A Financial Analysis of the Smartphone Industry

A Financial Analysis of the Smartphone Industry

Maria Thompson

Jared Fowler

John Froman

Michael Collingsworth

Emily Barnes

Emily Pounders

Robert Crittenden

The University of North Alabama

September 23, 2011

A Financial Analysis of the Smartphone Industry

The industry of Smartphones is rapidly growing. Through our analysis, we have seen companies that have taken advantage of this rapid growth and some that have only experienced moderate growth. Through comparative analysis of financial statements, such as the income statement and balance sheet and the use of various ratios, we have analyzed the difference between seven companies in the smartphone industry. Upon close look at certain growth trends and common size ratio comparison we have found the leaders and followers in this industry.

Year-to-Year Growth

Revenue Growth

Upon first glance, the revenue growth chart between Smartphone manufacturers shows a few trends that are apparent right off hand. In 2006, hype was starting to generate about the first iPhone. In June of 2007, the iPhone was introduced into the market which affected all Smartphone manufacturers significantly. The revenue growth chart depicts this launch by showing Apple's revenue grow while every other Smartphone manufacturer's revenue decreased from 2006 to 2007. One of the hardest hit manufacturers was Research in Motion. This could have been due to the fact that Research in Motion's most popular Smartphone at that time, the Blackberry, was a keypad style phone instead of a touch screen phone. It took Research in Motion at least another year to catch up by releasing a touch screen phone themselves.

The second trend that is apparent when analyzing the revenue growth data is the fact that every company's revenue decreased in 2008. This could be attributed to the presidential election in 2008 and the state of the economy in the United States. At that time, consumers were very concerned with saving money due to the instability in the country.

Since 2008, every company besides Research in Motion seems to be growing. Apple has appeared as the strongest competitor. This could be attributed to the numerous goods and services that Apple offers such as their computers, iPads, iPods, and iTunes. The way all of these devices interface and sync together seamlessly makes it more appealing to have an iPhone.

SG&A Growth

When analyzing the SG&A growth data, the first apparent trend is the drastic drop of almost all of the manufacturer's SG&A expenses from 2007 to 2008. Much like revenue growth, this could be due to the fact that the market in the United States was very unstable at that time. These manufacturers were probably afraid of putting too much money behind their products and getting diminishing returns due to the economy. These manufacturers may have had to lay off employees as a result as well.

From 2007 to 2008, Research in Motion did not follow the same trend of cutting back on expenses like most other manufacturers. Instead, they increased their SG&A expenses. This could also attribute to the reason why their revenue growth is still in decline to this day. They may have spent too much money when they did not have the money to spend.

Looking at 2009 to the present, Research in Motion is the only company that has not started to increase SG&A expenses. This could be attributed to the market in the United States regaining some sort of stability. With a more stable market, manufactures are more likely to feel confident that their products will sell.

Operating Income Growth

The operating income growth comparison starts at the end of 2006 with Apple having the largest growth and Alcatel with the smallest. Apple's operating margin was 28.00%. This is largely due to the fact that the company is a leader in innovation and has the ability to capture market share by creating product buzz. Apple's operating margins also increased in 2009 and 2010. Apple has endured executive shakeups and has still been able to create products that are cemented in brand loyalty.

Alcatel reported a -2.00% operating margin at the end of 2010, which was the lowest of the compared companies. In this same year, Alcatel reported an operating income loss of $409.49 million. This is significantly better than the loss of $7,474.58 million they reported at the end of 2008. Alcatel has reported losses in operating income for four out of five years which resulted in Alcatel's operating income growth being negative as well. Motorola has also had consistent poor operating income growth with a negative four out of the five years.

Nokia, Motorola, Hewlett-Packard, and Dell, all had operating margins in the single digits, from 4.00% to 9.00%. Research in Motion had a 23.29% margin. Research in Motion actually had a better operating margin than Apple for three of the past five years. Research in Motion could be using a cost cutting strategy to be able to compete in the market. Most of these companies were in other aspects of the electronics industry before venturing into the Smartphone segment. As a result, their marketing division hasn't caught up the marketing exposure that Apple has.

Net Income Growth

The Net Income category has Apple leading with $14.01 million in 2010. Although Hewlett-Packard recorded higher profits at the beginning, they have followed second to Apple for the last two years. Alcatel, on the other hand, remained in the negative all five years in this category. The companies with net income problems have also had operating income inequalities. The loss of income tends to eat into the company's profit margin. In 2008, Alcatel was the worst performer with a net income loss of $7,291.24. Dell, Research in Motion, Nokia, and Hewlett-Packard all consistently had positive net incomes, but Apple had the best year over year income.

Common Size Ratio Comparisons

Gross Margin

At the end of 2006, Research in Motion had a very strong advantage in gross margin. Their gross margin was 54.59%, which translates into slightly over half of their sales going toward fixed costs.