Moody’s Ratings Assigns Aa1 Senior Unsecured Ratings to Apple Inc.
Moody’s Ratings Assigns Aa1Senior Unsecured Ratings toApple Inc.April 23, 2013 Moody’s Ratings gave Apple Inc. anupgrade.
Global Credit Research - 23 Apr 2013New York, April 23, 2013 -- Moodys Investors Service ("Moodys") assigned a senior unsecuredrating of Aa1 to Apple Inc. The rating outlook is stable.RATINGS RATIONALEThe Aa1 rating reflects Apples position as one the worlds leading providers of mobilecommunications devices, tablets, personal computers, portable media players and digital content.Although the company does not possess dominant market share in most of its segments, its brandpositioning at the higher end of its product categories, led by the flagship iPhone, and itsinterrelated suite of products allows it to command premium pricing and generate outsizedreturns relative to industry peers. Strong consumer demand for products such as the iPhone andiPad has supported expansion of the companys business platform and resulted in sales growth ata CAGR of over 110% over the past five fiscal years. Apple has a very robust financial profile withoperating margins, coverage, and cash flow metrics that compare favorably with the non-financialcompanies that have Aaa ratings.
"But, Apples Aa1 rating is not higher (Aaa), due to Moodys view that there are inherent long-runrisks for any company with high exposure to shifting consumer preferences in the rapidly evolvingtechnology and wireless communications sectors," said Moodys analyst, Gerald Granovsky. "Therapid rise and fall of new products demonstrates these sectors are particularly prone totransformational changes that can lead to shifts in market leadership." Moodys expects thecompany will continue to deliver strong operating and financial performance over the foreseeablefuture based on its current products and product pipeline. The Aa1 rating also considers that thequality of the companys products and a unique cohesion of hardware and software around itsMac OS and mobile iOS operating systems have engendered stronger customer loyalty than hasbeen typical in this sector in the past. Granovsky added, "This customer stickiness creates aneffective annuity revenue stream during subsequent product refreshes. It also solidifies a largeplatform of users who will be more likely to try the companys new products and services."The rating also assumes that Apples product refreshes continue along the same pace as inprevious years. However, the history of technology and consumer electronics industries hasconsistently demonstrated that disruptive technologies will arrive and incumbents are notnecessarily the ones who will benefit. Thus, Apples credit profile is tied to the companys ability tokeep up with innovations and maintain its unique corporate culture with its signature convergenceof design and engineering in the final products.
The rating incorporates Moodys expectations for continual strong sales growth over the nextcouple of years as Apple regularly updates its devices to willing buyers and expands iPhonedistribution to new telecom carriers and new markets, although further penetration may be drivenby a mix shift toward lower end and lower gross margin products. Moodys believes the companyhas ample room to grow its addressable market, as smartphone penetration is still at 50% of totalsubscriber counts in developed countries, and below 15% in developing countries.Moodys expects Apple will generate additional revenue growth from iPad sales, as tabletscontinue to displace the portable PCs (notebooks, netbook and ultrabooks) in the homes, while abudding opportunity for tablets to grab a seat in enterprise deployments could create anothernew market.On the other hand, Moodys recognizes that competition from other handset manufacturers andstrains in telecom distribution will weigh on iPhone pricing and margins. Although the telecomcarriers currently benefit from the incremental wireless data fees that iPhone customersgenerate, as the pricing for wireless data service declines, the economic equation of subsidizingnew iPhones will turn more negative for the telecom carriers. This may force Apple to either lowertheir price to the carriers or start taking on a greater role in financing the upfront cost of thehandsets.
The company has extremely strong liquidity, underpinned by over $144 billion of cash andequivalents at March 31, 2013. Despite Apples announced $100 billion capital returnprogram, Moodys thinks that over the next few years, the company is likely to continue tomaintain net cash balances in excess of $100 billion, which is significantly more than any other non-financial company globally. However, Moodys believes Apples larger cash holdings and cash flowgeneration relative to other leading companies presages pressure to return additional cash toshareholders over time.While Apples Aa1 rating incorporates an expectation that the company will maintain a veryconservative financial policy and very strong liquidity, the rating is not reliant upon an assumptionthat the company will permanently maintain an extraordinarily large cash position.Moodys notes that the companys US cash position will decline substantially as it completes thecurrent capital return program by 2015, unless the US corporate tax laws are changed or thecompany finds other mechanisms to repatriate the overseas cash at favorable tax rates. Given thegrowing divergence of Apples cash inflows (largely international) and outflows (largelydomestic), the company is likely to increase its debt levels if it were to extend its dividend andstock buyback programs.OutlookThe stable outlook reflects Moodys expectations that Apple will continue to maintain and defendits very strong market position in mobile devices and tablets as well as expand its addressablemarket to new regions and carriers. The stable outlook also incorporates the expectation thatApple will continue to maintain a very high net cash balance and a lowly levered balance sheet.
What can move the rating upGiven the industry risks inherent in the rapidly evolving technology and wireless communicationssectors, Moodys does not expect upwards rating movement over the intermediate term. Longerterm, the rating could be upgraded if Apple sustains its strong business execution and cashgeneration, and there is tangible evidence that the companys ecosystem cements the users to itsproducts upon subsequent updates and new product introductions. Ratings could also beupgraded if changes in US corporate tax laws or other mechanisms would allow the company torepatriate cash on a more tax efficient basis and this leads to sustained low debt levels rather thanusing debt as a vehicle to return cash to shareholders.What can move the rating downThe ratings could face downwards pressure if there is deterioration in the companys core businessmodel that results in a material, sustained erosion in its very strong market positions, profitabilityor cash flow generation, or management adopts substantially more aggressive financial policiesthat weaken its very strong liquidity position and raise leverage significantly.The principal methodology used in this rating was Global Technology Hardware published inOctober 2010. Please see the Credit Policy page on www.moodys.com for a copy of thesemethodologyApple Inc., headquartered in Cupertino, CA, is a leading global designer, manufacturer and seller ofpremium mobile devices, tablets, personal computers, digital media players, and through its fullyintegrated operating system provides a platform for its own and third party applications thatdelivers mobile, digital and cloud applications and services. The company generated nearly $165billion of revenues for the trailing twelve month period, ended December 29, 2012.
REGULATORY DISCLOSURESFor ratings issued on a program, series or category/class of debt, this announcement providescertain regulatory disclosures in relation to each rating of a subsequently issued bond or note ofthe same series or category/class of debt or pursuant to a program for which the ratings arederived exclusively from existing ratings in accordance with Moodys rating practices. For ratingsissued on a support provider, this announcement provides certain regulatory disclosures in relationto the rating action on the support provider and in relation to each particular rating action forsecurities that derive their credit ratings from the support providers credit rating. For provisionalratings, this announcement provides certain regulatory disclosures in relation to the provisionalrating assigned, and in relation to a definitive rating that may be assigned subsequent to the finalissuance of the debt, in each case where the transaction structure and terms have not changedprior to the assignment of the definitive rating in a manner that would have affected the rating.For further information please see the ratings tab on the issuer/entity page for the respectiveissuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primaryentity(ies) of this rating action, and whose ratings may change as a result of this rating action, theassociated regulatory disclosures will be those of the guarantor entity. Exceptions to this approachexist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure torated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to theMoodys legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatorydisclosures for each credit rating.Gerald GranovskySenior Vice PresidentCorporate Finance GroupMoodys Investors Service, Inc.250 Greenwich StreetNew York, NY 10007U.S.A.JOURNALISTS: 212-553-0376SUBSCRIBERS: 212-553-1653Robert P JankowitzAssociate Managing DirectorCorporate Finance GroupJOURNALISTS: 212-553-0376SUBSCRIBERS: 212-553-1653Releasing Office:Moodys Investors Service, Inc.250 Greenwich StreetNew York, NY 10007U.S.A.JOURNALISTS: 212-553-0376SUBSCRIBERS: 212-553-1653