New York, April 23, 2013 -- Moody's Investors Service ("Moody's") assigned
a senior unsecured rating of Aa1 to Apple Inc. The rating outlook
is stable.
RATINGS RATIONALE
The Aa1 rating reflects Apple's position as one the world's leading
providers of mobile communications devices, tablets, personal
computers, portable media players and digital content. Although
the company does not possess dominant market share in most of its segments,
its brand positioning at the higher end of its product categories,
led by the flagship iPhone, and its interrelated suite of products
allows it to command premium pricing and generate outsized returns relative
to industry peers. Strong consumer demand for products such as
the iPhone and iPad has supported expansion of the company's business
platform and resulted in sales growth at a CAGR of over 110% over
the past five fiscal years. Apple has a very robust financial profile
with operating margins, coverage, and cash flow metrics that
compare favorably with the non-financial companies that have Aaa
ratings.
"But, Apple's Aa1 rating is not higher (Aaa),
due to Moody's view that there are inherent long-run risks
for any company with high exposure to shifting consumer preferences in
the rapidly evolving technology and wireless communications sectors,"
said Moody's analyst, Gerald Granovsky. "The rapid
rise and fall of new products demonstrates these sectors are particularly
prone to transformational changes that can lead to shifts in market leadership."
Moody's expects the company will continue to deliver strong operating
and financial performance over the foreseeable future based on its current
products and product pipeline. The Aa1 rating also considers that
the quality of the company's products and a unique cohesion of hardware
and software around its Mac OS and mobile iOS operating systems have engendered
stronger customer loyalty than has been typical in this sector in the
past. Granovsky added, "This customer stickiness creates
an effective annuity revenue stream during subsequent product refreshes.
It also solidifies a large platform of users who will be more likely to
try the company's new products and services."
The rating also assumes that Apple's product refreshes continue
along the same pace as in previous years. However, the history
of technology and consumer electronics industries has consistently demonstrated
that disruptive technologies will arrive and incumbents are not necessarily
the ones who will benefit. Thus, Apple's credit profile
is tied to the company's ability to keep up with innovations and
maintain its unique corporate culture with its signature convergence of
design and engineering in the final products.
The rating incorporates Moody's expectations for continual strong
sales growth over the next couple of years as Apple regularly updates
its devices to willing buyers and expands iPhone distribution to new telecom
carriers and new markets, although further penetration may be driven
by a mix shift toward lower end and lower gross margin products.
Moody's believes the company has ample room to grow its addressable
market, as smartphone penetration is still at 50% of total
subscriber counts in developed countries, and below 15% in
developing countries.
Moody's expects Apple will generate additional revenue growth from
iPad sales, as tablets continue to displace the portable PCs (notebooks,
netbook and ultrabooks) in the homes, while a budding opportunity
for tablets to grab a seat in enterprise deployments could create another
new market.
On the other hand, Moody's recognizes that competition from
other handset manufacturers and strains in telecom distribution will weigh
on iPhone pricing and margins. Although the telecom carriers currently
benefit from the incremental wireless data fees that iPhone customers
generate, as the pricing for wireless data service declines,
the economic equation of subsidizing new iPhones will turn more negative
for the telecom carriers. This may force Apple to either lower
their price to the carriers or start taking on a greater role in financing
the upfront cost of the handsets.
The company has extremely strong liquidity, underpinned by over
$144 billion of cash and equivalents at March 31, 2013.
Despite Apple's announced $100 billion capital return program,
Moody's thinks that over the next few years, the company is
likely to continue to maintain net cash balances in excess of $100
billion, which is significantly more than any other non-financial
company globally. However, Moody's believes Apple's
larger cash holdings and cash flow generation relative to other leading
companies presages pressure to return additional cash to shareholders
over time. While Apple's Aa1 rating incorporates an expectation
that the company will maintain a very conservative financial policy and
very strong liquidity, the rating is not reliant upon an assumption
that the company will permanently maintain an extraordinarily large cash
position.
Moody's notes that the company's US cash position will decline
substantially as it completes the current capital return program by 2015,
unless the US corporate tax laws are changed or the company finds other
mechanisms to repatriate the overseas cash at favorable tax rates.
Given the growing divergence of Apple's cash inflows (largely international)
and outflows (largely domestic), the company is likely to increase
its debt levels if it were to extend its dividend and stock buyback programs.
Outlook
The stable outlook reflects Moody's expectations that Apple will continue
to maintain and defend its very strong market position in mobile devices
and tablets as well as expand its addressable market to new regions and
carriers. The stable outlook also incorporates the expectation
that Apple will continue to maintain a very high net cash balance and
a lowly levered balance sheet.
What can move the rating up
Given the industry risks inherent in the rapidly evolving technology and
wireless communications sectors, Moody's does not expect upwards
rating movement over the intermediate term. Longer term,
the rating could be upgraded if Apple sustains its strong business execution
and cash generation, and there is tangible evidence that the company's
ecosystem cements the users to its products upon subsequent updates and
new product introductions. Ratings could also be upgraded if changes
in US corporate tax laws or other mechanisms would allow the company to
repatriate cash on a more tax efficient basis and this leads to sustained
low debt levels rather than using debt as a vehicle to return cash to
shareholders.
What can move the rating down
The ratings could face downwards pressure if there is deterioration in
the company's core business model that results in a material, sustained
erosion in its very strong market positions, profitability or cash
flow generation, or management adopts substantially more aggressive
financial policies that weaken its very strong liquidity position and
raise leverage significantly.
The principal methodology used in this rating was Global Technology Hardware
published in October 2010. Please see the Credit Policy page on
www.moodys.com for a copy of these methodology
Apple Inc., headquartered in Cupertino, CA, is
a leading global designer, manufacturer and seller of premium mobile
devices, tablets, personal computers, digital media
players, and through its fully integrated operating system provides
a platform for its own and third party applications that delivers mobile,
digital and cloud applications and services. The company generated
nearly $165 billion of revenues for the trailing twelve month period,
ended December 29, 2012.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Gerald Granovsky
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Robert P Jankowitz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns Aa1 senior unsecured rating to Apple Inc.
