Apple Now Debt Free, Says Internal Memo 627
An anonymous reader writes "99mac.se publishes an internal memo from Steve Jobs to Apple employees today.
According to the Memo, Jobs states that "Today is a historic day of sorts for our company." Apple used $300 million in cash to pay off the rest of their debt, and is now a debt-free company. A big turnaround from over $1 billion in debt in mid-1997.
Also noted in the memo is that Apple has $4.8 billion in the bank at this time." (Since this is not coming straight from Apple, confirmation -- or debunking -- would be helpful.)
How does this compare with other companies? (Score:4, Interesting)
First to say - Well Done (Score:3, Interesting)
is that a good thing? (Score:5, Interesting)
Though cash in the bank is very safe, at least.
these numbers seem to high (Score:1, Interesting)
Where did the money come from (Score:4, Interesting)
SuDZ
The big question (Score:0, Interesting)
Re:First to say - Well Done (Score:5, Interesting)
They key is to manage the debt carefully, and make sure that the interest payments do not get so large that they start eating away at your profits.
Re:is that a good thing? (Score:5, Interesting)
However, there are too many variables for a non-insider to really know. Most companies have finance people who are at least competent enough to make these kinds of decisions. This is Finance 101 stuff.
Chris
Good for Apple (Score:1, Interesting)
Heck, Apple may one day soon be in a strong enough position to risk porting OSX to other platforms. I believe that the sooner one's choice OS becomes irrelevant, the sooner real, healthy, competition can take place in this industry.
Interesting for a public company (Score:5, Interesting)
It makes me wonder about Jobs' (or the CFO's) motivations. Strictly speaking, this would be the smartest move if Apple were to pursue a Leverage BuyOut (LBO), which is basically a reverse IPO. I can't see them doing this, but would give them a chance to radically reposition the company without requiring stockholder approval.
Just thinking out loud...
.
Isn't this a bad thing? (Score:3, Interesting)
Addicted to OS X (Score:5, Interesting)
Apple has always had pricey, but cool stuff. I paid a premium for my Apple II (serial number 79 !! - I used it to write the free Chess program that was on the demo cassette for the Apple II).
I paid a premium for my first Mac in 1984.
Sometimes, more expensive products are just worth it.
-Mark
Re:How does this compare with other companies? (Score:5, Interesting)
However, being debt free is not necessarily a good thing. I was informed by an accounting / MBA friend that having corporate debt can be a very, very good thing when it comes to tax time. Apparently, it's useful to mortgage certain properties (including real estate, physical plant, etc.). This lets you write down things or depreciate them differently I think.
I'm sure there's accountants out there (though how many of them read Slashdot is an open question). Can anyone explain this? Or Refute it?
-- Kevin J. Rice, programmer (not accountant!), Chicago area.
According to their last 10-Q (Score:5, Interesting)
I remember back to something Steve Jobs said back in 97 or 98 when asked how he was going to grow desktop market share. His response was something along the lines of 'We have 6% of the desktop market, Mercedes has 6% of the automobile market. Why aren't you predicting the end of Mercedes?'
iMac, iPod and iTunes really helped them accumulate some iCash.
Re:Lets see... (Score:4, Interesting)
Seriously! You ever get stuck making house calls to fix friend's computers? Ever since I've convinced people to go mac they've been more functional (making dvd's, photo albums, burning CD's, No Email viruses) and I get almost no calls from friends asking for help. They don't have the same issues as with Windows or even worse would be linux.
Tell-tale signs (Score:2, Interesting)
Re:Interesting for a public company (Score:1, Interesting)
Of course, we don't know this internal memo is necessarily true.
Re:Isn't this a bad thing? (Score:1, Interesting)
With interest rates as low as they are, normally, yes. But look at their operating margin:
http://finance.yahoo.com/q/co?s=AAPL
Wi
It wouldn't take much to bump them into a quarterly loss. Then the leverage effect would work against them.
I think this is a prudent move for Apple.
Re:Buy SCO? (Score:5, Interesting)
good insights from Feb 3 article (Score:5, Interesting)
The article [fool.com]
"Let's do the math: According to its latest earnings report, Apple averaged $349 in revenue per iPod sold. If prices remain stable, 3 million iPods would generate more than $1 billion in revenue. Four million units could produce $1.4 billion in sales. Apple sold $345 million in iPods during fiscal 2003.
Turning the dial to iTunes, Apple says that more than 30 million songs have been sold to date, with 17 million of those coming during the Christmas quarter. The Pepsi promotion should dramatically increase iTunes traffic. Add in the help from HP and paid downloads could pass 100 million during 2004. At that level, Apple should make a few pennies per song, up from zero now."
This is a bad thing (Score:0, Interesting)
But, financially, this isn't good news.
Re:Because.. (Score:5, Interesting)
That would be easy, I used to have a 7.5.5 boot CD and if I remember right, that stripped down System Folder took up all of about 30 MB with full network functionality.
Once we made a System 7.1 boot floppy with Appletalk and I don't remember what else so that we could dasiy-chain Performa 5xx series machines with the old LocalTalk boxes and phone cords and reformated 14 of them at a time from my G3 AIO.
I
Re:why wait so long? (Score:5, Interesting)
In fact, in successful companies, investors might actually prefer debt. If you and a friend have a project that will cost $1200 but will net you $1800 in a year, you each stand to gain $900 minus your investment. But you only have $800 total. If you get another friend in on it, all three of you will only net $200 apiece ($600 - $400). If you get $400 debt at 5%, then the two of you will make $1800 - $420 (debt + interest) = $1380 / 2 = $690 - $400 = $290.
So the current investors end up making more by taking debt. Of course new investors would love an opportunity at profiting from this project, but companies tend to look out for current shareholders more than anything else.
Re:Because.. (Score:2, Interesting)
Re:First to say - Well Done (Score:2, Interesting)
Three words: $500 billion deficit.
CFO Fred Anderson is Retiring in June (Score:5, Interesting)
I guess Fred feels his work is done now, because he is calling it quits on June 1. [apple.com] Anderson has been instrumental in solving Apple's financial problems from the day Gil Amelio hired him in 1996. He created the company's large cash reserves by liquidating unnecessary capital investments (plant), issuing a convertible debenture and selling some of their valuable ARM holdings. Then he managed the investment of those funds astutely enough to make the conversion of those outstanding notes to common stock a huge win for both the company and creditors. [macobserver.com] That 1999 conversion alone eliminated about two thirds of Apple's long term debt (conversely that means the issue had assumed most of Apple's debt). Really, this guy has done an outstanding job. You can thank him for their sound financials.
ok, so... (Score:5, Interesting)
The profit margin on software is about as high as a profit margin can be, and even when you consider that they spend money on R&D, salaries, advertising, buildings, manufacturing, computers, etc., etc. -- that's still an enormous mark-up from the market value of their products. (They both sell hardware too, and in Apple's case, there's a hefty mark-up on that as well, especially RAM--but not nearly as much as there is on software.)
So it'll be interesting to see what happens, as Microsoft slashes prices on core offerings to compete with Linux, and newer desktop environments and toolkits are developed across the board to compete with Apple. Still--I don't know about TCO, but there should be no doubt in your mind that these companies are overcharging.
debt = leverage (Score:2, Interesting)
Debt is the basis of leverage. Example: I have 1 million dollars. I buy a house for 1 million dollars. The house appreciates 10% in a year, and now I just made $100,000 off my investment. However, lets say you put down $100k on the 1 million dollar house, and the house still appreciates 10%. You just made 100k w/ 100k for a 100% return on your investment. Had you done that w/ ten other houses, you doubled your net worth. Of course, there would be a cost associated with borrowing that kind of money. Youre ahead as long as your cost of borrowing does not exceed your rate return. It gets alot trickier, and generally tilts the balance in favor of taking on alot of debt when you bring tax benefits into the picture. In the case of a house, the mortgage interest is deductible, so money is essentially 30-40% cheaper to borrow than whatever interest rate you are paying. Also, inflation eats away at your debt costs.
Of course your risk is alot higher. During good times, you can make a killing. But if the values of your assets start falling, you can quickly lose your shirt, and then some. in the 100k down on 10 houses scenario, a 20% drop in asset value would put you in the hole about 1 million (thats a net value of -1 million) as opposed to the opposite scenario where you are still worth 800k.
Re:How does this compare with other companies? (Score:5, Interesting)
So if Apple's not at risk of bankruptcy (they're not), they should have no problem finding cheap debt to invest. In this case, I think it's foolish for Apple to pay it's debt off.
Plus, the interest you pay on debt is tax deductible itself (as an expense) and that's just an extra bonus to load up on debt (assuming you can afford it, and aren't at risk of failing).
Re:Interesting for a public company.. HA HA (Score:3, Interesting)
Actually Corporate debt is not a Bad Thing (Score:4, Interesting)
Here's a pretty good case study [fool.com] from the Motley Fool on why taking on corporate debt is often better than trading away shares to make acquisitions. Basically, in this case, taking on a lot of debt is fine if it increases cash flow.
In general, if a company's risk rating is good, you could say that it is in fact wasting money by NOT taking on some debt in order to build infrastructure or make acquisitions.
As the Economist points out in an article called Debt is Good For You," [umich.edu] "dividends are paid out of companies' net-of-tax income,and are then taxed again in the hands of the recipients. Interest payments on debt, on the other hand, are tax-deductible."
"This means that a firm's overall value should increase as it substitutes debt for equity."
Re:First to say - Well Done (Score:5, Interesting)
This still compares favourably with countries like France and Spain that did the same thing and didn't become sucessful
Re:want confirmation? (Score:4, Interesting)
HUMANS [dmoz.org] do it better
Re:Interesting for a public company (Score:2, Interesting)
Apple merges with Pixar (Score:2, Interesting)
Re:why wait so long? (Score:3, Interesting)
Not really. Unless there are specific covenants on the bond (typically not), Apple wouldn't have given them the capital back, but sold the debt for its market value (on the Bond market) or whatever.
If the bond-holders were sitting on bonds that were paying a higher rate than the market rate, then Apple would have had to give them more than just the principal to pay off the debt.
Bond prices fluctuate with the interest rates as well, so paying off early would have netted bond-holders a premium and the opportunity to reinvest. If things were as you say they were, Apple could quite easily commit arbitrage by getting $1000 of cheap debt and paying off $1000 of expensive debt. But what would have happened is they could have bought $1000 of cheap debt but would have had to pay, say, $1100 to clear their $1000 of expensive debt (for the projected interest).
Re:is that a good thing? NO! and YES! (Score:3, Interesting)
Well, what are you referring to? Is it good that they are out of debt? Yes. Is having no debt necessarily good for a company? No. Can Apple now borrow a ton of money and go back into debt? Yes.
What we didn't see was the second memo that went around saying "So now we can borrow our asses off!" :-)
All this is saying is that they are out of debt. If they are like most people, the second they get out of debt, they usually go right back into it somehow. Maybe they paid off their higher interest debt, and will be able to get a big chunk of R&D money at lower rates. Hell, maybe this was just a PR thing to get them in the news. Seems to have worked...
Re:Lets see... (Score:2, Interesting)
I don't know if you are most qualified to answer for me but doesn't the RIAA still get money from each sale? My assumption that they do might be wrong but the assumption that they would have signed a contract with Apple without a blanket percentage scheme sounds unlikely. Anyone have an answer to this?
Re:How does this compare with other companies? (Score:5, Interesting)
For a simple example lets look at buying stock on margin. Take Microsoft, let's say Bill and Steve each have $1000 to invest in MS and the current share price is $25. Bill chooses to buy 40 shares for $1000 (ignoring commissions), while steve listened to his MBA friend and bought 80 shares, taking a loan for $1000 and puting up his own $1000. The next day MS comes out better than expected earnings and the price pops to $30 per share. Both sell their stock. Bill gets $1200 (40x$30) while Steve gets $1400 (80x30-1000) I'm rounding off the $0.11 in interest expenses.
Now if the news had been bad, and the stock fell to $20, the opposite would have happened, Bill would have $800 (40x$20), while Steve would have $600 (80x$20-1000), again ignoring the $0.11 in daily interest.
With debt financing you multiply the regular returns by the inverse of the percentage you put up. (If you put up one fifth of the intial capital you will recieve five times the return on the asset (before interest expenses), if it returns 10% annually the owner will get more like 50% annually, if it returns -5% annually, the owner will get -25% annually (again before interest expenses). In our examples above the asset returned 20% but due to the differences in financing the investors got very different returns.
Armed with this knowledge the optimal situation would be nearly no owner investment and almost all debt financing, assuming an investment is likely to produce returns. However, lenders will require a higher interest rate to projects that have less owner investment decreasing the returns (the asset must return more than the interst rate for this to work, it becomes increasingly difficult to find investments that will do this. In the stock market there are regulations limiting you to debt equal to your starting capital, and if you start to loose money the broker will issue a call requireing either additonal investments or he will sell your asset to bring it back in line with the rules. With a big successful company lenders stop at about 3/4 of total investment (3:1 leverage). Houses allow a ton of leverage (the old rules were for 20% (5:1 leverage) down but I know of people who put less than 10% down (10:1 leverage). Feel free to ask any further questions, this format is not ideal for math topics
Re:First to say - Well Done (Score:2, Interesting)
Re:Why?? (Score:1, Interesting)
This isn't a bad thing. There's a siginficant overlap in Linux and Apple interest, especially since Apple went UNIX with Mac OS X (an excellent move on Apple's part). So the content is quite relevant.
Attractive takeover target? (Score:3, Interesting)
Re:debunk (Score:3, Interesting)
Did I mention teh driver also adds scroll zones to the sides of the trackpad?
Re:As opposed to Red Ink Republicans? (Score:5, Interesting)
US Budget Summary since 1789 [gpo.gov]
Inflation calculator. [westegg.com]
Okay, the largest budget deficit of the 1930's (Great Depression, New Deal) was about $3bn in 1939. That's about $31bn in 2002 dollars.
The largest budget deficit of the 1940's (WWII) was $55bn in 1943. That's about $585bn in 2002 dollars.
The largest deficit of the 1960's (Soviet Union, Space Race) was $25bn in 1968. That's $130bn in 2002 dollars.
The largest deficit in the 1980's (Soviet Union) was $221bn in 1986. That's $354bn in 2002 dollars.
The largest deficit of the 1990's (Iraq war?) was $290bn in 1992, which is $370bn in 2002 dollars.
The 2004 budget deficit is officially $521bn. However, that does not count the costs of war, which are $84bn in Iraq alone. All told, the current deficit is well over $600bn. Depending on the cost model, that equates to about $580bn 2002 dollars.
So in any case, the current US budget deficit is not larger than at least the one FDR carried, but its skirting damn close.
Re:Good for everyone (Score:4, Interesting)
They kickstarted the horribly lagging USB device market. A lot of windows GUI elements seem to come from Apple. Zen seems to be heavily iPod inspired, for all I know, maybe we'd be stuck with ugly Nomads and Nomad clones.
Before Jobs took over, the PC market looked like a bunch of ugly square beige boxes, since, we now get a bunch of ugly multi-colored varying swoop-shaped windowed boxes. I haven't checked to see if there are any G5 inspired PC cases yet.
Why does apple keep so much in the bank? (Score:3, Interesting)
Re:want confirmation? (Score:3, Interesting)
Re:Interesting for a public company (Score:2, Interesting)
I mean, seriously, *home* computers?
Predates but basically separate (Score:4, Interesting)
My then company, PICA Pty Ltd, worked with both Sun and Adobe on the respective fronts way back then. Sun encouraged us to devote our own resources to a Macintosh port of NeWS by contracting us to develop NeWS demonstration applications, some of which got a guernsey in Gosling, Rosenthal and Arden's NeWS Book
We were a recognised early player in the PostScript game because I landed the job of doing a technical review of one of the first two Apple LaserWriters to reach Australia for Australian Macworld. That led to PICA becoming the local distributor for Adobe and other early desktop publishing products, and to me contributing the final chapter to Roth, ed's Real World PostScript
In what may seem like several cases of deja vu, Michelle Arden was very keen to help us try to convince Adobe to open up control of the PostScript standard, yet within a couple of years Sun, having made themselves quite unpopular through the success of NFS, were then rolled by the rest of the Unix community who insisted on adopting X as the blessed window system ahead of the much superior NeWS.
Despite strong support from our main contact person, the inability to focus by Sun's Sydney office brought our efforts to a premature end, on one hand because they had initially tried to motivate us by suggesting we were in competition in the porting project with Keith Henson's Grasshopper Group. Then when I finally met Keith we became instant friends. Meanwhile Sun Australia also managed to hold up payment for our contracted work for 14 months.
Bottom line is that Sun's efforts with NeWS were in spite of Adobe. The significantly later Display PostScript did not borrow directly from NeWS in any way. If Sun ever gain a clue as to why they are being overrun by history, despite making a technical contribution over the years that has been disproportionate to their financial strength, one thing they could start with even at this late stage would be releasing NeWS to the public domain.
Re:Interesting for a public company (Score:1, Interesting)
Apple hiring hardware designers by the dozens (Score:3, Interesting)