Apple: Three Items To Watch

I’ve been tracking the performance of Apple for nearly twenty five years and chronicling the twists, turns, successes and changes at the company for most of that time. Over the past several months I’ve taken time to look at the company in several different ways and today I will mention three items I consider important for long-term shareholders of the company. These items are the share repurchase program, Apple’s rising R&D expenses and the growth in the company’s Services revenue segment. 

I consider these three items important as Apple faces yet another period of change and eventual transformation. The pace of iPhone units sales growth has slowed and the company faces challenges in all three of its major device lines. Yet for long-term shareholders there’s more to Apple than this fiscal year’s performance. I will explain more in this article.

Today’s coverage of Apple in the financial and popular press frequently mentions speculation about the upcoming iPhone refresh, rumors about changes in the iPhone’s form expected in the fall of 2017 and the decline in iPhone unit sales compared to last fiscal year’s nearly 37% unit sales growth rate. But there’s much more to Apple than the iPhone franchise and while unit sales will always be in flux, the three items I’m mentioning today demonstrate a trend that may lead to higher shareholder value over the next several years. 

Apple’s Share Repurchase Program

The graph below illustrates the impact of Apple’s massive share repurchase program on the fully diluted share count as reported each quarter. Since reaching a peak of 6.637 billion shares on a split-adjust basis in the September quarter of FY2012, management has reduced the fully diluted share count as of the end of the March quarter to about 5.541 billion shares or by about 16.50% in under four years. 

As of the end of the March quarter Apple had exhausted $117 billion of the $175 billion in authorized share repurchases. The remaining $58 billion in authorized repurchases are scheduled to be completed by the end of March 2018. Notwithstanding the debt acquired to fund the massive share repurchase program, Apple’s cash position remains the envy of much of corporate America. Net of debt the company’s cash and equivalents position stood at nearly $164 billion at the end of the March quarter. 

For long-term shareholders the reduction in the fully diluted share count boosts the company's reported earnings per share due to the fact there are fewer shares by which reported net income is divided to determine the eps results. It’s my view net income growth is the primary driver of Apple’s share price appreciation. In periods of rising net income, the share repurchase program will amplify the impact of rising net income on the earnings per share results. In addition to a beneficial impact on earnings per share results, the fewer number of shares may mean a larger dividend per share in the years ahead.

Apple And The Long Arc Of Time

“In the fiscal year beginning in late September, Apple will generate over one-quarter trillion dollars in revenue and sell more than one-quarter billion iPhone handsets. In the upcoming December quarter the company will set yet another record for corporate profitability in a three-month period.”

I posted the above paragraph as a comment on a recent column by Philip Elmer-DeWitt about Apple’s upcoming September 9th event. The focus of Philip’s column, in my interpretation, is the incessant demands of Wall Street for sensational new products, “one more thing” surprises and almost Hollywood-style showmanship at every Apple special event. I concluded my comment by posting, “While some on Wall Street might want the likes of PT Barnum, most of us who buy Apple products and invest in the company’s stock prefer the steady hand of CEO Tim Cook.”

While millions of us may enjoy discussing, debating and speculating about what new products Apple might have under development or may announce during the company’s fairly regular product events, the company’s revenue over the past several years has been marked by an impressive and unbroken sequence of rising year-over-year quarterly growth. This has occurred without game show-style product introductions or fantastical claims about future product features and functionality. 

Apple And The Long Arc Of Time 

The graph below illustrates Apple’s revenue on a quarterly basis as far back as FQ1 2009. In that quarter recognized revenue was $11.880 billon. By comparison, in FQ1 2015 Apple’s recognized revenue was $74.599 billion or a greater than six-fold increase in revenue in the first quarter of the fiscal year over a six-year period of time. No wonder Apple’s CEO is fond of the term “long arc of time” when responding to analyst questions during the quarterly conference call with analysts. When Apple completes the current fiscal year near the end of September, the company will report a greater than five-fold increase in revenue over the same six-year period. 

The corresponding EPS graph below illustrates an even more impressive outcome during this six-year period. Again using FQ1 2009 as the benchmark, Apple’s earnings per share in FQ1 2015 of $3.06 was 8.5 times greater than the split-adjusted $.36 in eps reported in FQ1 2009. While the company’s ongoing share repurchase program has diminished the fully diluted share used on a split-adjusted basis in this comparison, the company’s rising revenue has been the most substantial factor in the eps growth rate.