results for Q1 2020.

Apple’s personal computer business, built around the Mac, generated sales of $25.7 billion in fiscal year 2019. Mac’s contribution to Apple’s growth has consistently fallen as the personal computer industry has experienced slowing demand worldwide. For the fourth quarter of the fiscal year 2019, Mac products only accounted for approximately 11% of the company’s revenue. However, from a strategic perspective, Apple’s personal computer business is very important for the company because it’s part of a broad, interlinked product family running on the iOS operating system.

When Apple launched its iPad in 2010, it quickly became the first commercially successful tablet computer to hit the market. In the first three months after it was released, the device sold more than three million units. As of the fourth quarter of 2019, the iPad held a 36.5 % share of the global tablet market. In the fiscal year 2019, iPad sales came in at $21.3 billion.

Wearables, Home, and Accessories

Apple’s Wearables, Home and Accessories segment is made up of devices such as AirPods, Apple Watch, and HomePods. The segment posted $24.5 billion in sales in the fiscal year 2019. Apple has been ramping up the release of products in this category. The second generation of AirPods, the company’s popular wireless headphones, launched in the first half of 2019 and the noise-canceling AirPod Pro wireless headphones launched in October 2019.

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How Apple Makes Money

Apple’s biggest revenue sources are the iPhone and the Americas

Apple Inc. (AAPL) is a global technology company that designs, manufactures, and sells smartphones, personal computers, tablets, wearables, and accessories. Some of its main products include the iPhone, the Mac line of personal computers and laptops, iPad, Apple Watch, and Apple TV. The company also has a fast-growing services business that includes its iCloud cloud service, and its digital content streaming services such as Apple Music and Apple TV+, the latter launched in November 2019.

Apple faces numerous competitors including smartphone manufacturers Samsung Electronics Co. Ltd. (005930) and LG Electronics Inc. (066570), computer manufacturers Lenovo Group Ltd. (0992) and Dell Technologies Inc. (DELL), streaming-content providers Spotify Technology S.A. (SPOT) and Netflix Inc. (NFLX), and other technology companies like Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), and Amazon.com Inc. (AMZN).

Key Takeaways

• Apple sells smartphones, personal computers, tablets, wearables and accessories, and services.
• iPhones are Apple’s biggest source of revenue by product, and the Americas is the largest revenue generator among its geographic regions.
• Apple’s services business generates the highest gross margins.
• Apple recently acquired classical music streaming service Primephonic.
• Apple announced changes to its ecosystem that will allow developers to offer payment options to users of their apps outside of the App Store.

Apple’s Financials

Apple posted net income of $21.7 billion on revenue of $81.4 billion in Q3 of its 2021 fiscal year (FY), the three-month period that ended June 26, 2021. Apple refers to revenue as net sales in its financial reports. Both net income and revenue rose compared to the year-ago quarter. Net income grew 93.2% as revenue climbed 36.4%.

Both Apple’s Products and Services businesses grew during the quarter. Revenue for the Products business rose 37.4% compared to the year-ago quarter, comprising about 79% of Apple’s total revenue. Among its products, iPhones comprised 49% of total revenue; Macs (10%); iPads (9%); and Wearables, Home and Accessories (11%). Services revenue grew 32.9% compared to the same quarter a year ago, comprising 21% of Apple’s total revenue.

Apple has mounted a major corporate strategy to reduce its dependence on lower-margin hardware products, which face slowing growth, while accelerating the growth of its Services business, which has higher margins and a more predictable, recurring revenue stream. Apple has introduced many new services in recent years, including Apple Arcade, Apple TV+, Apple News+, and Apple Card. The company now offers many of its services in one simple plan called Apple One.

The high margins in Apple’s Services business have continued to rise. Gross margin as a percentage of sales was 69.8% in Q3 FY 2021. Its annual gross margin in FY 2020 was 66.0% compared to 63.7% in FY 2019 and 60.8% in FY 2018. Gross margin as a percentage of sales for Products was 36.0% in Q3 FY 2021. It was 31.5% in FY 2020, down from 32.2% in FY 2019 and from 34.4% in FY 2018.

Apple’s Business Segments

Apple provides a breakdown of revenue and operating income for the following geographical segments: Americas; Europe; Greater China; Japan; and the Rest of Asia Pacific.

While the U.S. is still the dominant market, Asia is rapidly catching up. In Q3 FY 2021, markets in China, Japan, and Asia Pacific contributed 36% of operating income and 33% of revenue. That makes the Asia region dramatically more important than Europe to Apple for growth and profits.

Americas

The Americas segment includes both North and South America. Revenue grew 32.8% in Q3 FY 2021 to $35.9 billion, comprising about 44% of Apple’s total revenue. Operating income grew 62.0% to $12.9 billion, comprising about 41% of the operating income for all segments.

Europe

The Europe segment includes European countries, as well as India, the Middle East, and Africa. Revenue grew 33.7% in Q3 FY 2021 to $18.9 billion, comprising about 23% of Apple’s total revenue. Operating income grew 60% to $7.1 billion, comprising about 23% of combined operating income for all segments.

Greater China

The Greater China segment includes mainland China, Hong Kong, and Taiwan. Revenue rose 58.2% in Q3 FY 2021 to $14.8 billion, comprising about 18% of Apple’s total revenue. Operating income rose 84.6% to $6.3 billion, comprising about 20% of the combined operating income for all segments.

Japan

Revenue for the segment rose 30.2% in Q3 FY 2021 to $6.5 billion, comprising about 8% of Apple’s total revenue. Operating income rose 43.4% to $3.0 billion, comprising about 10% of the combined operating income for all segments.

Rest of Asia Pacific

The Rest of the Asia Pacific segment includes Australia and those Asian countries not included in the company’s other reportable geographic segments. Revenue for the segment grew 28.5% in Q3 FY 2021 to $5.4 billion, comprising about 7% of Apple’s total revenue. Operating income grew 54.0% to $2.1 billion, comprising about 7% of the combined operating income for all segments.

A note to readers that the combined operating income used in the segment breakdowns above and in the pie charts was $31.5 billion in Q3 FY 2021. To arrive at Apple’s lower, reported consolidated operating income of $24.1 billion for the quarter, Apple makes deductions for research and development expenses and other corporate expenses.

Apple’s Recent Developments

On Aug. 30, 2021, Apple announced that it has acquired Primephonic, a classical music streaming service. Financial terms of the transaction were not disclosed.

On Aug. 26, 2021, Apple announced that developers will be able to share purchase options with users of their apps outside of Apple’s ecosystem. The change, which comes as part of a proposed settlement of a class-action lawsuit, will make it easier for Apple’s customers to use forms of payment other than the App Store.

How Apple Reports Diversity and Inclusiveness

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Apple and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Apple releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.

Below is a table of potential diversity measurements. It shows whether Apple discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Apple breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and membership in the LGBTQ+ community.

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The Cost of Making an iPhone

Apple (AAPL) is one of the most popular companies in the world and produces one of the most ubiquitous smartphones. Despite the iPhone being one of the most sought after products in the world, as of 2019, Apple was third in market share for smartphones, behind Samsung and Huawei.

Apple controls 14.5% of the global smartphone market share, while Samsung controls 21.8% and Huawei controls 17.6%. That being said, in terms of profits from smartphones, Apple is the leader. The company took 66% of the industry’s profits and 32% of revenue in 2019.

It seems that the company must be making a sizable markup if it’s the leader in profits but third in sales. Let’s find out how much it costs to make this iconic product.

iPhone 11 Pro Max

The current and most expensive iPhone is the iPhone 11 pro max, released in late 2019. Depending on the storage size, the cost of the phone ranges from $1,099 to $1,449. It’s quite a hefty price tag, especially when it’s estimated that the actual cost of all the components to make the phone amounts to approximately $490.50.

Cost Breakdown

The breakdown of the cost of the components of the phone is as follows:

• Screen: $66.50
• Battery: $10.50
• Triple Camera: $73.50
• Processor, Modems, and Memory: $159
• Sensors, Holding Material, Assembly, and Other: $181

It’s important to note that this cost does not include research and development (R&D) or marketing, which would increase the price of the phone.

Labor Costs

The iPhone is primarily assembled in China by Taiwanese companies, such as Foxconn. The starting wage for an iPhone worker in China is $3.15 per hour. Much lower than the minimum wage in the U.S., which is $7.25 per hour. In 2018, it was quoted that employees at Foxconn make around $300 a month.

According to Tim Cook, the CEO of Apple, the reason to build in China is not because of the lower labor costs. If this were the case, Apple could make its phones in even cheaper locations. The main reason, according to Cook, is the skill required in tooling engineering. He claims that the specific skill set is no longer available in the U.S., but in China the expertise is prevalent.

In addition, logistically, China makes the most sense to ship a product around the world as the country has seven of the world’s largest 10 ports. If Apple were to build the iPhone in the U.S., it would only be able to build a small amount a year at a significantly higher cost.

Labor Conditions

In the early days of iPhone production, there were reports that labor conditions for workers were awful, however, this seems to have improved over time. According to some employees at Foxconn, the conditions are no worse when compared to other factories in China, and sometimes better. Outside of the big cities in China, most of the country is still underdeveloped and the cost of living is low, resulting in wages that may appear low when compared to Western society. The issue, really then, is not the wages, but the conditions employees endure to earn those wages.

The Bottom Line

Apple is a very successful company, and as consumers, we pay a premium price for the products the company makes. Some people purchase Apple products to become part of the ‘trendy’ Apple brand. However, for Apple to maintain its high profits and low manufacturing costs, the company will continue to manufacture its phones in China, as it looks for other low-cost locations, such as India and Vietnam.

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