Under Apple's Financial FY09 Q2 Covers: Net Sales Slipping

One of the strengths of Apple has been the ability of its brand to command premium pricing, whether in computers, MP3 players, or cell handsets. That has lead to a level of profitability that is the envy of its competitors. But there are signs of countervailing pressure that is forcing Apple to make less and less on the bulk of its products, bringing to question whether the company retains the same qualitative allure to a broader public as it displayed among the faithful. In a continuing period feature, we look into the details of a company’s SEC filings for trends and insight.

The best way to see the movement of Apple’s business is to look at the progression of unit sales and the average per unit net sales from the company’s own SEC filings, including 10-Qs for 2008 and 2009 and the 2009 10-K (unit sales in thousands, per unit net sales as is):

First a caveat about the iPhone per unit net sales. Accounting revenue recognition will have an impact on when Apple can book the service revenue that comes from its share of carrier monthly fees. Although Apple does not give per unit net sales, I divided a given quarter’s net sales by the number of iPhone units sold. This is highly deceptive because there are going to be swells where revenue builds up on earlier sales (and this is likely to get even more confusing as people re-up and either do or don’t get a new iPhone). But it does indicate the periodic nature of Apple’s iPhone revenue, given accounting rules and introduction of new models.

Caveats aside for a moment, it is clear that Apple’s unit product margins in dollars are steadily slipping. Over the last six quarters:

• Macs have lost 13.3 percent of their average per unit net sales.
• iPod per unit net sales are down 17.2 percent.
• In the confusing world of the iPhone financials, given the amount of information available, it may not be possible to come up with a reasonable analysis. Peak to peak revenue is down by 31.3 percent, but the low end revenue is up by 12.5 percent, and the middle range is up by 28.8 percent.

What all this does show is that Apple has come under increasing revenue pressures. Part of that is undoubtedly because the company, wisely, continues to expand beyond its fanatical core audience and the growing audience is likely unwilling to pay for the same degree of Apple affiliation. Part may be due to retail partners that demand enough of a discount to make a profit on sales. But given the increasing year-over-year numbers of units they sell, almost regardless of category (except for last quarter in the computer arena, which was notoriously bad for everyone), it’s likely a smart trade-off.

However, it also suggests that Apple finds that it has to redefine its business model and marketing strategies as it tries to sell to a broader audience. One of the classic issues of an upscale or somehow exclusive brand is that becoming too popular can undermine the entire corporate positioning. Certainly the company has room to maneuver, but it will have to beware going too far and suddenly losing the perception of difference that helps sustain it. And even though the company’s margins improved last quarter, unit net sales — how much money products actually bring in the door — are the ultimate limitation on earnings.

[UPDATE: As Arik Hesseldahl at Businessweek reported, revenue at Apple's 252 retail stores was $1.47 billion, up from $1.45 billion a year earlier. That's an increase of about 1.4 percent. However, the number of visitors to the stores was 39.1 million, up 16 percent from 33.7 million. One of the measures of retail operations is how much you get the average visitor to buy. That number is clearly on the decline, sitting at roughly $37.60 per visitor rather than the roughly $43 per visitor the year before. Also, given the price of Apple products, that would suggest a whole lot of window shopping by most people -- pardon the pun -- and not necessarily a lot of buying. To be fair, as many purchases are handled in the stores by sending people to the Apple web site, it could be that the numbers are deceptive, with the stores driving directly funneling business to the web. But I don't have the information that would make the relationship clearer there.

And even more update -- per store revenue declined from $7.1 million to $5.9 million, a drop of almost 17 percent. Apple is cutting 1,600 full-time equivalent positions in its retail group. That's about a ten percent staffing cut, though it could mean more people than 1,600, with more than one part-timer making up a single full-time equivalent.]

iPod image courtesy of Apple.