The 'biggest tree in the forest' may be an Apple tree

Apple has released its annual 10-K report to the US Securities and Exchange Commission. This report is mandatory and that's a good thing: the 10-K is pretty much the only public document US companies have to release in which they are required to come clean about ... almost everything. Even the future.

The 10-K requires perceived risk factors be noted. For Apple, these include economic conditions that could materially adversely affect the company.

Apple's seemingly persistent problems with non-transparent stock options practices also get a mention: "The matters relating to Apple's past stock option practices and the restatement of the Company's consolidated financial statements may result in additional litigation."

In troubled times, supply is a worry. A faltering economy may lead to factory closures. Apple has stated that its ability to obtain key components including, but not limited to, microprocessors, NAND flash memory, DRAM and LCDs "at favourable prices and in sufficient quantities" is a concern, as are ongoing patent infringement suits.

Intellectual property is incredibly important to Apple and the company is currently defending more than 21 infringement cases, 13 of which were filed during fiscal 2008. Several pending claims are in various stages of evaluation at the moment.

The iPhone comes under the spotlight too - as the report notes, "In certain countries, including the US, the Company relies on a single cellular network carrier to provide service for iPhone." They will be hoping those companies are not exposed.

The obvious headaches get mentioned too - political events, war, terrorism, public health issues, natural disasters and other 'acts of God'. But that's probably a copy and paste from previous years.

Apple is as vulnerable to credit risk on its accounts receivable and prepayments related to long-term supply agreements as any other product and services trading company. This risk is heightened during periods of worsening economic conditions. You can check out the full PDF-format report here.

None of this means Apple is faltering. If anything, it just proves Apple is aware of possible risks and, hopefully, working at future-proofing. But people are already scaling down their purchasing plans. As Paul Carton, ChangeWave's research director said recently, "There's been a massive breakdown in consumer spending plans going forward. We've never seen anything like it."

According to ChangeWave's polling, 59 per cent of US consumers said they were planning on spending less in the next 90 days, an increase from 52 per cent in September. Meanwhile, the number who said they were planning on spending more dropped from 18 per cent that month to just 10 per cent in November.

And this is in the US, where the new MacBooks and MB Pros came out cheaper than the models they superseded. Down here and the UK, the prices went up due to exchange rates, so the intended scaling back of spending may be more pronounced than in the US.

Actually, exchange rates got a specific mention in the report. After a continuous rise in Apple sales in Australasia, Apple is cognisant of the fact that this growth may slow. Apple states that the company "derives a large and growing portion of its revenue and earnings from its international operations" and goes on to specifically mention fluctuations in exchange rates in Europe, Japan, Australia, Canada, and certain parts of Asia. (New Zealand is largely treated as a subset of Apple's Australian operation.)

Many now expect the worst economic changes to manifest themselves early next year, when redundancies will really sink in. But after that, ChangeWave's Carton predicts Apple will come out stronger than ever.
This is because Apple retains such strong brand loyalty and also because of its iPhone, which Carton characterised as a mini-computer in its own right.

The iPhone often seems the brightest light for Apple these days, heading off criticism that Apple hasn't made a netbook for the still-expanding category, and sure enough, in ChangeWave's polling, the iPhone came out the clear winner for those who said they were planning on buying a smart phone in the next three months, registering 41 per cent of the total.

"Apple will clearly come out of this as the biggest tree in the forest," Carton said. He thinks the company will "be in extraordinary shape compared to everyone else when things improve. I don't think that Apple can escape the enormity of this downturn in the short run, but in the big picture, I think [these numbers] are wonderful news for Apple."

- Mark Webster mac.nz