Apple

ANALYSIS for NASDAQ : AAPL DECEMBER 22, 2011

IPHONE

$

503

$

399
Market Price

iPhone Pricing 5 iPhone's Market Share in Mobile Phones 6 Global Mobile Phones Sold 8 iPhone Gross Profit Margin 9
IPAD

$471.9 B MKT CAP
Trefis Estimate

$370.5 B MKT CAP

iPad Pricing 11 iPad Units Sales 12 iPad Gross Profit Margin 13
NOTEBOOKS

— CORPORATE SNAPSHOT —

Apple makes money primarily by selling mobile phones, computers, and portable media players to consumers worldwide. Apple's well known consumer products include the iPhone, Macintosh ("Mac") computers, iPad and the iPod media player. In addition to selling hardware, Apple makes money by brokering the sale of music, films, TV shows, games, and iPhone software applications through its iTunes platform. It also makes money by selling ads on the free apps through the iAd platform. 1. iPhone constitutes 53% of the Trefis price estimate for Apple's stock. 2. iPad constitutes 12% of the Trefis price estimate for Apple's stock. 3. Macintosh (Desktops, Notebooks, Software & Services, Peripherals) constitutes 12% of the Trefis price estimate for Apple's stock.

Mac Notebook Pricing 15 Mac Notebooks Market Share 16 Global Notebook & Netbook Units Sold 17 Mac Notebooks Gross Profit Margin 18
SOFTWARE & SERVICES Revenue Per Mac 20

Global Notebook & Netbook Units Sold 21 Software and Services Gross Profit Margin 22
ITUNES

Songs Pricing 24 Unit Sales of Songs 25 iTunes Gross Profit Margin 25
APPS FOR IPHONE, IPOD & IPAD

Average Paid iPhone & iPad App Pricing 28 Number of iPhone & iPad Apps Downloaded 29 Paid App % 30 iPhone, iPod Touch & iPad Apps Gross Profit Margin 30

Our share price estimate and the overall company value is derived by summing-up the values of individual divisions/businesses in a sum-of-theparts analysis. The value of each division is calculated using a discounted cash flow (DCF) methodology. We forecast fundamental drivers like pricing, market share, and profit margins for different businesses in estimating the division’s value within the DCF framework. The analysis below primarily focuses on those important forecasts that drive our share price and value estimate. Our complete analysis, including sources of historical data, underlying equations and additional discussion are available on www.trefis.com.
— POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE —

DESKTOPS

Mac Desktop Pricing 33 Mac Desktops Market Share 34 Global Desktop Units Sold 35 Mac Desktops Gross Profit Margin 35
IPOD

iPod Pricing 38 iPod Market Share 39 Portable Media Players Units 40 iPod Gross Profit Margin 41
PERIPHERALS Revenue Per Mac 43

Below are key drivers of Apple's value that present opportunities for upside or

Global Notebook & Netbook Units Sold 44

downside to the current Trefis price estimate for Apple: iPhone • iPhone Market Share: Apple's iPhone market share has increased at a fast rate from around 0.3% in 2007 to around 3% in 2010, and we expect it to continue to increase to around 15% by the end of Trefis forecast period. The iPhone’s unique touch screen interface, and the intuitive and user friendly features are some of the factors behind its success. Also, the new iOS 5 boasts of over 200 new features including the much touted iCloud and the iMessage which is supposed to be Apple's answer to BlackBerry's popular BBM service. Apple launched the iPhone 4S recently and if the first weekend sales of over 4 million is anything to go by, it seems very likely that the latest in the iPhone series will turn out to be Apple's best-selling iPhone yet. In case one out of 5 mobile phones is an iPhone in the long term, or in other words, iPhone's market share increases to 20% by the end of Trefis forecast period, there could be an upside of 25% to our estimate for Apple stock. On the other hand, if Apple iPhone market share increases slowly to 10% by the end of Trefis forecast period, there could be a downside of around 15% to the Trefis price estimate for Apple stock. • iPhone Gross Margins: Apple's iPhone gross margins have declined in the past from 62% in 2007 to around 51% in 2010. However, we expect Apple to protect or even slightly improve on its margins this year before continuing to decline gradually to 37% by the end of Trefis forecast period. Fierce competition with Android-based smartphones from Samsung, Motorola and HTC, as well as RIM, Nokia, etc, may have led to a price drop in Apple's smartphones but component costs have also moved sharply in its favor recently. Reduced manufacturing costs will help Apple stem the decline in the near term. However, there could a downside of around 15% to our estimate for Apple stock if iPhone margins declines to around 30% by the end of Trefis forecast period. On the other hand, there could be an upside of around 15% to our estimate for Apple stock if iPhone margins remains constant at around 51% over the Trefis forecast period, instead of the decline that we forecast. For additional details, select a driver above or select a division from the interactive Trefis split for Apple at the top of the page.
— SOURCES OF VALUE —

Peripherals Gross Profit Margin 45
APPLE TV

Apple TV Pricing 47 Unit Sales of Apple TV 48 Apple TV Gross Profit Margin 48
APPENDICES

Summary P&L for Apple 50 Detailed iPhone P&L 52 Detailed iPad P&L 53 Detailed Notebooks P&L 54 Detailed Software & Services P&L 55 Detailed iTunes P&L 57 Detailed Apps for iPhone, iPod & iPad P&L 59 Detailed Desktops P&L 61 Detailed iPod P&L 62 Detailed Peripherals P&L 63 Detailed Apple TV P&L 64

We believe the iPhone segment is more valuable than the Macintosh and iPod segments for two primary reasons: Large Mobile Phone Market We believe 1.60 billion mobile phones will be sold worldwide in 2011 compared to 259 million notebooks, 140 million desktops, and 207 million portable media players (like iPod, Zune and Sansa). Although Apple's iPhone market share within the mobile phone market is smaller than its

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market shares within the PC and portable media player markets, the underlying market opportunity over the forecast period is much larger. High iPhone Profit Margins We believe Apple will have around 53% gross margins on iPhones in 2011 compared to less than 30% for Macintosh.
— KEY TRENDS —

Tablets growth not cannibalizing Apple product sales Apple already has a substantial share in the high end of the PC market with its Mac line of products, and the iPad now allows the company to tap the lower price range. Although tablets are believed to have cannibalized a good chunk of PC sales, Apple’s Mac sales have actually maintained a solid growth pace. Rather than cannibalizing Apple’s own product sales, the iPad appears to be creating a halo effect and lifting sales for the company’s other products. Supply chain management a major risk for mobile phone companies Companies like Apple are more concerned about the component supply related issues rather than demand issues. The earthquake in Japan has now spurred new issues with regards to component supplies, as many Apple suppliers are Japanese companies. Mobile phone software features playing major role in its sales Slowly the mobile phone software is becoming more important than its hardware. The mobile phone apps' selection is also an area of growth for mobile phone companies. Features like integration with social networks and multi-tasking ability are some of the features that mobile phone companies have come forward with over the last few years. Apple, Android, RIM and Nokia have been coming up with new versions of their OSes to keep adding new features. Another example is Samsung, which realized that they have a good hardware, but not so good software, hence they came with their own new Bada OS to compete in the smartphone market. Touch screen smartphones gaining popularity After Apple iPhone’s success, every mobile phone vendor is bringing this feature to the market. For example, RIM is planning to have this feature with improvements to touch screen interface. Nokia has recently come up with a few touch screen smartphones. Samsung also did the same thing. Browser improvements to a smartphone Mobile Phone companies are looking to improve browsers so as to have faster browser access along with less bandwidth consumption. Nokia acquired Novarra in this regard. Processor speeds increases

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Nokia and Motorola smartphones. Gray market proliferation hurting mobile phone companies These are unlicensed and illegal mobile phone vendors in emerging markets.2 GHz. Apple iPhone. games. The availability of mobile TV shows. Samsung. Consumers now have an array of smartphone choices. Apple entered the smartphone market with iPhone. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. photo sharing. Demand for e-readers and tablet PCs With Amazon Kindle and Apple iPad.COM + 1 617 394 8763 •4 . We believe that this trend will continue as PC manufacturers like RIM. the A4.Apple's new A5 processor is a dual-core affair. Since these are unlicensed. Motorola Mobility. Increasing Wi-Fi and Mobile Broadband Availability The increasing availability of mobile high-speed Internet access creates opportunities for smartphones to move beyond e-mail and basic Internet surfing to new competitive fields. and capable of running at up to 1GHz. films. Shift from Desktops to Notebooks (and Netbooks) We believe that the recent shift of consumer preferences from desktops to notebooks will continue as the performance and pricing gap between desktops and notebooks narrows. This has started to hurt the established players. Qualcomm’s Snapdragon has come up with an even higher processor speed of around 1. Apple acquired Quattro. Apple then came up with the iAd platform. software applications. HP and Dell entering into the tablet market. including the RIM BlackBerry. However. and video conferencing are potential points of differentiation among smartphone competitors. Apps advertising business increasing popularity Google acquired Admob in this regard. they are able to sell phones at a much cheaper price. the demand for e-readers and tablet PCs have increased at a rapid rate. Nokia and RIM entered in this segment before Apple. Increasing Smartphone Demand and Competition In June 2007. and the company claims that it's twice as fast as its predecessor.

For consumers in the US.The most important drivers for the iPhone business are: • iPhone Pricing • iPhone's Market Share in Mobile Phones • Global Mobile Phones Sold • iPhone Gross Profit Margin — IPHONE PRICING — iPhone Pricing represents the amount that Apple receives for every iPhone sold. In addition to the purchase price of the iPhone paid by consumers. Forecast Rationale Apple is expected to lower iPhone prices over time to stimulate market share gains. Apple initially earned subsequent revenues through a revenue share agreement with AT&T.iPhone The iPhone division constitutes 52. based on our sum of the parts analysis. Apple actually sells the phones in the U. iPhone Pricing ($) 750 500 250 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Two initial versions of the iPhone were launched in June of 2007 in the US with price points of $499 and $599. Verizon and now. which would reduce the iPhone Average Price. We believe there is uncertainty around the size of the price reductions and the impact of a potential low-end iPhone.COM + 1 617 394 8763 •5 . the average revenue per iPhone that Apple captured over time for iPhones sold in 2007 is substantially higher than the sticker prices of the phones. As a result. We estimate that iPhone Pricing declined from $868 in 2007 to $611 in 2010. $299 for the 32 GB and $399 for the 64 GB version.5% of our $503 price estimate for this stock. These prices are arrived at after a huge subsidy of about $450 that carriers such as AT&T. for a much higher amount to the carriers that then discount it for their customers. Sprint offer their subscribers in return for a two year contract.S. iPhone 4S is priced at $199 for the 16 GB. So. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.

0 2.5 5. The iPhone is a smartphone having computer like features. Apple receives even higher competition from Google's Android operating system smartphones.0 2007 0 8 09 10 11 12 13 14 15 16 17 18 TREFIS ANALYSIS for APPLE CONTENT@TREFIS.0 12. RIM (which makes BlackBerry phones). such as: • E-mail. PRICING PRESSURE FROM COMPETITORS – RIM. Motorola and HTC. 1. there will be a tendency for smartphone companies to lower the smartphone prices as the lower prices will be compensated by higher subscriber growth. This hypothesis is especially true for emerging markets. as it has started to expand its reach. • A media player. • Photo-browsing and video clip-viewing capabilities iPhone's Market Share in Mobile Phones (%) 15. Apple will be compelled to lower prices or introduce new phone features to maintain premium pricing. The average price of all the iPhones sold is bound to fall with this strategy.Among all this uncertainty. Sources for historical data and explanations can be found on the Trefis.5 0. 3. SLASHING PRICES OF THE OLDER IPHONES IN A BID TO ENTER MID AND LOW-END MARKETS – The iPhone 3GS is now being offered for free with a two-year contract. • Internet access. 2. • The ability to read business documents.5 10. where the smartphone market is still in nascent stage.COM + 1 617 394 8763 •6 . When competitors start slashing prices. Nokia and Motorola Mobility are Apple's biggest competitors in the smartphone space. We understand this is a strategy by Apple to woo the mid-market buyers to ward off competition from the Android smartphones. Apple's primary competitors in mobile phones are Nokia. we still believe iPhone pricing will decline at faster rate initially for a couple of years and then undergo a slow decline as the smartphone market matures.0 7.com website (link) — IPHONE'S MARKET SHARE IN MOBILE PHONES — iPhone's Market Share in Mobile Phones represents the number of iPhones sold as a percentage of global mobile phones sold annually. INCREASING COMMODITIZATION OF SMARTPHONES WILL BRING DOWN PRICES – As smartphones become more and more commoditized.

2. In addition. one will not be required to upload a song even if a song is not purchased through iTunes. Additionally. and calendars. The iPhone 4S is running on the new iOS 5. 4. This could help Apple drive iPhone and iPad sales. GROWING DEMAND FOR CONTINUOUS E-MAIL ACCESS DRIVING SMARTPHONE ADOPTION – Increasing use of email by both enterprise and consumer customers as a primary means of communication is driving demand for smartphones like the iPhone. Functionality improvements. China's #2 mobile phone provider. The iPhone 4S was also launched on the Sprint network recently. In spite of not so rave reviews.S. better battery life and an improved camera with 1. IMESSAGE SERVICE TO CHALLENGE RIM'S BBM SERVICE – Apple announced the iOS version 5 in which one of the main feature was the iMessage service. Fast wireless networks create an opportunity for instant messaging through devices like the BlackBerry and media rich applications (TV on a BlackBerry). . Notable among these are the iCloud and iMessage service as well as Siri voice assistant 5. to distribute iPhones. 7. EXTRAORDINARY CONSUMER-FRIENDLY INTERFACE AND FEATURES RICH PHONE – Apple products often score high on usability and interface quality. If the iPhone were to capture comparable share (30%).3% in 2007 to about 3% in 2010. Through this app users can chat and exchange files through Wi-fi and 3G. Through iTunes Match. iPad or Mac. INCREASING AVAILABILITY OF HIGH-SPEED WIRELESS NETWORKS DRIVING SMARTPHONE ADOPTION – The increasing availability of high-speed wireless networks allowed for the delivery of voice and data to 'convergence' devices. such as the BlackBerry and iPhone. There is a growing reliance on smartphones. a voice recognition system.080 pixels resolution for high definition video. a service that replaces the user's music with iTunes compatible format. one can consume music through different Apple devices. 9. and audio files as well as the ability to read and compose email have made it a feature-rich smartphone. Both these developments will help Apple expand its addressable market. it could mean an upside of 85% to our price estimate. ICLOUD SERVICE WILL INCREASE THE POPULARITY OF IPHONES – iCloud service gives user the ability to listen to music stored in the cloud (remote computers) through iPhone. such as the ability to copy and paste. which has been a unique selling point for them. iPhone's Market Share in Mobile Phones increased from 0.The iPhone was launched in June 2007. the inclusion of productivity and entertainment software on smartphones will further the attractiveness of such devices to businesses and consumers. China Unicom has over 140 million subscribers TREFIS ANALYSIS for APPLE CONTENT@TREFIS. These features will give much more convenience to the user in managing music files. as substitutes for PDAs containing address books. The ease-of-portability with the iPod and Mac for data transfer has also helped it increase market share. the ability to send photos. with a market share of more than 30% while Sprint has a market share of around 16%. Apple's competitors are still working to catch up with the quality of Apple's touch screen interface. it could influence demand for all Apple devices in a meaningful way. Trefis forecasts that iPhone's Market Share in Mobile Phones will increase at a faster than historical rate. notes. and scores well over other smartphones now. 8.COM + 1 617 394 8763 •7 . the 4S managed to rack up impressive sales of over 4 million on its debut weekend. The iPhone has seen continuous upgrades to its features. If iCloud becomes the new model for media consumption. contacts. iMessage can make Apple devices more attractive to potential customers that have many friends and family that are already using iOS devices. iMessage is an app and is a free service similar to RIM's popular BlackBerry Messenger (BBM) service. Supporting: 1. as the consumers desire easy sync across multiple platforms. THE SMARTPHONE SPACE HAS A LOT OF POTENTIAL IN EMERGING MARKETS – Apple announced a deal with China Unicom. 3. such as the BlackBerry and iPhone. COULD APPLE CREATE THE SAME SUCCESS STORY WITH IPHONES AS IT DID WITH IPODS? – iPod share of the portable media player market share grew from 0% at launch in October 2001 to around 30% in 7 years. 6. SUCCESS OF THE IPHONE 4S – The iPhone 4S carries a faster A5 dual core processor. IPHONE ON VERIZON AND SPRINT NETWORK WILL HELP EXPAND ITS ADDRESSABLE MARKET – Apple's iPhone 4 was launched on Verizon network in February 2011. Verizon has more than 90 million subscribers in the U. Forecast Rationale iPhone's Market Share in Mobile Phones is driven by (1) The level of penetration of smartphones within the mobile phone market and (2) iPhone's market share within the smartphone segment. which is an improved operating system for Apple with over 200 new features.

within the 700 million subscriber Chinese mobile phone market. iPhone revenues have grown at a fast rate in China in the last few quarters. According to FY Q2 2010 earnings transcript, the iPhone revenues from China alone was $1.3 billion out of the total of $11.18 billion revenues for iPhone worldwide for the first six months of FY 2010. This revenues growth in China was a 200% growth year over year. People are becoming more fashion-conscious and smartphones are considered a status symbol in emerging markets. Growing technological savviness amongst consumers means they will demand more features and better interfaces which favors smartphones. Mitigating: 10. THREAT FROM RIM'S BLACKBERRY AND GOOGLE ANDROID-BASED SMARTPHONES – Apple's biggest smartphone threats are from Android-based smartphones and RIM's BlackBerry. According to NPD, Android surpassed Apple iPhone market share in the US in the first quarter of 2010. 11.SUPPLY CHAIN MANAGEMENT A MAJOR RISK FOR MOBILE PHONE COMPANIES – Companies like Apple are more concerned about the component supply related issues rather than demand issues. The earthquake in Japan has now spurred new issues with regards to component supplies, as many Apple suppliers are Japanese companies. Sources for historical data and explanations can be found on the Trefis.com website (link)
— GLOBAL MOBILE PHONES SOLD —

Global Mobile Phones Sold represents the number of mobile phone units sold each year globally.

Global Mobile Phones Sold (Bil)

2.0 1.5 1.0 0.5 0.0 2007 0 8 09 10 11 12 13 14 15 16 17 18

Historically, unit sales of mobile phones have increased from about 990 million units in 2006 to 1.6 billion units in 2010. Mobile Intelligence, a market research firm, estimated that the number of mobile phones in use was equivalent to about 50% of the world population in early 2008, a year in which about 1.2 billion mobile phones were sold. Wireless Intelligence, another market research firm, indicated that more than 5 billion mobile phones were in use in 2010, suggesting the equivalent of about 70% worldwide mobile penetration in 2010. During 2010, we estimate that about 1.6 billion mobile phones were sold. These figures suggest that a 20 percentage point increment in penetration corresponds to a 0.4 billion increment in mobile phone unit sales. If mobile penetration were to reach 90% of the world population of

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about 7 billion, this suggests that there would be another 0.4 billion increase in unit sales suggesting around 2 billion mobile phones sold annually at that point. We estimate slightly higher unit sales of 2.2 billion annually by the end of the Trefis forecast period based on rising upgrade frequency as mobile phone prices decline further and demand for secondary phones. Forecast Rationale 1. INCREASING RELIANCE ON MOBILE PHONES AS PRIMARY MEANS OF COMMUNICATION – The consumer's need for mobile phones has been increasing day-by-day as people want to be reachable and want to be able reach others all the time. As people are travelling more out of business or personal needs, mobile phones are the best means for them to be reachable. 2. DECLINING HANDSET PRICING AS WELL AS MORE FLEXIBLE PRICING PLANS – The handset pricing has been on a continuous decline due to decreasing input costs associated with making a mobile phone. On top of that, wireless carriers are giving highly subsidized phones--along with a 1-2 year contract--to the customers. These factors have contributed to an increase in sales across the world. 3. EMERGING MARKETS (INDIA, CHINA, BRAZIL) TO DRIVE THE GROWTH – The cellular penetration rate in emerging markets like China and India is still low. We expect more and more people to buy handsets, as wireless providers foray into rural areas, where the penetration is at very low levels. Handset companies will be the direct beneficiaries of high growth rates of new subscriptions expected for telecom providers. 4. DEMAND FOR SECONDARY MOBILE PHONES – We expect that there will be a rise in penetration beyond 100% in certain countries as the prevalence of secondary phones exceeds the number of people without any phones. Some countries already have penetration levels that exceed 100%, including Germany, Italy and the UK. Sources for historical data and explanations can be found on the Trefis.com website (link)
— IPHONE GROSS PROFIT MARGIN —

Gross Margin represents Gross Profit as a percentage of Revenue. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold.

iPhone Gross Profit Margin (%)

60 50 40 30 20 10 0 2007 0 8 09 10 11 12 13 14 15 16 17 18

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We estimate that iPhone Gross Profit Margin decreased from 62% in 2007 to 51% in 2010. Although the margins have decreased, the iPhone is still one of Apple's most profitable products. We believe the hit that Apple had taken in 2010 on the iPhone 4's margins is a thing of the past with the release of the new iPhone 4S. We estimate iPhone's gross margins will improve slightly to around 53% on back of the last quarter iPhone 4S sales. Moving forward, Trefis forecasts that iPhone Gross Profit Margin will decline at a moderate rate till the end of the forecast period. Forecast Rationale Supporting: 1. DECLINING AVERAGE PRICES – Apple's average pricing is expected to decline in the future, which will decrease its margins. Furthermore, increasing smartphone competition from RIM, Nokia and HTC will put additional pressure on prices. We expect that price competition and lower- end iPhone versions will reduce Apple's overall iPhone Gross Profit Margin. Mitigating: 2. FALLING INPUT OR MANUFACTURING COSTS – The input and manufacturing costs for smartphones are expected to decrease due to technological improvements and standardization across the segment. Sources for historical data and explanations can be found on the Trefis.com website (link) Total Revenue (Bil $) iPhones (% of total) iPhone Accessories (% of total) Direct Expense (Bil $) Indirect Expense (Bil $) Gross Profit (Bil $) Free Cash Flow (Bil $) CY07 3.27 98.5 1.53 1.24 0.94 2.03 N/A CY08 9.69 98.2 1.75 4.07 3.90 5.62 N/A CY09 15.7 97.6 2.44 6.19 2.04 9.48 N/A CY10 30.1 96.4 3.56 14.6 8.75 15.4 N/A CY11 53.0 96.4 3.57 24.9 16.5 28.1 11.6 CY12 64.3 96.1 3.94 31.5 19.3 32.8 13.5 CY13 75.7 95.8 4.23 38.6 21.3 37.1 15.8 CY14 88.5 95.5 4.48 46.9 22.9 41.6 18.7 CY15 103 95.3 4.70 56.8 25.2 46.5 21.3 CY16 116 95.1 4.94 66.6 28.1 50.2 22.2 CY17 131 94.8 5.18 77.4 30.5 53.8 23.3 CY18 144 94.6 5.44 88.4 32.6 56.5 23.9

Note that Apple reports financial information for fiscal year ended September 30th. We have calendarized Apple's reported financial data for year ended December 31st.

In addition, you can see the detailed P&L for the iPhone business in the Appendix (link)

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but also because of the monthly fees to AT&T for use of its 3G network. or $25 for 2 GB of data per motnh. iPad's pricing is based on the amount of memory included and whether the device is 3G capable. Buyers may be deterred from purchasing an iPad with 3G not only because of the higher price tag for the device. $629 with WiFi and 3G • 32 GB – $599 with WiFi . the ability to play video games. it reduced the pricing of the lowest version of iPad from $499 to $399. We believe that Apple will reduce iPad Pricing over time. listen to music as well as access to the wide variety of apps available for the iPhone. PRICING TO DECLINE AS APPLE SLASHES PRICES OF OLDER IPAD VERSIONS – After Apple released iPad 2 in March 2011. iPad pricing is distinguished by two features: (i) memory (ii) 3G capability: • 16 GB – $499 with WiFi . The cost of TREFIS ANALYSIS for APPLE CONTENT@TREFIS. This raises the total ownership cost for an iPad with 3G by $180 to $360 in the first year of ownership alone. However. and Apple launched iPad 2 in March 2011. $829 with WiFi and 3G iPad Pricing ($) 600 500 400 300 200 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 iPad was launched in April of 2010. $729 with WiFi and 3G • 64 GB – $699 with WiFi. Kindle is much more mower priced than iPad. Forecast Rationale 1. An AT&T data plan is necessary (in the US) for transferring data over 3G networks and AT&T charges $14.99 for up to 250 MB of data per month.iPad The most important drivers for the iPad business are: • iPad Pricing • iPad Units Sales • iPad Gross Profit Margin — IPAD PRICING — iPad Pricing represents the average price of an iPad. Compared to the Kindle. the iPad offers more capabilities like a color touch-screen.COM + 1 617 394 8763 •11 .

Pricing will play an important role as some consumers opt for cheaper devices in a weak economy. The iPad is a tablet PC that is larger than a smartphone but smaller than a notebook PC. DECLINING NETBOOK PRICES COULD FORCE APPLE TO REDUCE IPAD'S PRICING – Apple has deliberately not forayed into the low priced netbook market as it is a highly competitive market with vendors living on razor thin margins. iPad Units Sales (Mil) 100 75 50 25 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 Apple sold around 14. watch videos. However.com website (link) — IPAD UNITS SALES — iPad Units Sales represents the number iPads sold by Apple. Most of the netbooks are priced below $400 compared to the $499 price for the basic iPad model. The iPad has a 9. download apps and play games on an iPod Touch. In comparison. Samsung. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. we believe there is room for Apple to slash iPad prices in the future. . play video games.8 million iPads in 2010.7 inch screen. IPOD TOUCH HAS SIMILAR FEATURES TO AN IPAD WITH A LOWER PRICE POINT – iPad is considered to be a bigger iPod Touch with many of the same functionality available on the iPod Touch. 2. one can read books and magazines. which is considered ideal for reading books and magazines. Sources for historical data and explanations can be found on the Trefis. view photos. and download apps from the iTunes App Store.COM + 1 617 394 8763 •12 . Apple released the next version of iPad named iPad 2 in March 2011. Motorola Mobility's Xoom. the iPad could cannibalize the netbook sales of competitors since the iPad does have comparable capabilities to some netbooks. the Kindle and Nook come with free wireless service. The main difference between the non-3G iPad and iPod Touch is the screen size. or $25 for 2GB of data per month. AT&T is charging $14.99 for up to 250 MB of data per month. In comparison. Dell and LG tablets. read email.ownership for the 3G iPads can be even higher than the purchase price since an AT&T data plan is necessary (in the US) for transferring data over 3G networks. The iPad competes with RIM PlayBook. Given the significant price gap between the iPad and iPod Touch. For example. The basic version of the iPod Touch is priced at $200 or $299 less than the basic iPad model.7 million iPhones in the 2007 after the launch of the device in June of that year. 3. The iPad allows you to browse the web. Apple sold about 3.

iMessage can make Apple devices more attractive to potential customers that have many friends and family that are already using iOS devices. it could influence demand for all Apple devices in a meaningful way. watch videos and read email. These features will give much more convenience to the user in managing music files. LOWER THAN EXPECTED PRICE POINT TO BENEFIT SALES – Many initially speculated that Apple's iPad would come at a price point between $600 and $1. IMESSAGE SERVICE TO CHALLENGE RIM'S BBM SERVICE – Apple announced the iOS version 5 in which one of the main feature was the iMessage service. view photos. listen to music. a service that replaces the user's music with iTunes compatible format. a totally revamped user interface. 3. Through this app users can chat and exchange files through Wi-fi and 3G. use apps. ICLOUD SERVICE WILL INCREASE THE POPULARITY OF IPADS – iCloud service gives user the ability to listen to music stored in the cloud (remote computers) through iPhone.We forecast that iPad sales will continue to increase at a rapid rate. extensive multi-tasking and multiple home screens among other features. Additionally.COM + 1 617 394 8763 •13 . 2. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. IPAD 2 COULD BOOST APPLE – Apple released iPad 2 in March 2011 and has a few superior features over iPad. front and rear facing cameras. iPad or Mac. INCREASED COMPETITION COULD CHALLENGE APPLE – Google released Android's new version named Honeycomb. Apple announced that a basic iPad model would be available for $499. IPAD IS MUCH MORE THAN A NORMAL E-READER – iPad is not only an e-reader. which is specifically designed for tablets. This could help Apple drive iPhone and iPad sales. which includes the faster A5 processor. which could leverage its dominant position in the enterprise segment to penetrate the tablet market. Through iTunes Match. one will not be required to upload a song even if a song is not purchased through iTunes. one can consume music through different Apple devices. but also a useful device to surf the web. it is an ultra thin and light device. 4. which will benefit its unit sales even more.000. and is designed thinner and lighter. We expect iPad pricing to decline further in the future. It includes support for big screens (7 to 9 inch). If iCloud becomes the new model for media consumption. 5. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold. RIM is expected to release PlayBook tablet. In addition to that. Forecast Rationale Supporting: 1.com website (link) — IPAD GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue. iMessage is an app and is a free service similar to RIM's popular BlackBerry Messenger (BBM) service. Sources for historical data and explanations can be found on the Trefis. Mitigating: 6.

you can see the detailed P&L for the iPad business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS.36 11.29 7. after it launched iPad 2 in March 2011 Mitigating: 2.06 12.6 5.8 5.20 CY15 45. Apple has already slashed the pricing of lowest version of iPad from $499 to $399.37 11.iPad Gross Profit Margin (%) 30 25 20 15 10 5 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 The iPad Gross Profit Margin was around 30% for 2010.8 31.44 1. In addition.2 41.8 6.87 12. Future technology improvements could enable the iPad to decrease its manufacturing cost and help offset some declines in margins associated with lower pricing.0 7.76 N/A CY11 24.0 4.3 6.56 2.23 CY18 53.66 11. Trefis forecasts that iPad Gross Profit Margin will decline. PRICING DECLINE TO AFFECT MARGINS – We estimate Apple's average iPad pricing to decline going forward.27 CY17 50.4 5.9 5.com website (link) Total Revenue (Bil $) Direct Expense (Bil $) Indirect Expense (Bil $) Gross Profit (Bil $) Free Cash Flow (Bil $) CY10 9.97 4.2 5. as Apple slash prices for older versions of iPad. FALLING INPUT OR MANUFACTURING COSTS – The iPad uses NAND flash memory for most of its models and NAND memory prices are are constantly falling.7 35.4 38. Forecast Rationale Supporting: 1.1 5.29 11.1 4.31 3. Sources for historical data and explanations can be found on the Trefis. We have calendarized Apple's reported financial data for year ended December 31st.68 CY14 42.4 17.2 6.4 24.87 9.COM + 1 617 394 8763 •14 .18 Note that Apple reports financial information for fiscal year ended September 30th.20 6.5 6.38 CY16 47.2 28.02 CY12 34.2 33.10 CY13 39.3 6.

based on our sum of the parts analysis. and HP have seen a lot of price erosion each year.50 0. APPLE PRICING DECLINES HAVE BEEN LESS SEVERE THAN THAT OF COMPETITION – Surprisingly.426. 2.The most important drivers for the Notebooks business are: • Mac Notebook Pricing • Mac Notebooks Market Share • Global Notebook & Netbook Units Sold • Mac Notebooks Gross Profit Margin — MAC NOTEBOOK PRICING — Mac Notebook Pricing represents the average price of a Mac Notebook. Acer.65% of our $503 price estimate for the stock. It declined further to around $1.50 1. Apple's strong brand recognition and the success of its OS X Leopard Operating system has contributed to its growing user base. when the average Mac Notebook Pricing decreased for the first time to $1. Apple has always had a niche market and differentiated product in the crowded personal computer market.COM + 1 617 394 8763 •15 . Apple has been able to maintain its Mac Notebook Pricing.00 0. and constitutes 5. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. This is evident from the fact that Q3 08 was the first quarter that saw notebook shipments overtake desktop shipments.399 in 2005 to $1. INCREASING ADOPTION OF NOTEBOOKS COMPARED TO DESKTOPS – There has been a global increase in demand for notebooks compared to desktops and hence we believe the prices should not decline at as fast a pace as desktops.00 2007 0 8 09 10 11 12 13 14 15 16 17 18 The average Mac Notebook Pricing increased from $1.460 in 2007. The declining trend in pricing started from 2008.Notebooks The Notebooks division is part of the Macintosh business.75 0.25 0. Mac Notebook Pricing (K $) 1.250 in 2010. Trefis forecasts that Mac Notebook Pricing will decrease. whereas its competitors like Dell.25 1. Forecast Rationale 1.

Mac Notebooks Market Share (%) 7.com website (link) — MAC NOTEBOOKS MARKET SHARE — Mac Notebooks Market Share represents the percentage share of notebook units sold by Apple. These features will give much more convenience to the user in managing music files. The iMac is targeted at general consumers. one can consume music through different Apple devices. The Mac Pro is specifically designed for professionals and business users. and Acer. which is priced lower and starts at $699.5% in 2005 to 5% in 2010. Its unique touch screen interface is what attracts the high-end users. users who intend to use it for educational purposes. Dell. SWITCHING FROM PC TO MAC HAS BECOME EASIER – Switching to a Mac is becoming increasingly appealing to existing PC-Windows users due to Apple's Mac OS and TREFIS ANALYSIS for APPLE CONTENT@TREFIS. Its primary competitors are HP.0 2007 0 8 09 10 11 12 13 14 15 16 17 18 The Mac Notebooks Market Share increased from 3. 4. 2. Trefis forecasts that Mac Notebooks Market Share will continue to increase at a moderate rate.5 5. AGGRESSIVE PRICING CUTS COULD BENEFIT MARKET SHARE – Apple has been reducing the prices of all its MacBook products in the past and we expect this will benefit Apple's market share. UNIQUE GRAPHICAL USER INTERFACE AND NEW PRODUCTS – Macintosh scores over other competitors in terms of the unique and user friendly graphical user interface. and business users. ICLOUD SERVICE WILL INCREASE THE POPULARITY OF MACS – iCloud service gives user the ability to listen to music stored in the cloud (remote computers) through iPhone.Sources for historical data and explanations can be found on the Trefis. Additionally. it could influence demand for all Apple devices in a meaningful way. 3. Through iTunes Match. like .5 0. Forecast Rationale Supporting: 1. Mac has consistently come up with new products. If iCloud becomes the new model for media consumption. The Mac Mini is a small sized desktop. one will not be required to upload a song even if a song is not purchased through iTunes.0 2. iPad or Mac. a service that replaces the user's music with iTunes compatible format.COM + 1 617 394 8763 •16 .

This could be a disadvantage for Apple. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. such as Parallels has made it easier to retain Windows features on a Macintosh. Apple updated MacBook Air With Next Generation Processors. especially in the recessionary environment. 5. Sources for historical data and explanations can be found on the Trefis. Mitigating: 6. low-cost virtualization software.Windows' dual-boot system (Bootcamp). Dell. . such as Microsoft Office can also be run natively in Mac OS. The growth in notebook shipments has been driven by: 1.COM + 1 617 394 8763 •17 .com website (link) — GLOBAL NOTEBOOK & NETBOOK UNITS SOLD — Global Notebook & Netbook Units Sold represents the number of notebooks units sold each year globally. Desktop shipments increased only by 15% in the last 5 years while notebooks witnessed about 150% in the same period. Thunderbolt I/O & Backlit Keyboard in July 2011 after which Mac sales went up 22% in the next two months. and Acer. INCREASING SHIFT FROM DESKTOPS TO NOTEBOOKS – There has been a significant shift from desktops to notebooks in the last few years. with Q3 08 seen as the inflection point when notebook shipments outpaced desktop shipments heralding the advent of notebooks in a big way . RECESSIONARY ENVIRONMENT TO PREVENT USERS FROM SWITCHING TO MAC – All Mac desktops are in the higher price range when compared to competing PCS by HP. Additionally. HALO EFFECT OF IPOD AND IPHONES – Mac has been able to increase its market share due to the halo effect. The market share increase has been in effect after Apple re-branded its Mac. Global Notebook & Netbook Units Sold (Mil) 250 200 150 100 50 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Global Notebook & Netbook Units Sold have increased more than three folds during 2005-10 reaching 203 million in 2010. as consumers look to cut costs. Key Microsoft productivity tools. whereby satisfied iPod and iPhone users purchase more Apple products.

ICLOUD COULD BE A THREAT TO PC MARKET GROWTH – iCloud service gives user the ability to listen to music stored in the cloud (remote computers) through iPhone. and this should further spur the growth in shipments post 2009. increasing competition from tablet devices will severely slow down the grow in Global Notebook & Netbook Units Sold Sources for historical data and explanations can be found on the Trefis. iPad or Mac. thereby limiting PC's usage. 2. photo and document library. NOTEBOOKS – SMALLER AND MORE CONVENIENT – One of the reasons notebooks are gaining increasing popularity over desktops is because of their size which allows consumers the convenience and flexibility to have a moving computer with them as against a desktop 3. Those customers may choose to just have the iPhone and iPad (which now automatically sync with each other via iCloud) and not own a PC altogether.COM + 1 617 394 8763 •18 . Forecast Rationale 1.com website (link) — MAC NOTEBOOKS GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue. Mac Notebooks Gross Profit Margin (%) 30 25 20 15 10 5 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 TREFIS ANALYSIS for APPLE CONTENT@TREFIS. Thus while we estimate Global Notebook & Netbook Units Sold to grow going forward as PC penetration increases globally. the tablet devices will soon be competing with notebooks & netbooks in functionality and given their ultra portable nature giving notebooks & netbooks a run for their money.2. in April 2010 a number of firms around the world have come up with their own tablet device with increased features and functionality. Going forward we expect Global Notebook & Netbook Units Sold to increase though at much slower than historical rate. As the companies around the world strive hard to capture a share in the potentially huge tablet market. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold. we believe. iCloud has the potential to replace the traditional usage of the PC as a music. a tablet computing device. ADVENT OF NETBOOKS – THE NEXT GENERATION OF NOTEBOOKS – The advent of netbooks and mini notebooks at prices starting at $200 is giving consumers a very economical and convenient option. RISING POPULARITY OF TABLET DEVICES – With the launch of Apple's iPad.

Mitigating: 2.4 15. Forecast Rationale Supporting: 1.54 2. we would expect further average margin declines.54 1.67 4. you can see the detailed P&L for the Notebooks business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS.78 6.92 2. DECLINING NOTEBOOK PRICES AND POTENTIAL MIX SHIFT IF APPLE INTRODUCES A NETBOOK – We believe notebook prices will continue to decline.83 0.96 2.03 CY13 18.COM + 1 617 394 8763 •19 . If Apple introduces a netbook to compete in the nascent netbook market.37 2.91 2.21 6.8 15.07 N/A CY08 9. FALLING INPUT OR MANUFACTURING COSTS – Mac Notebooks use the Intel microprocessors in most of its models for which the prices are constantly falling.90 4. Sources for historical data and explanations can be found on the Trefis.96 5.56 2. which is encouraging.1 13.42 CY15 20.9 2.35 Note that Apple reports financial information for fiscal year ended September 30th.18 5.88 CY12 17.5 3.We estimate that Mac Notebooks Gross Profit Margin has been around 30% historically.com website (link) Total Revenue (Bil $) Direct Expense (Bil $) Indirect Expense (Bil $) Gross Profit (Bil $) Free Cash Flow (Bil $) CY07 6.14 5.56 2. Also.2 14.48 CY17 21.76 N/A CY09 9.1 15. Nevertheless.58 N/A CY11 15.42 CY18 21.93 N/A CY10 12.01 5. which will put pressure on margins.6 3.90 4.2 13.1 2.96 5. Trefis forecasts that Mac Notebooks Gross Profit Margin will decline at a moderate rate. We have calendarized Apple's reported financial data for year ended December 31st.54 CY16 20.0 12.21 CY14 19. there is an overall industry decline in average notebook prices.8 2.60 2.63 2.1 8.62 2.03 3. technology improvements has enabled Mac to decrease its manufacturing cost.8 3.44 1.17 2. In addition.85 0.4 10.2 3.0 2.21 5. Apple's notebook prices have not declined as fast the competition's prices.

90% of our $503 price estimate for the stock. LOW COST OR FREE SOFTWARE ALTERNATIVES COULD NEGATIVELY IMPACT APPLE – Increasingly. OS X Lion is the Mac operating system. spreadsheets and presentations. iLife is used to organize photos and enhance movie quality. enhance the movie quality. iLife helps users to organize photos. MobileMe helps to keep email. and constitutes 3. This could be substituted for by TREFIS ANALYSIS for APPLE CONTENT@TREFIS.COM + 1 617 394 8763 •20 . 4. based on our sum of the parts analysis. and iPod. 3.Software & Services The Software & Services division is part of the Macintosh business. Trefis forecasts that Apple will see continuous decline in Revenue Per Mac at a slower rate. which is called the AppleCare. Aperture is Apple's photo editing software. and carry out other related tasks. iPhone. Users can access it for an extra charge. and calender-related data in sync with the Mac. iWork helps users to organize software. For example. 5. Forecast Rationale 1. Revenue Per Mac ($ per unit) 200 150 100 50 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 The Revenue Per Mac for Software & Services has decreased from approximately $245 in 2005 to $212 in 2010 according to our estimates. which could be a substitute for high cost Apple Mac software. there are a number of cheaper and better quality software options on the market. such as: 1. The services part of Mac is the extended warranty service. 2.The most important drivers for the Software & Services business are: • Revenue Per Mac • Global Notebook & Netbook Units Sold • Software and Services Gross Profit Margin — REVENUE PER MAC — The software subdivision of Mac consists of software. contacts.

com website (link) — GLOBAL NOTEBOOK & NETBOOK UNITS SOLD — Global Notebook & Netbook Units Sold represents the number of notebooks units sold each year globally. Apple updated MacBook Air With Next Generation Processors. RECESSIONARY ENVIRONMENT FORCING CONSUMERS TO CUT COST ON DISCRETIONARY ITEMS – We believe the above mentioned software and services are discretionary in nature and consumers will look to cut these types of costs during the recession. Desktop shipments increased only by 15% in the last 5 years while notebooks witnessed about 150% in the same period. ADVENT OF NETBOOKS – THE NEXT GENERATION OF NOTEBOOKS – The advent of netbooks and mini notebooks at prices starting at $200 is giving consumers a very economical and convenient option. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. 3. . The growth in notebook shipments has been driven by: 1. Sources for historical data and explanations can be found on the Trefis. REDUCING COSTS OF ITS NEW SOFTWARE RELEASES WILL HELP APPLE – Apple released the latest version of its Mac operating system named OS X Lion and slashed its price to $30 resulting in sales of over a million licenses on the very first day of the launch. 2. with Q3 08 seen as the inflection point when notebook shipments outpaced desktop shipments heralding the advent of notebooks in a big way . which is freely downloadable. NOTEBOOKS – SMALLER AND MORE CONVENIENT – One of the reasons notebooks are gaining increasing popularity over desktops is because of their size which allows consumers the convenience and flexibility to have a moving computer with them as against a desktop 3. Thunderbolt I/O & Backlit Keyboard in July 2011 after which Mac sales went up 22% in the next two months. and this should further spur the growth in shipments post 2009. INCREASING SHIFT FROM DESKTOPS TO NOTEBOOKS – There has been a significant shift from desktops to notebooks in the last few years.COM + 1 617 394 8763 •21 .Google's Picasa software. 2. Global Notebook & Netbook Units Sold (Mil) 250 200 150 100 50 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Global Notebook & Netbook Units Sold have increased more than three folds during 2005-10 reaching 203 million in 2010.

Apple unveiled Mac OS X Lion version. photo and document library. The OS can be downloaded online TREFIS ANALYSIS for APPLE CONTENT@TREFIS. iPad or Mac. Thus while we estimate Global Notebook & Netbook Units Sold to grow going forward as PC penetration increases globally. the tablet devices will soon be competing with notebooks & netbooks in functionality and given their ultra portable nature giving notebooks & netbooks a run for their money. RISING POPULARITY OF TABLET DEVICES – With the launch of Apple's iPad. thereby limiting PC's usage. Software and Services Gross Profit Margin (%) 70 60 50 40 30 20 10 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 The Software and Services Gross Profit Margin has been around 70% as per our estimates. Those customers may choose to just have the iPhone and iPad (which now automatically sync with each other via iCloud) and not own a PC altogether. Forecast Rationale 1.com website (link) — SOFTWARE AND SERVICES GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue. and was attractively priced at $30. MAC OS X PRICE DECLINE TO BE SOMEWHAT OFFSET BY REDUCED COST – During the WWDC event held on June 6th 2011. ICLOUD COULD BE A THREAT TO PC MARKET GROWTH – iCloud service gives user the ability to listen to music stored in the cloud (remote computers) through iPhone. Forecast Rationale 1. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold. Trefis forecasts that Software and Services Gross Profit Margin will increase at a moderate rate. a tablet computing device.Going forward we expect Global Notebook & Netbook Units Sold to increase though at much slower than historical rate. As the companies around the world strive hard to capture a share in the potentially huge tablet market. increasing competition from tablet devices will severely slow down the grow in Global Notebook & Netbook Units Sold Sources for historical data and explanations can be found on the Trefis. in April 2010 a number of firms around the world have come up with their own tablet device with increased features and functionality. 2.COM + 1 617 394 8763 •22 . we believe. iCloud has the potential to replace the traditional usage of the PC as a music.

COM + 1 617 394 8763 •23 .77 3.06 1. we believe that these mostly involve the manpower costs and negligible manufacturing or input costs.37 1.66 1.07 0. 3.31 CY14 4.53 N/A CY09 2.75 1.67 2. The previous versions require installation through physical optical disc available in the retail stores. INCREASED MAC UNITS SALES TO BENEFIT SOFTWARE & SERVICES SEGMENT – The Software and Services segment's revenues are directly correlated with the number of Mac desktops and notebooks unit sales.84 1.31 1.73 0. you can see the detailed P&L for the Software & Services business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS. In addition.19 0.71 N/A CY10 3.53 1.06 CY12 4.09 1.17 CY13 4.22 3.35 4.92 1.25 N/A CY08 2.03 1. it should directly benefit Software & Services segment of Apple.92 3.07 1.32 1.72 Note that Apple reports financial information for fiscal year ended September 30th.04 1.54 0.67 2.56 2. we believe the online availability of software would have reduced input cost for Apple.10 3.91 1. We have calendarized Apple's reported financial data for year ended December 31st.48 1. Although this price cut was a drastic cut from previous OS prices.70 1.20 1.61 2. Sources for historical data and explanations can be found on the Trefis.66 CY17 5.from the Mac App store.08 1.55 1.49 CY15 5.51 2.57 1. Hence the gross margins may not be affected through this change.63 CY16 5.com website (link) Total Revenue (Bil $) Direct Expense (Bil $) Indirect Expense (Bil $) Gross Profit (Bil $) Free Cash Flow (Bil $) CY07 1.58 1.22 2.44 0. NEGLIGIBLE INPUT OR MANUFACTURING COSTS – Since Software & Services segment manufactures software and provides warranty services.30 1.69 CY18 5.79 0. 2.39 1.15 N/A CY11 3.66 1.38 1.82 3. As we expect healthy Mac unit growth.74 1.

to counter-attack.00 0. Forecast Rationale 1.04% of our $503 price estimate for the stock.75 0. We expect iTunes to lead the industry trend for lower pricing over time.50 0.25 0.00 2007 0 8 09 10 11 12 13 14 15 16 17 18 Songs Pricing declined slightly from around $0. Songs Pricing ($) 1.99 in 2006 to $0. which sells individual tracks for a lower price to iTunes.69.The most important drivers for the iTunes business are: • Songs Pricing • Unit Sales of Songs • iTunes Gross Profit Margin — SONGS PRICING — Songs Pricing represents the average price of Songs sold through the iTunes store.COM + 1 617 394 8763 •24 . But Apple is facing increasing competition from Pandora and Samsung's Media Store. Apple has discontinued selling all individual songs for $0. Sources for historical data and explanations can be found on the Trefis.93 in 2010. and started offering three tiers: $0. Trefis forecasts that Songs Pricing will decline at a moderate rate. based on our sum of the parts analysis. the industry has started reducing the prices of legal music available online.com website (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS.29 in 2009. 2.99 and $1. ONLINE MUSIC HAS CHEAP AVAILABLE SUBSTITUTES – What users find the best about iTunes is the voice quality when listened through a iPod or iPhone. Another competitor NexTune offers much the same functionality as iTunes. $0. ILLEGAL MUSIC DOWNLOADS STILL PREVALENT – The music industry has realized that it is almost impossible for them to stop illegal music downloads from the Internet.99. and constitutes 2. So.iTunes The iTunes division is part of the iTunes & iOS Apps business.

2 billion units in 2006 to 3. These margins include the margins for iTunes as well as iPhone Applications segment. we expect the online usage for content to increase as it provides low cost substitutes. Sources for historical data and explanations can be found on the Trefis. COPYRIGHT PROTECTION LAWS DISSUADING PEOPLE TO USE ILLEGAL MEANS OF MUSIC DOWNLOAD – iTunes will gain more if copyright protection laws for illegal music download remain strict and enforceable.4 billion units in 2010 as per our estimates. Unit Sales of Songs (Bil) 8 7 6 5 4 3 2 1 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 The Unit Sales of Songs has increased from 1. Trefis forecasts that Unit Sales of Songs will increase at a fast rate over the next few years before stabilizing. iTunes provides low cost legal music downloads and hence should see increased usage. users like to download iTunes Music rather than buy a music CD or DVD. For example. where users are looking to cut costs wherever possible. We foresee that this is indeed the case that should happen going forward although illegal music downloads have reached record highs.com website (link) — ITUNES GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue.COM + 1 617 394 8763 •25 . which costs much more. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold.— UNIT SALES OF SONGS — Unit Sales of Songs represents the number of units of Songs sold by Apple. Forecast Rationale 1. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. RECESSIONARY ENVIRONMENT A BOON FOR ONLINE CONTENT – Due to the prevailing recessionary environment. 2.

07 6.12 4.0 83.44 N/A CY08 2.0 83.37 0.39 11.42 10.8 0.3 0.85 N/A 89.08 9.iTunes Gross Profit Margin (%) 30 25 20 15 10 5 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 iTunes Gross Profit Margin has been around 30% from 2005 to 2009.55 0.66 1.13 4.06 5.90 0.69 0.COM + 1 617 394 8763 •26 .88 0.9 82.7 80.95 0.61 0.20 0.02 0.79 N/A 89.37 1.72 0.06 5.18 2.13 0.05 5.0 0.02 0.13 0.54 0.8 0.14 3.58 10.82 0.77 795 CY15 6.36 562 CY12 5.6 0.24 1.80 1.52 0.80 0.14 2.49 10.47 N/A 87.11 891 TREFIS ANALYSIS for APPLE CONTENT@TREFIS.13 4.67 N/A CY09 2.87 0.89 0.3 0.03 0.2 0.23 0.92 1.85 846 CY16 6.00 1. Trefis forecasts that iTunes Gross Profit Margin will remain constant as we don't expect Apple to change its policy of giving 70% cut to production companies and applications developers.43 0.91 1.67 710 CY14 5.16 0.0 0.07 6.63 9.46 0.51 10.28 1.96 1.18 0. as major share of profits is taken up by production companies and iPhone Apps developers as they are the content providers.06 5.9 82.16 N/A CY11 4.44 10.9 0.8 81.9 82.78 0.7 0. Sources for historical data and explanations can be found on the Trefis.22 2.08 8.06 6.09 9.11 4.13 0.72 0.07 10.12 4.31 1.46 10.2 1.90 81.22 0.17 0.40 11.7 0.50 1.57 644 CY13 5.1 0.17 3. Online downloading has always been a low margin business.08 1.56 0.15 3.66 0.83 N/A CY10 3.02 872 CY18 7.14 0.97 1.70 1.com website (link) Total Revenue (Bil $) iPod Games (% of total) TV Shows (% of total) Movies (% of total) eBooks (% of total) Music (% of total) Audiobooks (% of total) Direct Expense (Bil $) Indirect Expense (Bil $) Gross Profit (Bil $) Free Cash Flow (Mil $) CY07 1.8 82.08 7.46 0.93 852 CY17 6.

you can see the detailed P&L for the iTunes business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS. We have calendarized Apple's reported financial data for year ended December 31st. In addition.Note that Apple reports financial information for fiscal year ended September 30th.COM + 1 617 394 8763 •27 .

iPod Touch & iPad Apps Gross Profit Margin — AVERAGE PAID IPHONE & IPAD APP PRICING — Average Paid iPhone & iPad App Pricing represents the average price of a paid iPhone.03 in 2010 which consisted solely of iPhone and iPod Touch apps. 2. The number of available apps are in excess of 350. and constitutes 1.Apps for iPhone.5 0. based on our sum of the parts analysis. iPod & iPad The Apps for iPhone. Trefis forecasts that Average Paid iPhone & iPad App Pricing will decrease at a moderate rate.COM + 1 617 394 8763 •28 . MORE IPHONE AND IPAD USERS WILL ALLOW APPS TO BE PROFITABLE AT LOWER PRICE POINT AND HIGHER SALES VOLUME – Developers will have an incentive to reduce pricing so as to benefit from the increased number of downloads TREFIS ANALYSIS for APPLE CONTENT@TREFIS. competition amongst apps for user attention will lead to decreasing apps average pricing. INCREASING COMPETITION AMONGST APPS – As the number of available download-able applications increases.5 1. iPod & iPad business are: • Average Paid iPhone & iPad App Pricing • Number of iPhone & iPad Apps Downloaded • Paid App % • iPhone.0 1. Forecast Rationale Supporting: 1.000 as of 2010. Average Paid iPhone & iPad App Pricing ($) 2.The most important drivers for the Apps for iPhone.99% of our $503 price estimate for the stock.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The Average Paid iPhone & iPad App Pricing was $2. iPod & iPad division is part of the iTunes & iOS Apps business.0 0. iPod Touch and iPad Application.

TREFIS ANALYSIS for APPLE CONTENT@TREFIS.com website (link) — NUMBER OF IPHONE & IPAD APPS DOWNLOADED — Number of iPhone & iPad Apps Downloaded represents the number of software applications for the iPhone that have been downloaded through Apple's iPhone App store which was launched in July of 2008. Most of the iPhone Apps are re-developed by developers so as to optimize it for the larger resolution screen of iPad.COM + 1 617 394 8763 •29 . iPad’s larger screen compared to the iPhone gives developers an opportunity to provide more features and improve the graphics of an application.Mitigating: 3. The figures prior to the launch of the iPad in April 2010 refer solely to iPhone apps. Scrabble App is being sold for $10 on iPad versus $3 on iPhone and Tetris App is being sold for $8 on the iPad versus $5 on the iPhone. The iPhone app download number touched the 1 billion mark in April 2009. The Number of iPhone & iPad Apps Downloaded was around 7. Sources for historical data and explanations can be found on the Trefis.2 billion by the end of 2009 and has shown continued strong growth in 2010. IPAD APP PRICING LIKELY TO REMAIN HIGHER THAN IPHONE APP PRICING – iPad Apps will be optimized for the larger screen. surged up to 5 billion by June 2010 and has now exceeded 18 billion as of September 2011. OmniGraffle is a new $50 iPad app that allows for touch-based diagramming and brainstorming and is not available for the iPhone.2 billion in 2010. Number of iPhone & iPad Apps Downloaded (Bil) 70 60 50 40 30 20 10 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The Number of iPhone & iPad Apps Downloaded was around 2. the Number of iPhone & iPad Apps Downloaded increases multi-fold. There will be better features and graphics on iPad Apps. The larger screen also encourages apps for the iPad that wouldn’t otherwise be available for the iPhone. Trefis forecasts that Number of iPhone & iPad Apps Downloaded will continue growing as more people purchase iPhones. For example. For example. The number of iPhones sold has increased at a fast rate. Forecast Rationale 1. For every additional sale of an iPhone. MORE IPHONE USERS WILL MEAN MORE IPHONE APPS USERS – iPhone mobile phone sales have shown a healthy growth since the launch of the iPhone in July 2007. This could require more effort and cost on the developer’s part.

APPLICATIONS ARE A CHEAP SOURCE OF OWNING GAMES AND TOOLS – iPhone Apps have become a popular source of owning games and tools at a low price. Trefis forecasts that Paid App % will increase at a slow rate. Forecast Rationale 1. Paid App % (%) 5 4 3 2 1 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The Paid App % was approximately 4% in 2010. The iAd platform will help developers monetize free apps.com website (link) — PAID APP % — Paid App % represents the percentage of downloaded iPhone applications that are paid. and applications like Skype for free. Sources for historical data and explanations can be found on the Trefis. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. users can download popular games like Tiger Woods for as low as $10. EXCESSIVE ADS ON A FREE APP COULD COMPEL USERS TO DOWNLOAD A PAID APP – Since the majority of paid apps are low priced ($1 to $2 only). 3. IPOD TOUCH & IPAD APPS GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue. users will not shy away from buying paid apps. The only source of revenue for a developer for free apps is advertisements. Sources for historical data and explanations can be found on the Trefis. if excessive advertising on a free app becomes a nuisance for them. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold.COM + 1 617 394 8763 •30 . APPS DOWNLOADS FROM IPAD ITSELF COULD REACH 11 BILLION – We estimate there could be 11 billion application downloads from iPads alone by the end of the Trefis forecast period.2. For example. but may not necessarily be a good thing for app users.com website (link) — IPHONE.

06 N/A CY08 CY09 CY10 CY11 0.4 76.8 4.0 0.53 23.12 27.24 0.65 1.98 0.01 0. we forecast that iPhone.87 CY18 7.45 18.0 89.02 94.72 0.38 CY14 CY15 3. With the introduction of the iAd platform in 2010.65 1.2 83.77 16.1 2. Through iAd.COM + 1 617 394 8763 •31 .01 N/A 100 0.02 0.48 0.32 11.45 0.85 total) Paid Apps (% of total) Direct Expense (Bil $) Indirect Expense (Bil $) Gross Profit (Bil $) Free Cash Flow (Bil $) 100 0. iPod Touch & iPad Apps Gross Profit Margin to jump up to nearly 38%. We don't expect Apple to change its policy of giving a 70% cut to developers for paid apps and 60% to developers through the iAd platform.96 1.15 2. iPod Touch & iPad Apps Gross Profit Margin (%) 30 25 20 15 10 5 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The iPhone.38 2.26 CY13 2.19 0.03 0.iPhone.67 CY16 CY17 5.8 1.27 35. Since we expect Apple's revenues earned through the iAd platform to be less than through paid apps. we expect the mix of paid apps to increase slightly over the forecast period.13 0.80 1.0 73. Apple will get a cut of 40% of iAd gross revenues while the rest goes to the app developer.2 1.41 0.1 4.9 69.10 1.04 0.51 0.47 0.2 64.89 0.9 81. As a result.2 0.01 0.63 0. the increase in average app gross margins will be small.87 1. The remaining 70% goes to the app developer.20 N/A TREFIS ANALYSIS for APPLE CONTENT@TREFIS.20 6. we expect iPhone.8 86. Sources for historical data and explanations can be found on the Trefis.76 30. As shown in our Paid App % forecast. iPod Touch & iPad Apps Gross Profit Margin will decline only slightly due to a change in mix of paid apps.44 0.37 0.17 CY12 1.89 0.6 2.99 13.0 3.17 0.61 4. iPod Touch & iPad Apps Gross Profit Margin has been 30% from 2008 to 2009 since Apple only gets 30% of the Paid Apps revenues.36 0.com website (link) Total Revenue (Bil $) iAd App Advertising Revenue (% of N/A N/A 5.91 0.11 0.40 1.

COM + 1 617 394 8763 •32 . you can see the detailed P&L for the Apps for iPhone. In addition. We have calendarized Apple's reported financial data for year ended December 31st. iPod & iPad business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS.Note that Apple reports financial information for fiscal year ended September 30th.

75 0. Apple's Mac Desktop Pricing has not seen the same level of price erosion experienced by competing desktops from Dell. Mac Desktop Pricing (K $) 1.25 1. Apple has always had a niche market and differentiated product in the crowded personal computer market. Trefis forecasts that Mac Desktop Pricing will decrease. Mitigating: 2.COM + 1 617 394 8763 •33 . GROWING USER BASE OF ITS UNIQUE PC PLATFORM – Surprisingly.00 2007 0 8 09 10 11 12 13 14 15 16 17 18 The average Mac Desktop Pricing increased from $1.50 1. and constitutes 1. Apple's strong brand recognition and the success of its OS X Leopard Operating system has contributed to its growing user base. when the average Mac Desktop Pricing decreased for the first time to $1.500 in 2007.50 0. Acer and HP. Forecast Rationale Supporting: 1. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. The declining trend in pricing started from 2008.305 in 2005 to $1. It then reached around $1.Desktops The Desktops division is part of the Macintosh business.The most important drivers for the Desktops business are: • Mac Desktop Pricing • Mac Desktops Market Share • Global Desktop Units Sold • Mac Desktops Gross Profit Margin — MAC DESKTOP PRICING — Mac Desktop Pricing represents the average price of a Mac Desktop.25 0. INCREASING ADOPTION OF NOTEBOOKS OVER DESKTOPS – Increasing worldwide preference for notebooks over desktops means that desktop prices should decline at a fast pace to remain attractive to buyers.62% of our $503 price estimate for the stock.00 0.488. based on our sum of the parts analysis.340 in 2010.

The iMac is targeted at general consumers. HALO EFFECT OF IPOD AND IPHONES – Mac has been able to increase its market share due to the halo effect. 3. The Mac Pro is specifically designed for professionals and business users. Mac has consistently come up with new products. Mac Desktops Market Share (%) 5 4 3 2 1 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 The Mac Desktops Market Share increased from 1. Sources for historical data and explanations can be found on the Trefis. INCREASE IN PRICING AS DESKTOPS BECOME MORE POWERFUL – Demand for desktops may ultimately be limited to very powerful computers. Trefis forecasts that Mac Desktops Market Share will continue to increase at a moderate rate.COM + 1 617 394 8763 •34 . Apple announced updates to the Mac Mini to include the Lion OS and high speed processors in July 2011. such as Parallels has made it easier to retain Windows features on a Macintosh. Key Microsoft productivity tools. and business users. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. such as. Forecast Rationale Supporting: 1.com website (link) — MAC DESKTOPS MARKET SHARE — Mac Desktops Market Share represents the percentage share of Desktop Units sold by Apple. users who intend to use it for educational purposes. whereby satisfied iPod and iPhone users purchase more Apple products. The market share increase has been in effect after Apple re-branded its Mac. SWITCHING FROM PC TO MAC HAS BECOME EASIER – Switching to a Mac is becoming increasingly appealing to existing PC-Windows users due to Apple's Mac OS and Windows' dual-boot system (Bootcamp). The Mac Mini is a small sized desktop.8% in 2005 to 3.3. Its unique touch screen interface is what attracts the high-end users. Dell. in which case the average pricing for such computers may be higher than historical averages. Its primary competitors are HP. Additionally. and Acer.4% in 2010. such as Microsoft Office can also be run natively in Mac OS. lowcost virtualization software. UNIQUE GRAPHICAL USER INTERFACE AND NEW PRODUCTS – Macintosh scores over other competitors in terms of the unique and user friendly graphical user interface. 2. which is priced lower and starts at $699.

Sources for historical data and explanations can be found on the Trefis. Forecast Rationale 1. ADVENT OF NETBOOKS – THE NEXT GENERATION OF NOTEBOOKS – The advent of netbooks and mini notebooks at prices starting at $200 is giving consumers more choices when it comes to mobile PCs.COM + 1 617 394 8763 •35 . Global Desktop Units Sold (Mil) 150 125 100 75 50 25 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Historically. 2. This could be a disadvantage to Apple. and Acer. desktop units sales have decreased from 143 million units in 2005 to 140 million units in 2010. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. NOTEBOOKS – SMALLER AND MORE CONVENIENT – One of the reasons notebooks are gaining increasing popularity over desktops is because of their size which allows for greater mobility. Dell. RECESSIONARY ENVIRONMENT TO PREVENT USERS FROM SWITCHING TO MAC – All Mac desktops are in the higher price range when compared to competitors like HP.Mitigating: 4.com website (link) — GLOBAL DESKTOP UNITS SOLD — Global Desktop Units Sold represents the number of desktop units sold each year globally.com website (link) — MAC DESKTOPS GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold. as consumers look to cut costs. 3. INCREASING SHIFT FROM DESKTOPS TO NOTEBOOKS – There has been a significant shift from desktops to notebooks in the last few years with Q3 08 seen as the inflection point when notebook shipments outpaced desktop shipment. Demand for netbooks will have a positive impact on sales growth. especially in the recessionary environment. We expect the Global Desktop Units Sold to increase at a slower rate. Sources for historical data and explanations can be found on the Trefis.

Apple may choose to focus solely on high-end desktops.88 1.93 1.53 1.79 739 CY12 7.97 3.com website (link) Total Revenue (Bil $) Direct Expense (Bil $) Indirect Expense (Bil $) Gross Profit (Bil $) Free Cash Flow (Mil $) CY07 4. High end desktops would likely be priced at a premium and afford Apple better margins. along with other PC makers.28 5. and their prices have formed an upper bound for desktop pricing.89 1.61 0.55 N/A CY11 7. .51 1. which have superior performance to notebooks.COM + 1 617 394 8763 •36 .60 707 CY17 7.03 1.72 735 CY14 7.15 3.27 1.88 1.89 1.78 0.05 1.68 0. FALLING INPUT OR MANUFACTURING COSTS – Most Mac desktop models use Intel microprocessors. Mitigating: 2.15 N/A CY08 5.68 0. Technology improvements have enabled Mac to decrease its manufacturing cost.65 0.65 753 CY16 7. 3.76 723 CY13 7.67 0.30 5.67 0.73 0.56 673 CY18 7. As notebook prices continue to fall to unprecedented lows--and pricing between desktops and notebooks remains narrow--Apple.29 N/A CY09 4.33 5.44 0.18 5.86 0.Mac Desktops Gross Profit Margin (%) 25 20 15 10 5 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Mac Desktops Gross Profit Margin has been around 25% historically according to our estimates. may be forced to sacrifice margins to continue selling desktops. PRICE COMPETITION IN DESKTOPS AND FALLING NOTEBOOK PRICES COULD PRESSURE MARGINS – Notebooks are typically priced at a premium when compared to desktops with similar specifications.58 3.89 1. Forecast Rationale Supporting: 1.34 5.99 1.32 4.57 1.24 N/A CY10 6.69 758 CY15 7. APPLE MAY FOCUS EXCLUSIVELY ON HIGH END DESKTOPS – Rather than attempt to compete in the low-end desktop segment and to make desktop pricing as attractive as notebook pricing.87 1. Sources for historical data and explanations can be found on the Trefis.31 5.33 5.51 638 TREFIS ANALYSIS for APPLE CONTENT@TREFIS. which are constantly declining in price.24 5. Trefis forecasts that Mac Desktops Gross Profit Margin will decline at a moderate rate.

you can see the detailed P&L for the Desktops business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS. We have calendarized Apple's reported financial data for year ended December 31st.Note that Apple reports financial information for fiscal year ended September 30th. In addition.COM + 1 617 394 8763 •37 .

Also. 2. better and cheaper products from Creative and Sandisk should serve as a warning to iPod's near monopoly.iPod The most important drivers for the iPod business are: • iPod Pricing • iPod Market Share • Portable Media Players Units • iPod Gross Profit Margin — IPOD PRICING — iPod Pricing represents the average price of the iPod. Forecast Rationale 1. PRICE COMPETITION FROM MICROSOFT AND SANDISK – Microsoft's Zune HD directly competes with iPod Touch and is priced lower compared to iPod. TECHNOLOGY IMPROVEMENTS AND REDUCED INPUT COSTS – iPod uses NAND flash memory for most of its models. the Sanza Fuze from Sandisk has many features which compete directly with iPod and is priced cheaply as well.COM + 1 617 394 8763 •38 .com website (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS. For example. Apple has been reducing the price for each new product it launches in the market. for which costs are constantly falling. technology improvements have enabled iPod to decrease its manufacturing cost. iPod Pricing ($) 175 150 125 100 75 50 25 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 iPod Pricing decreased from $195 in 2005 to $163 in 2010. Though iPod has always enjoyed a greater market share since its inception. Sources for historical data and explanations can be found on the Trefis. and hence. Trefis forecasts that Apple will continue to reduce iPod Pricing at a moderate rate.

However. iPod Market Share has been in the range 24% to 31% for the last few years. as well as the designed synchronization of iPods and iTunes. 4. HALO EFFECT FROM IPHONE AND OTHER APPLE PRODUCTS – iPod sales benefits from the brand and marketing awareness of other popular Apple products. Trefis forecasts that iPod will continue to gain market share in the long term. The introduction of the iPod Shuffle. MICROSOFT WILL STOP INTRODUCING NEW VERSIONS OF ZUNE – According to a March 2011 Bloomberg report. 2. This development will mean that Apple stands to gain even more as Microsoft will no more be a potent competitor for Apple in this market. SEAMLESS INTEGRATION BETWEEN IPOD AND ITUNES – The expansion of content--including Digital Rights Management (DRM) free content--on Apple's iTunes Store. INTRODUCTION OF NEW INNOVATIVE PRODUCTS – Apple continues to innovate and improve its iPod product. the iPod Touch. Its primary competitors are Sandisk. makes Apple's products more appealing to many consumers. Microsoft will stop introducing new versions of the Zune music and video player because of the tepid demand. Microsoft's only chance of maintaining market share was to keep coming out with the compelling new versions of Zune. 3. Forecast Rationale Supporting: 1. This means that its market share could continue to decline to almost zero levels in a few years from now. iPod Market Share (%) 30 25 20 15 10 5 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 iPod has always been a market leader and has been able to maintain a large portion of market share primarily due to its marketing strategy and brand name. now Microsoft will only be selling the existing versions of Zune. Creative and Microsoft. Mitigating: TREFIS ANALYSIS for APPLE CONTENT@TREFIS.— IPOD MARKET SHARE — iPod Market Share represents the percentage of worldwide media player units sold by Apple.COM + 1 617 394 8763 •39 . and the video and touch-screen iPod Nano will help to keep demand high.

which makes them arrange playlists according to a user's voice commands. These innovative additions to the features could prevent declines. INCREASED COMPETITION FROM MICROSOFT AND SANDISK – Microsoft's Zune directly competes with iPod Touch and is priced significant lower. CANNIBALIZATION FROM IPHONE – We expect that higher-end iPod versions will experience sales cannibalization from customers opting for iPhones with similar functionality.5. better and cheap products from Creative and Sandisk should serve a warning to iPod near monopoly. 6.COM + 1 617 394 8763 •40 . 2. We believe the decreased average selling price of media players could help slow a decline in demand. media player units sales have increased from 120 million units in 2005 to 200 million units in 2010. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. VIDEO PLAYING AND VOICEOVER CAPABILITIES PROVIDE MULTIPLE FEATURES – Media players have transitioned from a pure digital audio player to a video-playing device with voice-recognition capabilities.com website (link) — PORTABLE MEDIA PLAYERS UNITS — Portable Media Players Units represents the number of media players sold each year globally. Sources for historical data and explanations can be found on the Trefis. Apple. Portable Media Players Units (Mil) 200 150 100 50 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Historically. For example. Sandisk. We expect the global media players market to increase. FALLING DIGITAL MEDIA PLAYER PRICES COULD STIMULATE DEMAND – Digital media players are undergoing reduced prices due to technology improvement and increased competition. the Sanza Fuze from Sandisk has many features which compete directly with the iPod and is priced cheaply as well. Alhough the iPod has always enjoyed a bigger chunk of market share since its inception. and Creative are vying to take the share of Media players. For example. Forecast Rationale Supporting: 1.

technology improvements have enabled the iPod to decrease its manufacturing cost. Trefis forecasts that iPod Gross Profit Margin will decline at a moderate rate. Apple has aggressively reduced pricing of each iPod model.com website (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS. Mitigating: 2.COM + 1 617 394 8763 •41 . once iPhone prices fall even more. Forecast Rationale Supporting: 1. Sources for historical data and explanations can be found on the Trefis. MIX SHIFT TO LOW END IPODS – We expect iPod to experience a mix shift toward lower end. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold. FALLING INPUT OR MANUFACTURING COSTS – Since the iPod uses NAND flash memory for most of its models. the iPhone could become a substitute for iPods. smartphones become an easy substitute for Media Players. iPod Gross Profit Margin (%) 25 20 15 10 5 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 We estimate that iPod Gross Profit Margin declined from around 26% in 2006 to 24% in 2010. there could be a case where. lower margin iPods. as most of the features present in Portable Media Players are also available in today's generation of smartphones. Sources for historical data and explanations can be found on the Trefis. for which the cost are constantly falling. In fact.com website (link) — IPOD GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue. SMARTPHONES ACTING AS SUBSTITUTES FOR PORTABLE MEDIA PLAYERS – As smartphone demand grows. as the high-end iPod segment is cannibalized by iPhone sales. which will also contribute to reducing gross margins.Mitigating: 3. Also.

95 0.88 1.33 86.0 7.88 1.97 1.9 13.86 79.28 84.32 0.29 85.53 83.1 12.66 82.55 N/A CY09 9.3 17.58 698 CY17 7.56 673 CY18 7.0 13.93 1.96 1.79 80.8 14.46 1.6 6.1 6.38 N/A CY10 9.14 N/A CY11 7.68 693 CY12 7.61 736 CY16 7.77 2.COM + 1 617 394 8763 •42 . you can see the detailed P&L for the iPod business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS.23 0.87 1.0 12.98 1.4 6. We have calendarized Apple's reported financial data for year ended December 31st.2 5.61 0.2 16.5 6.8 5.62 727 CY15 7.7 6.88 1.25 1.0 5.5 19.64 673 CY13 7.0 16.21 2.72 81.63 694 CY14 7.91 0.Total Revenue (Bil $) iPods (% of total) iPod Accessories (% of total) Direct Expense (Bil $) Indirect Expense (Bil $) Gross Profit (Bil $) Free Cash Flow (Mil $) CY07 10.22 2.2 5.4 18.9 6.80 87.77 0.14 0.1 88.64 0.6 20.8 15.0 7. In addition.40 84.62 N/A CY08 9.05 0.51 2.53 648 Note that Apple reports financial information for fiscal year ended September 30th.89 1.11 87.

Keyboard 4.The most important drivers for the Peripherals business are: • Revenue Per Mac • Global Notebook & Netbook Units Sold • Peripherals Gross Profit Margin — REVENUE PER MAC — The Peripherals subdivision of Mac desktops and notebooks consists of the peripherals or the accessories that can be connected to a Mac to enhance its features and quality. Wireless Mouse 5. 2. These include: 1.Peripherals The Peripherals division is part of the Macintosh business. Time Capsule – This device allows users to backup data wirelessly. based on our sum of the parts analysis. Trefis forecasts that Peripherals will see continuous declines in Revenue Per Mac at a slower rate. people may shun away from buying expensive peripherals and instead buy a TREFIS ANALYSIS for APPLE CONTENT@TREFIS. AirportExpress and AirportExtreme – These devices can be connected to speakers or work wirelessly.COM + 1 617 394 8763 •43 . and constitutes 0. LED Cinema Display – This is a display screen for desktops and notebooks Revenue Per Mac ($ per unit) 125 100 75 50 25 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 The Revenue Per Mac for Peripherals has decreased approximately from $204 in 2005 to $99 in 2010 according to our estimates.80% of our $503 price estimate for the stock. 2. DECREASING NOTEBOOKS AND DESKTOPS PRICES MAY ALSO HAVE A MAJOR IMPACT – Since the world is seeing decreasing notebook and desktops price. SLOW ECONOMY FORCING CONSUMERS TO CUT COST ON DISCRETIONARY ITEMS – We believe the above mentioned peripherals are discretionary in nature and consumers will look to cut these types of costs in a slower economy or recessionary environment. 3. Forecast Rationale 1.

Thunderbolt I/O & Backlit Keyboard in July 2011 after which Mac sales went up 22% in the next two months. . Going forward we expect Global Notebook & Netbook Units Sold to increase though at much slower than historical rate. This is because buying a Mac could become cost effective than buying peripherals. The growth in notebook shipments has been driven by: 1. Apple will have to lower the peripherals pricing in line with Mac desktop and notebook pricing.COM + 1 617 394 8763 •44 . as Mac's pricing declines. with Q3 08 seen as the inflection point when notebook shipments outpaced desktop shipments heralding the advent of notebooks in a big way .com website (link) — GLOBAL NOTEBOOK & NETBOOK UNITS SOLD — Global Notebook & Netbook Units Sold represents the number of notebooks units sold each year globally. 2. INCREASING SHIFT FROM DESKTOPS TO NOTEBOOKS – There has been a significant shift from desktops to notebooks in the last few years. and this should further spur the growth in shipments post 2009. Global Notebook & Netbook Units Sold (Mil) 250 200 150 100 50 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Global Notebook & Netbook Units Sold have increased more than three folds during 2005-10 reaching 203 million in 2010.new Mac. ADVENT OF NETBOOKS – THE NEXT GENERATION OF NOTEBOOKS – The advent of netbooks and mini notebooks at prices starting at $200 is giving consumers a very economical and convenient option. Sources for historical data and explanations can be found on the Trefis. which also could impact Revenue Per Mac. Desktop shipments increased only by 15% in the last 5 years while notebooks witnessed about 150% in the same period. Apple updated MacBook Air With Next Generation Processors. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. NOTEBOOKS – SMALLER AND MORE CONVENIENT – One of the reasons notebooks are gaining increasing popularity over desktops is because of their size which allows consumers the convenience and flexibility to have a moving computer with them as against a desktop 3.

Gross Profit is determined as Revenue minus Cost of Goods and Services Sold. Thus while we estimate Global Notebook & Netbook Units Sold to grow going forward as PC penetration increases globally. ICLOUD COULD BE A THREAT TO PC MARKET GROWTH – iCloud service gives user the ability to listen to music stored in the cloud (remote computers) through iPhone. RISING POPULARITY OF TABLET DEVICES – With the launch of Apple's iPad. in April 2010 a number of firms around the world have come up with their own tablet device with increased features and functionality. a tablet computing device. we believe. Those customers may choose to just have the iPhone and iPad (which now automatically sync with each other via iCloud) and not own a PC altogether. photo and document library. iCloud has the potential to replace the traditional usage of the PC as a music. Peripherals Gross Profit Margin (%) 35 30 25 20 15 10 5 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 The Peripherals Gross Profit Margin has been maintained at around 35% as per our estimates. Trefis forecasts that Peripherals Gross Profit Margin will decline at a moderate rate. it will have a direct impact on the topline and gross profit margins.Forecast Rationale 1. iPad or Mac. REDUCED TOPLINE GROWTH FOR PERIPHERALS DIVISION – As Mac undergoes a reduction in the number of units sold.com website (link) — PERIPHERALS GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue. 2. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. along with decreasing peripheral average revenue per Mac. As the companies around the world strive hard to capture a share in the potentially huge tablet market. Forecast Rationale Supporting: 1. the tablet devices will soon be competing with notebooks & netbooks in functionality and given their ultra portable nature giving notebooks & netbooks a run for their money. thereby limiting PC's usage.COM + 1 617 394 8763 •45 . increasing competition from tablet devices will severely slow down the grow in Global Notebook & Netbook Units Sold Sources for historical data and explanations can be found on the Trefis.

47 1.85 471 817 346 Note that Apple reports financial information for fiscal year ended September 30th. the input costs for these are constantly falling due to technological improvement and increasing commoditization.19 1.COM + 1 617 394 8763 •46 .25 372 632 260 CY13 2.93 279 493 N/A CY11 1.34 1. keyboards.67 1.36 386 673 287 CY14 2.86 328 473 N/A CY09 1. you can see the detailed P&L for the Peripherals business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS. wireless mice. and other accessories.12 340 580 239 CY12 1. In addition.77 453 799 345 CY18 2.04 1. REDUCED INPUT OR MANUFACTURING COSTS – Since the Mac peripherals subdivision manufactures Mac accessories like LED Cinema displays.74 85.59 407 751 343 CY16 2. We have calendarized Apple's reported financial data for year ended December 31st.5 397 N/A CY10 1.69 435 780 344 CY17 2. Sources for historical data and explanations can be found on the Trefis.70 180 387 N/A CY08 1.43 0.com website (link) Total Revenue (Bil $) Direct Expense (Bil $) Indirect Expense (Mil $) Gross Profit (Mil $) Free Cash Flow (Mil $) CY07 1.88 1.13 0.47 392 713 320 CY15 2.70 1.57 1.09 0.33 0.Mitigating: 2.

INTRODUCTION OF GAMING CONSOLE – The Average Selling Price (ASP) declines of Apple TV may not continue at a fast rate in the future. YouTube as well as from PCs. Trefis forecasts that Apple TV Pricing will decrease. Apple TV Pricing ($) 300 250 200 150 100 50 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Apple TV Pricing decreased from $299 in 2007 to $121 in 2010 as Apple launched the $99 Apple TV.COM + 1 617 394 8763 •47 . It has no local storage and streams the content from the Internet to the TV. APPLE TV PRICE LOWERED TO BOOST SALES AND INCREASE PUBLICITY – We believe Apple TV is currently priced lower than many of Apple's other products on a gross margin basis.com website (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS. Content can be streamed from sites like Netflix. This is because Apple TV is a late comer to the digital set top box space and reducing the price is a strategy to gain share in this market. 3. 2. NEW APPLE TV PRICED AT $99 – Apple unveiled the $99 Apple TV that is a fourth of the size of the original. Forecast Rationale 1. Sources for historical data and explanations can be found on the Trefis. These additional features will help arrest the price declines at a fast rate. such as the gaming console.Apple TV The most important drivers for the Apple TV business are: • Apple TV Pricing • Unit Sales of Apple TV • Apple TV Gross Profit Margin — APPLE TV PRICING — Apple TV Pricing represents the average price of Apple TV. as Apple integrates value-added features.

5 15.5 5. YouTube as well as from PCs.— UNIT SALES OF APPLE TV — Unit Sales of Apple TV represents the number of units of Apple TV sold by Apple.com website (link) — APPLE TV GROSS PROFIT MARGIN — Gross Margin represents Gross Profit as a percentage of Revenue. increased broadband penetration among consumers will increase the market for Apple TV users.0 2007 0 8 09 10 11 12 13 14 15 16 17 18 Unit Sales of Apple TV has increased from 1. TREFIS ANALYSIS for APPLE CONTENT@TREFIS. 3. INTRODUCTION OF GAMING CONSOLE – The Average Selling Price (ASP) declines of Apple TV may not continue at a fast rate in the future. Content can be streamed from sites like Netflix. 2.0 million units in 2007 to around 3. It has no local storage and streams the content from the Internet to the TV. Sources for historical data and explanations can be found on the Trefis. films and music. NEW APPLE TV PRICED AT $99 – Apple unveiled the $99 Apple TV that is a fourth of the size of the original. ITUNES SUCCESS TO AFFECT ADOPTION OF APPLE TV – As consumers become conditioned to using their TV as a media entertainment center for downloadable TV shows. as Apple integrates value-added features. Forecast Rationale 1.0 2.0 12. BROADBAND PENETRATION INCREASE TO BENEFIT APPLE TV – As high-speed broadband technology improves and becomes cheaper.5 0.0 7. 4. Trefis forecasts that Unit Sales of Apple TV will increase at a fast rate for the next few years before stabilizing.5 million units in 2009 according to our estimates. Gross Profit is determined as Revenue minus Cost of Goods and Services Sold. such as the gaming console.COM + 1 617 394 8763 •48 . Unit Sales of Apple TV (Mil) 17.5 10. We believe this lower priced Apple TV will help boost its sales. These additional features will help arrest the price declines at a fast rate. success will be dependent on Apple's ability to provide attractive content for consumers through its iTunes online store by establishing contracts with TV and film producers.

Hence we have raised our estimate for Gross margins to 25% in 2010 and then to 30% from 2011 onwards.9 N/A CY08 0. and hence. Sources for historical data and explanations can be found on the Trefis.8 61. However.00 715 158 287 129 CY15 1. We have calendarized Apple's reported financial data for year ended December 31st.06 760 161 298 136 CY16 1.37 292 53.25 914 192 333 140 Note that Apple reports financial information for fiscal year ended September 30th. Forecast Rationale 1. In addition.COM + 1 617 394 8763 •49 .81 566 140 239 98. Trefis forecasts that Apple TV Gross Profit Margin will decrease. BOM is $64.0 76.4 N/A CY09 0. APPLE TV PRICE LOWERED TO BOOST SALES AND INCREASE PUBLICITY – Apple TV is currently priced lower than many of Apple's other products on a gross margin basis. you can see the detailed P&L for the Apple TV business in the Appendix (link) TREFIS ANALYSIS for APPLE CONTENT@TREFIS. the $99 Apple TV.1 CY12 0.6 N/A CY10 0.42 316 60.18 859 182 321 138 CY18 1.12 808 173 309 136 CY17 1.63 436 110 188 78. This is also because Apple TV has setup its footprint quite late.42 338 18. but severe price reductions will not help its gross profit margins.4 CY13 0.com website (link) Total Revenue (Bil $) Direct Expense (Mil $) Indirect Expense (Mil $) Gross Profit (Mil $) Free Cash Flow (Mil $) CY07 0.Apple TV Gross Profit Margin (%) 30 25 20 15 10 5 0 2007 0 8 09 10 11 12 13 14 15 16 17 18 The Apple TV Gross Profit Margin for Apple TV has been maintained at around 21% from 2007 till 2009. reducing the price makes it an attractive bet. We expect Apple to increase its sales.5 106 N/A CY11 0.92 650 153 268 114 CY14 1. according to iSuppli report.30 237 28.4 85.

34 1. iPod & iPad (% of N/A 0.1 15.2 N/A 23.78 3.1 7.24 1.2 16.07 11.69 4.85 3.98 4.31 0.40 74.9 24.35 3.02 1.40 4.94 TREFIS ANALYSIS for APPLE CONTENT@TREFIS.5 6.7 7.46 Desktops (% of total) iPod (% of total) Peripherals (% of total) Apple TV (% of total) Gross Profit (Bil $) iPhone (% of total) iPad (% of total) Notebooks (% of total) Software & Services (% of total) iTunes (% of total) Apps for iPhone.88 2.42 2.62 10.70 2.25 1.9 5.4 12.6 8.08 0.72 2.8 11.37 0.96 CY10 76.5 N/A 18.15 1.08 5.02 5.37 5.04 2.50 12.10 3.73 2.88 8.80 2.2 N/A 20.09 2.2 15.58 1.38 83.24 7.97 CY08 40.50 12.20 CY12 144 44.2 3.75 1.86 1.1 9.5 N/A 20.43 0.30 6.7 17.62 1.Appendix Summary P&L for Apple Summary P&L for Apple Total Revenues (Bil $) iPhone (% of total) iPad (% of total) Notebooks (% of total) Software & Services (% of total) iTunes (% of total) Apps for iPhone.73 1.0 20.0 7.6 49.56 1.1 20.07 11.67 2.4 2.70 2.64 1.2 9.07 4.9 3.5 17.7 21.20 2.51 15.7 57.96 2.42 69.07 0.7 52.20 0.4 10.86 0.67 2.3 14.6 N/A 15.86 1.55 113 60.3 9.52 70.81 1.44 2.32 0.56 87.39 48.88 0.5 6.38 87.16 2.76 0.16 Desktops (% of total) iPod (% of total) Peripherals (% of total) 1.49 4.6 20.41 1.6 N/A 15.25 0.75 15.67 5.73 1.70 4.67 0.2 4.99 0.6 9.46 1.4 20.81 0.67 CY11 119 44.45 19.69 4.64 4.8 2.98 CY17 239 54.5 26.96 2.24 1.2 4.75 1.41 2.4 6.9 15.39 12.47 1.4 8.73 2.86 1.85 8.94 0.11 6.42 57.87 1.03 0.81 3.94 0.01 4.5 3.49 1.7 7.76 0.4 10.0 15.80 2.0 5.78 4.56 46.92 4.7 33.3 14.2 N/A 20.38 4.72 2.0 24.70 1.41 CY18 258 56.0 57.2 15.0 2.92 25.57 3.02 1.43 2.39 8.4 10.COM + 1 617 394 8763 •50 .1 6.15 1.3 8.30 3.37 5.41 2. iPod & iPad (% of total) CY07 29.19 4.98 0.27 2.64 1.34 1.68 3.08 4.09 0.9 4.00 0.5 8.29 11.4 23.9 62.67 5.7 7.9 21.0 3.48 3.0 3.41 2.03 0.85 3.1 49.80 2.43 0.46 1.41 total) Desktops (% of total) iPod (% of total) Peripherals (% of total) Apple TV (% of total) Direct Expenses (Bil $) iPhone (% of total) iPad (% of total) Notebooks (% of total) Software & Services (% of total) iTunes (% of total) Apps for iPhone.1 6.91 27.4 8.5 17.7 12.0 7.5 63.96 0.42 2.1 58.6 52.2 16.27 3.87 0.2 3.52 127 62.02 3.42 63.58 1.19 4.1 N/A 23.55 3.5 N/A 18.87 1.5 4.07 0.69 3.49 156 64.5 4.99 2.38 4.94 0.1 2.7 64.0 8.11 0.1 64.08 0.20 2.5 20.24 7.22 2.15 0.9 15.21 5.4 2.99 0.6 34.46 10.0 11.0 15.08 N/A 0.12 0.07 3.19 3.81 0.12 1.53 1.40 1.01 19.3 24.12 6.5 57.07 CY14 182 48.04 1.38 5.75 1.78 1. iPod & iPad (% of total) N/A 0.29 2.36 29.3 8.74 2.33 12.00 CY16 220 52.16 0.11 CY13 163 46.95 2.0 22.56 CY09 46.5 11.05 1.20 0.74 2.7 7.91 2.9 14.40 2.23 1.09 2.40 4.44 2.43 2.51 141 63.61 3.5 8.30 6.1 7.92 4.7 12.64 4.88 2.96 0.6 23.1 60.37 0.48 171 64.16 2.08 4.03 CY15 202 51.60 17.29 2.67 2.0 37.41 2.72 2.56 1.5 2.7 17.39 79.99 2.67 2.56 100 58.60 17.2 9.2 3.5 26.81 2.5 12.2 57.10 3.9 14.33 12.80 2.69 3.30 2.1 9.78 4.0 37.47 1.12 1.27 3.43 2.3 39.47 5.9 1.

39 28.80 2.15 1.42 2.96 2.39 44.24 1.94 0.37 5.29 2.75 1.1 7.64 1.5 26.62 4.4 10.98 0.4 57.39 CY08 0.73 2.5 6.33 12.88 2.02 1.56 1.7 12.5 8.16 0.42 33.46 1.70 2.38 50.41 1.07 0.2 15.69 3.86 0.0 60.COM + 1 617 394 8763 •51 .6 N/A 15.42 CY14 0.42 2.38 4.98 0.75 1.19 4.6 62.38 36.5 4.37 0.3 14.4 57.42 CY13 0.41 1.41 2.60 17.08 4.44 2.66 20.10 3.81 0.88 0.94 0.51 10.1 9.36 16.72 2.19 4.27 3.4 37. iPod & iPad (% of N/A 0.3 14.78 4.81 CY12 0.86 0.2 N/A 20.03 0.38 CY18 0.76 0.2 4.4 2.38 4.5 8.16 2.11 0.86 1.40 4.87 1.51 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.3 8.29 2.78 4.2 3.41 2.11 0.37 5.67 2.43 2.99 0.42 26.38 11.5 17.64 4.96 0.8 52.69 4.20 2.72 2.67 5.85 3.85 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A 3.11 49.1 57.86 1.02 1.70 2.2 58.7 7.40 40.99 0.3 64.0 3.42 CY15 0.42 36.0 15.45 4.16 2.9 14.20 0.96 0.5 57.87 1.1 60.96 2.09 2.3 62.0 7. iPod & iPad (% of total) CY07 0.44 2.80 2.24 7.67 0.5 6.40 4.03 0.00 0.45 N/A N/A N/A N/A N/A N/A CY10 0.39 35.1 9.92 4.40 CY16 0.39 CY17 0.67 2.1 63.43 2.Summary P&L for Apple continued Apple TV (% of total) Indirect Expenses (Bil $) iPhone (% of total) iPad (% of total) Notebooks (% of total) Software & Services (% of total) iTunes (% of total) Apps for iPhone.36 N/A N/A N/A N/A N/A N/A CY11 0.4 8.56 1.20 2.74 2.09 2. We have calendarized Apple's reported financial data for year ended December 31st.41 2.39 20.42 31.5 64.9 15.75 1.67 2.50 12.38 36.76 0.0 15.73 1.99 2.69 3.73 2.2 15.07 0.4 8. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.64 1.7 17.9 58.1 6.47 1.46 CY09 0.74 2.0 7.9 15.1 6.08 0.08 4.7 7.34 1.5 17.42 23.58 1.64 4.73 1.07 total) Desktops (% of total) iPod (% of total) Peripherals (% of total) Apple TV (% of total) Free Cash Flow (Bil $) iPhone (% of total) iPad (% of total) Notebooks (% of total) Software & Services (% of total) iTunes (% of total) Apps for iPhone.10 3.67 2.9 64.62 N/A N/A N/A N/A N/A N/A 8.99 2.00 0.88 2.15 1.94 0.2 16.5 N/A 18.38 47.75 1.7 7.47 1.30 6.20 0.7 7.2 16.4 63.7 17.69 4.46 1.2 9.42 38.34 1.41 2.2 64.58 1.9 14.40 34.39 Desktops (% of total) iPod (% of total) Peripherals (% of total) Apple TV (% of total) Note that Apple reports financial information for fiscal year ended September 30th.

8 23.80 24.5 98.8 32.4 2.63 25.07 22.47 31.19 60.47 38.9 53.47 56.6 18.6 509 8.9 7.18 14.72 53.0 3.23 7.07 1.74 69.0 46.0 4.41 22.52 696 1.3 0.12 1.81 2.26 -0.04 4.24 121 56.06 3.4 41.3 CY13 72.0 21.68 29.20 7.8 0.74 50.90 7.26 -1.96 3.24 62.3 7.5 7.0 19.5 9.2 0.2 7.46 -1.32 1.97 23.88 2.7 3.1 51.98 1.83 25.7 0.74 41.48 15.68 29.96 88.05 13.7 3.7 7.41 -2.18 7.10 116 124 450 12.5 9.5 21.3 2.90 19.60 30.16 131 CY18 137 432 14.15 0.0 25.6 49.69 15.0 610 2.88 29.4 3.32 1.94 8.4 4.5 536 7.7 570 5.5 0.9 8.46 -1.5 9.27 9.3 8.6 43.18 1.3 2.28 29.04 103 CY16 CY17 111 469 11.04 7.05 6.48 29.0 1.0 3.98 1.72 1.38 15.75 4.Detailed P&L for the iPhone business The most important drivers for the iPhone business are discussed above.5 2.2 9. We have calendarized Apple's reported financial data for year ended December 31st.0 30.60 1.98 1.4 28.1 15.88 24.1 7.93 -5.83 22.88 3.4 489 9. here is the detailed P&L.0 22.3 6.4 2.88 75.5 9.10 5.22 868 0.43 24.0 28.1 N/A N/A N/A N/A 11.03 5.74 59.21 15.46 -0.63 20.86 -0.5 1.4 39.06 -0.17 4.77 24. iPhone: Detailed P&L CY07 CY08 CY09 CY10 CY11 Revenues iPhones (Bil $) iPhone Pricing ($) iPhone's Market Share in Mobile Phones (%) Global Mobile Phones Sold (Bil) iPhone Accessories (Bil $) Revenue Per iPhone ($ per unit) iPhone's Market Share in Mobile Phones (%) Global Mobile Phones Sold (Bil) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) iPhone Gross Profit Margin (%) Indirect Expenses (Bil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.6 50.47 88.4 2.88 2.9 3.0 32.18 1.4 5.6 Note that Apple reports financial information for fiscal year ended September 30th.22 9.4 3.7 CY14 CY15 84.9 4.16 6.9 -1.15 3.97 8.0 16.24 107 53.2 2.60 -2.5 9.6 8.6 51.6 12.07 58.48 29.5 6.9 14.4 8.COM + 1 617 394 8763 •52 .07 1.0 0.48 1.47 66.3 608 2.75 6.21 0.20 144 3.8 37.9 8.08 29.62 9.8 45.01 -4.5 9.54 23.85 22.4 2.22 0.7 29.12 1.9 47.8 2.74 2.66 -0.28 27. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.98 1.03 23.47 77.47 Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Bil $) Free Cash Flow (Bil $) -4.4 1.06 29.28 23.44 32.4 11.48 1.8 13.81 64.23 23.4 4.5 2.7 3.5 9.47 24.23 24.9 4.86 26.1 620 4.8 41.5 51.8 2.24 82.17 12.89 23.2 22.78 1.03 26.47 46.5 9.86 24.5 23.5 9.63 20.20 23.24 94.78 1.6 6.3 0.1 3. % of Gross Profit (%) CY12 61.

4 2.03 23.8 34.8 25.83 22.68 29.20 0.2 CY16 CY17 47.4 29.24 39.20 24.28 29.2 45.2 506 89.4 622 39.2 CY14 CY15 42.06 8.02 Note that Apple reports financial information for fiscal year ended September 30th.4 6.0 6.26 -1.5 9.2 5.46 -0.5 39.5 26.87 6. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.66 7.9 4.0 6.9 3.44 30.87 7.8 9.74 37.5 9.4 CY13 39.7 50.46 -1.10 1.74 2.5 9.2 24.18 8.1 30.5 9.06 -0.23 24.2 12.37 7.3 9.4 4.24 42.38 0.31 N/A 3.9 4.08 29.46 -1.68 0.4 3.74 3. iPad: Detailed P&L CY10 CY11 Revenues iPad Revenue (Bil $) iPad Pricing ($) iPad Units Sales (Mil) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) iPad Gross Profit Margin (%) Indirect Expenses (Bil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.03 26.20 622 14.00 21.4 466 107 50.47 41.86 -0.6 11.0 23.Detailed P&L for the iPad business The most important drivers for the iPad business are discussed above.3 24.5 9.47 35.97 4.24 48.47 17.4 4.9 5.36 7.47 24. We have calendarized Apple's reported financial data for year ended December 31st.1 12.5 9.56 6.2 47.0 7.5 9.47 33.48 29.28 23.74 30.3 27.4 3.5 11.8 45.66 -0.74 34.28 27.27 0.76 7.5 9.8 527 81.0 4.88 29.0 4.7 486 98. here is the detailed P&L.4 CY18 53.63 20. % of Gross Profit (%) CY12 34.83 25.COM + 1 617 394 8763 •53 .48 29.63 20.29 7.68 29.4 584 58.0 5.2 9.5 11.0 6.63 25.23 0.0 6.6 5.47 38.47 28.8 11.1 5.47 Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Bil $) Free Cash Flow (Bil $) -2.0 6.0 1.5 9.7 3.1 42.47 31.24 45.7 3.2 555 70.06 4.8 5.2 28.29 6.43 24.2 448 118 53.26 -0.

41 22.21 4.0 6.5 2.5 26.86 32.78 12.26 -1.26 -0.03 26.1 CY14 CY15 19.83 22.46 1.0 6.24 18.5 9.0 0.4 4.24 19.0 5.42 0.21 0.44 30.47 10.62 2.01 -4.9 5.14 7.90 9.92 2.1 CY18 21.56 29.85 22.01 7.4 8.0 3.0 1.54 0.58 263 21.37 2.0 2.62 212 17.74 13.9 4.78 1.0 28.92 246 20.1 0.91 8.03 7.48 29.5 9. We have calendarized Apple's reported financial data for year ended December 31st. here is the detailed P&L.88 29.4 3.0 2.4 0.47 14.9 8.8 28.2 1.90 19.COM + 1 617 394 8763 •54 .21 8.60 -2.35 -1.6 6.88 271 21.74 5.6 5.06 3.79 8.23 24.0 4.24 4.09 7.2 20.28 23.47 12.7 3.5 9.44 7.17 2.47 13.5 9.48 10.67 6.63 7.66 -0.5 3.8 26.5 9.90 9. % of Gross Profit (%) CY12 17.41 -2.2 27.05 Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Bil $) Free Cash Flow (Bil $) -4.03 23.52 234 19.74 15.30 4.75 4.1 29.96 1.4 6.46 -1.7 3.1 1.47 0.36 7.5 9.87 111 132 9.76 2.96 7.99 202 15.07 2.85 30.69 160 9.8 0.0 3.1 15. Notebooks: Detailed P&L CY07 CY08 CY09 CY10 CY11 Revenues Mac Notebooks (Bil $) Mac Notebook Pricing (K $) Mac Notebooks Market Share (%) Global Notebook & Netbook Units Sold (Mil) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) Mac Notebooks Gross Profit Margin (%) Indirect Expenses (Bil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.5 9.43 24.9 29.79 202 12.24 17.1 1.86 -0.83 30.90 6.68 29.63 25.93 -5.60 2.93 3.7 5.47 15.2 CY16 CY17 20.28 27.6 2.15 7.5 9.5 2.46 -0.28 256 20.63 20. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.1 26.63 20.8 21.3 5.0 CY13 18.42 0.27 5.6 27.4 1.2 1.5 9.5 2.48 0.25 4.09 223 18.8 5.96 7.83 25.23 7.08 29.98 8.47 15.9 4.47 13.0 3.47 15.4 4.43 4.06 -0.54 2.21 6.5 2.24 18.5 3.58 4.56 2.18 8.93 8.06 29.9 3.18 7.28 29.54 N/A N/A N/A N/A 1.46 -1.03 6.03 1.74 15.88 Note that Apple reports financial information for fiscal year ended September 30th.4 6.74 16.68 29.Detailed P&L for the Notebooks business The most important drivers for the Notebooks business are discussed above.7 3.21 1.48 29.89 8.4 3.17 3.

5 9.39 70.04 204 4.48 70.56 70.83 22.79 230 2.74 2.88 29.92 7.06 3.71 2.5 9.41 22.99 202 3.33 148 4.4 4.28 144 8.8 2.46 -1.23 7.07 3.24 4.68 29.28 141 7.03 192 4.15 2.83 3. here is the detailed P&L.70 5.06 29.72 -1.9 8.47 Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Bil $) Free Cash Flow (Bil $) -4.1 3.72 1.74 180 5.08 29.21 3.06 3.7 3.74 3.5 9.0 3.87 2.14 1.23 24.5 1.24 3.17 0.7 3.63 20.44 3.66 208 3.05 70.83 25.28 256 5.54 70.24 111 1.88 271 5.66 0.53 1.5 9.9 2.49 0.17 1.66 0.2 1.47 1.4 4.62 212 4.44 216 2.32 1.73 70.38 CY14 CY15 4.06 -0.63 20.63 0.66 0.0 0.0 0.41 -2.18 0.4 8.3 1.47 1.06 7.03 23.6 1.44 32.74 2.5 9.47 1.51 6.77 7.38 200 4.85 22.82 7.28 29.74 3.19 2.60 -2.02 151 4.4 1.5 9.74 1.60 2.30 70.68 142 7.90 19.48 29.43 24.08 140 6.03 CY16 CY17 5.08 144 8.55 1.07 1.57 N/A N/A N/A N/A 1.37 7.65 3.47 1.04 CY13 4.67 70.40 3.6 6.69 0.46 -0.9 4.67 6.9 3.7 2.09 70.35 8.01 -4.12 1.5 9.74 1.03 26.26 -0.46 -1.58 263 5.10 7.68 29.24 3. % of Gross Profit (%) CY12 4.91 1.88 143 8.75 4.08 1.61 70.5 9.92 246 5.69 160 2.9 4.26 -1.28 23.5 9.09 223 4.31 188 4.38 139 4.25 1.7 3.4 3.22 7.79 2.47 1.48 29.93 -5.47 1.0 1.Detailed P&L for the Software & Services business The most important drivers for the Software & Services business are discussed above.75 1.10 2.53 CY18 5.88 139 5.48 141 7.28 27.20 70.53 184 5.COM + 1 617 394 8763 •55 .31 5.4 3.52 234 4.69 136 4.70 196 4.47 1.22 6.58 8.1 1.31 0.47 1.02 4.63 25.79 202 3.06 TREFIS ANALYSIS for APPLE CONTENT@TREFIS. Software & Services: Detailed P&L CY07 CY08 CY09 CY10 CY11 Revenues Revenue (Bil $) Revenue Per Mac ($ per unit) Mac Desktops Market Share (%) Global Desktop Units Sold (Mil) Mac Notebooks Market Share (%) Global Notebook & Netbook Units Sold (Mil) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) Software and Services Gross Profit Margin (%) Indirect Expenses (Bil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.92 70.24 3.19 220 2.84 1.86 -0.66 -0.87 132 2.07 212 3.86 26.

TREFIS ANALYSIS for APPLE CONTENT@TREFIS.COM + 1 617 394 8763 •56 .Note that Apple reports financial information for fiscal year ended September 30th. We have calendarized Apple's reported financial data for year ended December 31st.

76 62.73 8.26 -0.52 N/A N/A N/A 2.66 311 1.82 5.92 12.31 30.0 0.4 8.7 3.0 0.19 484 7.74 4.75 4.78 3.72 3.97 7.03 0.01 -4.38 7.46 1.62 641 7.08 7.86 0.20 8.24 5.16 0.75 348 1.94 12.21 293 26.10 N/A N/A N/A 1.27 123 5.11 326 27.96 737 6.84 0.74 4.29 0.88 4.02 2.98 360 1.48 29.64 4.43 24.9 4.95 30.5 8.02 30.9 616 5.44 32.5 9.92 11.72 14.18 2.87 7.87 361 1.23 114 22.5 9.99 75.99 2.58 0.70 0.74 4.18 7.6 4.47 4.35 218 2.1 3.22 CY13 3.13 30.23 2.20 149 1.96 7.06 29.0 0.47 4.30 82.0 18.97 3.6 462 2.70 30.80 6.25 279 26.90 3.0 1.0 3.84 0.9 5.0 6.91 30.26 -1.00 48.9 3.5 9.4 3.28 29.21 3.27 3.16 CY16 CY17 3.9 9.0 420 2.0 0.01 7.7 1.7 3.15 0.58 0.23 24.97 2.29 0.52 254 2.54 1.93 -5.51 601 7.50 0.96 2.14 7.Detailed P&L for the iTunes business The most important drivers for the iTunes business are discussed above.08 29.43 3.48 29.17 14.46 -1.70 N/A N/A N/A 1.0 0.85 0.47 2.10 0.13 3.8 673 6.90 19.7 7.2 7.58 1.28 23.46 7.08 90.72 3.66 -0.93 3.4 3.72 CY18 3.03 26.0 3.4 4.0 21.0 0.72 30.50 3.74 5.83 25.6 6.28 27.44 4.87 97.85 0.63 20.55 0.80 6. here is the detailed P&L.23 2.63 20.37 TREFIS ANALYSIS for APPLE CONTENT@TREFIS.30 15.73 3.75 4.1 653 6.17 1.68 29.5 9.47 3.36 7.13 -1.18 307 27.01 356 27.24 5.66 6.65 13.85 5.41 22.07 336 27.99 1.79 13.00 4.89 30.04 346 27.0 1.07 772 6.90 4.79 0.5 12.0 0.47 3.47 4.9 4.50 30.00 6.00 7.06 3.68 1.06 -0.31 0.5 9.0 1.35 563 7.47 3.30 95.47 4.63 25.55 0.4 4.84 3.1 6.23 7.0 1.33 0.47 Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) -4.9 4.COM + 1 617 394 8763 •57 .3 586 5.91 0.0 0.91 11.4 693 6.73 4.53 74.2 8.40 15.06 7.56 30.67 4.17 30.93 12.46 114 5.5 9.5 9.78 6.5 9.87 7.08 4.99 0.73 2.01 360 1.46 -1.74 1.74 3.05 3.05 1.90 11.73 4.9 8.24 5.1 508 3.66 0.90 384 8.95 361 1.46 -0.56 199 24.7 559 4.5 634 5.0 360 1.5 9.00 2.30 5.42 0.27 0.0 8.68 29. iTunes: Detailed P&L CY07 CY08 CY09 CY10 CY11 Revenues iPod Games (Mil $) iPod Games Pricing ($) Unit Sales of iPod Games (Mil) TV Shows (Mil $) TV Shows Pricing ($) Unit Sales of TV Shows (Mil) Movies (Mil $) Movies Pricing ($) Unit Sales of Movies (Mil) eBooks (Mil $) eBooks Pricing ($) Unit Sales of eBooks (Mil) Music (Bil $) Songs Pricing ($) Unit Sales of Songs (Bil) Audiobooks (Mil $) Audiobooks Pricing ($) Unit Sales of Audiobooks (K) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) iTunes Gross Profit Margin (%) Indirect Expenses (Bil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.42 7.89 7.24 6.14 317 27. % of Gross Profit (%) CY12 3.90 361 1.86 26.54 4.92 361 1.75 7.60 6.66 30.35 7.85 22.84 704 6.88 3.83 22.60 -2.4 4.73 672 6.02 1.4 3.41 -2.66 105 5.1 7.03 23.73 3.55 CY14 CY15 3.88 29.83 355 1.7 3.99 0.1 714 7.22 8.09 0.92 6.98 0.1 7.47 4.86 -0.1 7.

16 1. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.85 795 846 CY16 CY17 1.iTunes: Detailed P&L continued Gross Profits (Bil $) Free Cash Flow (Mil $) CY07 CY08 CY09 CY10 CY11 0.77 1.67 0.02 852 872 CY18 2.83 1.11 891 Note that Apple reports financial information for fiscal year ended September 30th.67 710 CY14 CY15 1.44 0.COM + 1 617 394 8763 •58 .93 2. We have calendarized Apple's reported financial data for year ended December 31st.57 644 CY13 1.36 N/A N/A N/A N/A 562 CY12 1.

05 7.4 4.47 1.01 7.77 CY14 CY15 0.7 3.5 0.4 3.63 20.28 29.57 4.89 32.24 1.44 1.47 0.27 0.40 2.01 7.63 0.56 1.03 0.93 1.68 0.56 0.44 32.06 -0.86 26. iPod Touch 0.41 22.4 3.83 24.33 1.5 9.3 4.68 29.6 4.41 N/A N/A N/A 0. iPod Touch & iPad Apps Gross Profit Margin (%) Indirect Expenses (Bil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.37 6.48 29.26 2.36 31.0 4.86 -0.26 -1.5 9.91 31.61 1.03 0.96 1.0 3.COM + 1 617 394 8763 •59 .12 CY18 2.38 8.48 29.74 3.23 24.25 3.02 -2.50 1.71 21.83 1.00 7.89 1.63 20.5 9.9 3.93 39.47 1.06 3.08 2.08 1.14 4.24 5.25 2.4 25.65 7.47 0.48 2.5 9.73 0.08 & iPad Devices in Use (Bil) Ad Impressions per Device (per N/A N/A Month) CY10 CY11 0.9 4.47 0.0 0.24 4.0 0.0 3.7 4.77 1.7 4.03 26.4 4.67 0.04 0.43 7.0 1.15 7.19 0.5 9.19 0.88 1.7 3.51 7. iPod & iPad business The most important drivers for the Apps for iPhone.46 -1.5 0.06 0.68 29.74 1.65 3.41 -2.46 -1.28 27.13 30.83 4.59 1.9 8.50 0.24 6.53 0.20 4.02 0.2 4.85 22.25 4.49 5.93 0.18 14.74 0.5 0.47 4.03 0.83 2.9 25.69 0.45 30.08 34.7 3.72 3.48 33.2 4. % of Gross Profit (%) 8.16 2.40 1.15 0.24 6.17 0. iPod & iPad: Detailed P&L CY08 CY09 Revenues iAd App Advertising Revenue (Bil $) N/A N/A Number of iPhone.00 4.35 7.18 0.4 4.98 33.20 Revenue per Ad Impression ($ per N/A N/A 10.1 CY13 0.47 Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Bil $) Free Cash Flow (Bil $) -5.17 TREFIS ANALYSIS for APPLE CONTENT@TREFIS.41 14.66 -0.47 2.03 23.20 1.87 33.33 30.83 22.99 0.0 0.11 6.3 4.15 2.5 4.0 5.6 6.74 2.23 62.26 1.28 23.87 0.Detailed P&L for the Apps for iPhone.22 6.41 47.86 24.03 30.80 54.10 33.14 0.4 5.63 7.80 0.88 29.5 9.20 4. iPod & iPad business are discussed above.47 4.27 0.08 29.90 19.26 -0. here is the detailed P&L.01 0.53 18.89 0.01 -4.40 1.5 9.45 0.74 1.20 0.42 6.32 1.04 CY16 CY17 1.24 3.0 1.45 28.74 2.35 41.0 0.69 1.2 6.61 7.71 71.4 3.0 4.47 2.5 9.15 0.31 10.78 1.75 CY12 0.76 0.5 9. Apps for iPhone.65 0.04 0.000) Paid Apps (Bil $) Number of iPhone & iPad Apps Downloaded (Bil) Paid App % (%) Average Paid iPhone & iPad App Pricing ($) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) iPhone.75 4.04 0.38 0.25 2.40 0.42 1.72 0.46 -0.

TREFIS ANALYSIS for APPLE CONTENT@TREFIS.COM + 1 617 394 8763 •60 .Note that Apple reports financial information for fiscal year ended September 30th. We have calendarized Apple's reported financial data for year ended December 31st.

90 19.06 3.15 1.24 0.17 3.15 4.47 5.15 1.4 3.34 CY14 CY15 7.5 0.0 1.30 1.08 140 7.31 1.56 2.88 29.5 9.33 1.28 1.67 21.46 -1.69 136 4.44 25.48 29. here is the detailed P&L.5 1.99 0.74 0.65 753 0.43 24.7 3.0 0.89 7.18 0.18 4.9 4.88 143 7.65 6. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.05 3.06 -0.68 142 7.86 25.83 22.33 1.0 0.55 1.6 6.5 9.24 6.4 8.34 3.32 7.24 1.4 4.75 4.32 1.93 -5.5 9.5 0.76 723 1.10 4.28 144 7.57 1.15 4.08 29.94 5.76 4.33 148 5.93 7.7 3.86 26.00 5.5 9.29 1.79 N/A N/A N/A N/A 739 Note that Apple reports financial information for fiscal year ended September 30th.56 1.83 25.0 0.85 22.47 5.0 0. % of Gross Profit (%) CY12 7.03 26.5 9.68 21.60 -2.08 144 7.01 -4.51 24.0 5.47 0.46 -0.5 9.60 6.34 1.58 1.22 4.9 4.48 141 7.28 7.49 2.72 735 1.30 3.68 29.63 25.78 24.86 -0.24 CY18 7.02 151 4.54 1.03 7.1 3.26 -1.23 23.31 CY16 CY17 7.56 673 0.7 3.47 5.74 1.68 22.COM + 1 617 394 8763 •61 .99 5.69 758 1.47 5.73 25.58 1.65 23.28 23.74 6.9 8.26 -0.89 7.28 27.4 3.63 20.53 8.28 4.35 2.28 141 7.74 0.58 5.24 6. Desktops: Detailed P&L CY07 CY08 CY09 CY10 CY11 Revenues Mac Desktops (Bil $) Mac Desktop Pricing (K $) Mac Desktops Market Share (%) Global Desktop Units Sold (Mil) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) Mac Desktops Gross Profit Margin (%) Indirect Expenses (Bil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.5 9.61 23.97 1.88 7.24 6.9 24.47 Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Bil $) Free Cash Flow (Mil $) -4.05 6.5 0.47 3. We have calendarized Apple's reported financial data for year ended December 31st.66 -0.67 22.88 6.28 29.33 CY13 7.88 139 7.57 24.0 3.47 5.38 139 6.03 6.5 9.41 22.4 4.27 7.23 7.0 0.35 3.04 4.Detailed P&L for the Desktops business The most important drivers for the Desktops business are discussed above.68 29.51 638 -1.48 29.44 32.18 4.97 4.89 7.24 6.33 7.63 20.97 6.5 5.60 707 0.58 1.60 6.41 -2.06 29.87 8.50 2.46 -1.47 5.5 9.74 3.

24 7.7 175 1.97 23.5 9.85 22.7 24.53 153 25.88 29.7 3.29 125 25.95 25.Detailed P&L for the iPod business The most important drivers for the iPod business are discussed above.68 9.3 200 1.93 -5. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.9 195 9.2 24.88 7.5 9.0 1.24 7.23 20.3 180 10.21 6.61 736 0.COM + 1 617 394 8763 •62 .88 7.03 23.28 27.86 26.66 -0.1 8.18 6.5 195 7.5 0.63 20.41 22.17 7.5 24.26 27.83 22. % of Gross Profit (%) CY12 6.9 195 1.60 6.18 26.47 5.1 3.5 0.87 7.70 1.0 29.5 9.51 7.53 6.63 20.02 7.3 26. We have calendarized Apple's reported financial data for year ended December 31st.28 CY13 6.11 6.47 6.25 26.9 4.5 170 7.46 26.28 23.48 29.05 6.56 673 0.17 24.98 6.5 9.17 142 24.0 0.5 9.72 6.0 3.9 203 1.66 CY16 CY17 6.3 200 9.03 24.74 2.7 25.5 0.11 1.26 149 24.06 29.53 648 -1.46 -0.0 0.6 6.96 6.26 -1.35 27.90 19.5 195 1.4 8.25 118 25.47 6.47 6.7 175 7.80 8.68 29.46 -1.38 2.0 1.29 7.58 698 0.0 0.08 29.5 0. iPod: Detailed P&L CY07 CY08 CY09 CY10 CY11 Revenues iPods (Bil $) iPod Pricing ($) iPod Market Share (%) Portable Media Players Units (Mil) iPod Accessories (Bil $) Revenue Per iPod ($ per unit) iPod Market Share (%) Portable Media Players Units (Mil) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) iPod Gross Profit Margin (%) Indirect Expenses (Bil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.48 29.62 2.9 181 1.32 19.1 186 1.22 137 24.23 7.7 199 7.64 673 1.74 6.5 9.23 24.68 29.03 26.11 25.92 1.5 1.46 -1.02 1.27 23.47 Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Bil $) Free Cash Flow (Mil $) -4.9 203 7.22 8.7 3.5 9.63 694 2.43 28.05 21.18 6.40 CY14 CY15 6.61 23.4 218 1.63 25.74 1.55 2.46 8.9 181 7.4 25.4 3.26 -0.5 25.68 N/A N/A N/A N/A 693 Note that Apple reports financial information for fiscal year ended September 30th.74 8.26 133 25.5 0.5 9.79 CY18 6.86 -0.60 6.3 192 1.9 3.88 8.47 5.9 4.28 29.8 25.5 170 1.88 168 29.4 3.0 0.1 186 7.21 1.80 1.77 7.86 8.94 162 24.11 154 26.3 192 7.75 4.93 7.0 25.24 7.61 30.9 8.27 122 25.14 20.74 0.77 22.4 4.89 7.33 7.0 25.7 199 1.22 23.06 3.47 6.24 6.41 -2.06 -0.14 1.47 5.7 3.21 23.62 727 0.3 180 1.52 29.91 21.4 4.01 -4.44 32.60 -2.0 24. here is the detailed P&L.83 25.43 24.30 129 25.4 218 9.47 5.64 22.5 9.

08 140 6.47 1.33 1.47 1.79 202 1.24 0.88 29.34 CY16 CY17 2.02 151 4.4 8. We have calendarized Apple's reported financial data for year ended December 31st.93 34.88 95.28 144 8.33 134 2.48 29.33 817 346 -1.92 246 2.46 2.74 1.28 141 7.9 3.23 24.06 29. here is the detailed P&L.4 4.5 9.24 111 1.6 180 8.69 31.1 5.4 4.24 2.69 136 4.87 713 320 0.23 799 345 0.41 22.68 29.47 1.74 1.63 20.28 256 2.18 0.09 1.83 22.67 84.90 19.04 CY14 CY15 2.28 23.93 -5.00 2.70 35.47 32.06 -0.28 29.57 CY18 2.5 9.5 9.62 632 260 1.74 0.43 98.13 751 343 780 344 387 473 397 493 580 N/A N/A N/A N/A 239 Note that Apple reports financial information for fiscal year ended September 30th.47 1.41 -2. Peripherals: Detailed P&L CY07 CY08 CY09 CY10 CY11 Revenues Revenue (Bil $) Revenue Per Mac ($ per unit) Mac Desktops Market Share (%) Global Desktop Units Sold (Mil) Mac Notebooks Market Share (%) Global Notebook & Netbook Units Sold (Mil) Total Revenues (Bil $) Expenses Direct Expenses (Bil $) Peripherals Gross Profit Margin (%) CY12 1.6 4.12 34.9 3.59 32.83 25.46 -0. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.24 0.99 202 1.68 29.8 5.68 142 7.46 -1.7 3.5 9.24 2.86 35.75 4.67 1.85 22.1 3.01 -4.1 85.44 32.6 6.46 -1.63 20.57 85.1 386 7.47 2.06 3.9 8.88 143 8.47 1.04 93.86 -0.1 453 7.6 279 6.47 Indirect Expenses (Mil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.6 328 7.23 7.63 25.5 9.86 26.05 0.0 3.1 340 6.88 CY13 2.6 471 8.1 407 7.9 4.62 212 1.03 26.5 9.34 89.38 139 4.19 2.43 1.6 392 7.48 141 7.60 -2.4 3.28 27.47 87.08 144 8.85 30.47 1.9 4.09 223 2.66 -0.82 1.1 4.0 4.47 1. % of Gross Profit (%) Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Mil $) Free Cash Flow (Mil $) -4.6 372 6.21 2.88 271 2.69 160 1.4 3.08 29.33 148 4.70 96.77 31.5 7.Detailed P&L for the Peripherals business The most important drivers for the Peripherals business are discussed above.19 91.52 234 2.75 673 287 0.74 35.5 9.5 9.26 -1.48 29.13 1.4 4.5 9.COM + 1 617 394 8763 •63 .7 3.6 435 7.87 132 1.74 1.25 33.88 1.03 23.43 24.70 0.18 0.9 3.09 140 2.17 0.74 1.26 -0.13 100 2.58 263 2.7 3.36 33.47 1.2 4.88 139 5.

9 1.93 -5.26 -0.74 0.5 9.9 8.63 99.75 4.88 29.5 6.4 3.74 0.5 9.60 -2.5 9.9 4.30 0.28 27.35 0.2 182 7.7 3.85 0.17 292 20.55 2.4 1.7 140 6.08 29.43 24.24 0.0 3.37 0.COM + 1 617 394 8763 •64 .4 7.18 316 25.92 CY14 CY15 1.4 8.6 0.66 -0.8 1.03 23.92 298 136 0.28 29.8 17.42 0.71 239 98.2 1. We have calendarized Apple's reported financial data for year ended December 31st.98 309 136 0.6 106 188 N/A N/A N/A N/A 78.63 237 20.48 29.4 3.7 14.12 75.9 13.42 0.5 9.06 29.24 1.2 12.1 Note that Apple reports financial information for fiscal year ended September 30th.06 CY16 CY17 1.4 1.32 0.5 9.12 1.9 76.24 0.47 715 28.86 26.00 1.05 338 20.80 0.1 8.63 20.76 0.Detailed P&L for the Apple TV business The most important drivers for the Apple TV business are discussed above.18 CY18 1.47 436 30.2 153 7.06 -0. Apple TV: Detailed P&L CY07 CY08 CY09 CY10 CY11 Revenues Revenue (Bil $) Apple TV Pricing ($) Unit Sales of Apple TV (Mil) Total Revenues (Bil $) Expenses Direct Expenses (Mil $) Apple TV Gross Profit Margin (%) CY12 0.11 333 140 -1.83 25.04 321 138 0.68 29.87 268 114 287 129 61.46 -1.7 3.5 9.01 -4.0 6.27 0.0 7.38 0.7 158 7.23 24.8 8.26 -1.47 808 27.83 22.36 0. here is the detailed P&L.9 4.63 20.30 0.7 53.5 9.28 23.63 25.2 1.2 110 6.47 760 28.4 85.7 28.7 173 7.42 120 3.74 0.5 10.5 9.85 22.1 3. % of Gross Profit (%) Tax Rate (%) CapEx % of Gross Profit (%) Increase in Net Working Capital % of Revenue (%) Increase in Net Operating Assets % of Revenue (%) Total Expenses (Bil $) Gross Profits (Mil $) Free Cash Flow (Mil $) -4.00 82.06 3.90 19.18 72. TREFIS ANALYSIS for APPLE CONTENT@TREFIS.51 0.000 0.7 16.4 4.5 9.4 4.9 3.25 69.47 914 26.81 CY13 0.2 161 7.81 91.41 -2.92 86.44 32.2 60.47 859 27.23 7.47 650 29.7 192 8.25 0.86 -0.74 0.7 3.2 18.41 22.06 78.68 29.46 -0.6 6.47 Indirect Expenses (Mil $) R&D % of Gross Profit (%) SG&A % of Gross Profit (%) Stock Comp.24 1.30 299 1.46 -1.74 0.47 566 29.42 241 1.37 284 1.03 26.48 29.