Apple: Revenue Growth vs. Growth in Operating Expenses

Apple: Revenue Growth Vs. Growth in Operating Expenses

I'm taking time mid-week as I prepare revisions to my December quarter estimates and resulting updates to my AAPL price targets and forecasts for a comparison of Apple's revenue growth vs. growth in the company's operating expenses.

Outside of the cost of sales (the costs of products sold), operating expenses represent Apple's largest cost segment. Comprised of R&D expenses and selling, general and administrative expenses, in fiscal year 2010 operating expenses consumed about 11.2% of Apple's reported revenue. From a high of 12.2% of revenue in the second fiscal quarter to a low of 10.2% of revenue in the fourth fiscal quarter, operating expenses have an direct and material impact on Apple's earnings and pace of earnings growth. 

FY2010 Revenue Growth v. Operating Expense Growth

In fiscal year 2010 Apple grew revenue 52% and earnings per share by an impressive 67%. Contributing to a pace of eps growth greater than the pace of growth in revenue was Apple's ability to keep the pace of growth in operating expenses well below the pace of growth in revenue.

Posts At Eventide Resource Guide For Independent AAPL Analysts

Posts At Eventide Resource Guide For Independent AAPL Analysts

As a moderator of the Apple Finance Board and an independent Apple analyst, two of the challenges I encounter in preparing quarterly estimates are finding useful historical information about Apple's quarterly results and formatting that information for purposes of analysis.

My AAPL quarterly estimates and share price forecasts are influenced by the company's more recent results. Consequently, finding and storing appropriate financial information is essential in the estimate and forecast development process. As a benefit to members of the AFB and regular readers of this blog, over the past few weeks I've posted a series of entries that provide "the essential building blocks" in developing quarterly estimates for future periods based in part on the company's more recent results. 

I'm posting the links to the pertinent blog posts as a reference guide for readers working  on their own quarterly estimates:

Apple: Testing Analyst EPS Estimates With Revenue Forecasts

Apple's Startling Rates of Growth: A Five-Year Overview

Apple: A Comparison of Eight Quarters of Revenue and Earnings Per Share

Apple: FY 2009 & 2010 Results By Quarter

Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue

Apple's Profitability and the Influences of Gross Margin, Tax Rates and OpEx

It's my desire for this work to be a benefit to all readers seeking to understand Apple's recent quarterly performances and to serve as a repository of information about the company's recent results for the benefit of other independent analysts preparing quarterly estimates and share price forecasts.

Robert Paul Leitao

Apple: Testing Analyst EPS Estimates With Revenue Forecasts

Apple: Testing Analyst EPS Estimates With Revenue Forecasts

I'm frequently asked by members of the Apple Finance Board to review the revenue and resulting earnings per share estimates of Wall Street analysts for accuracy of their eps estimate outcomes. 

Late last week Philip Elmer-DeWitt posted an Apple 2.0 column titled $1 billion here, a million there in which he cited recent analyst revisions to December quarter estimates. In composing a comment in response to that column, I reviewed the net revenue to net income ratio for Apple over the past several quarters and came up with a ratio to apply to revenue estimates to determine a corresponding eps result. This is one of the tests I apply to my own estimates before publishing the results of my work.

It's a fairly easy and reasonable (though not intended to be precise) way to test the relationship between an analyst's revenue and eps estimates. In fiscal year 2010 about $.215 of each revenue dollar reached the net income line. Multiple an analyst's revenue estimate in billions by .215 and then divide that amount by .935 for the number of shares (about 935 million) that will be reported by Apple in the December quarter for use in the eps calculations.

Quarterly Revenue Data and Cost Component Ratios
On November 21st I published a blog post titled Apple's Profitability and the Influences of Gross Margins, Tax Rates and OpEx. This post details the impact of these components on Apple's quarterly results over the past two fiscal years. On November 28th I continued this review in a blog post titled Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue. For readers interested is reviewing the quarterly results for the past two fiscal years, I've posted the data in an entry titled Apple: A Comparison of Eight Quarters of Revenue and Earnings Per Share. The post is intended to be a conveniently accessed repository of the quarterly information for Apple Finance Board members and other readers if this blog. 

I will be updating my own published estimates for the December quarter before the end of the month and under no scenario do I see quarterly revenue below $26.5 billion and eps below $6.00 per share.

In the December quarter, due in large part to an anticipated 70% rise in revenue, I expect the net income ratio to revenue to be higher than the FY2010 average. In the December quarter operating expenses will scale at no more than two-thirds the pace of revenue growth and the company's tax rate will remain low. I also expect gross margin to rise sequentially, leading to an eps performance far higher than current analyst estimates.



Robert Paul Leitao

Let's Take A Look Back At The Mac's Performance

Let's Take A Look Back At The Mac

Today I'd like to close my recent series of posts analyzing Apple's results over the past eight fiscal quarters with a quick look back at the Mac. Apple's line of Macintosh personal computers has been the company's most enduring product line and for most years of the company's existence the product line most critical to the company's financial success. 

The Apple iPod, iPhone and iPad

Beginning in 2003, following the opening of the iTunes music store and the release of iTunes for Windows, the Apple iPod began to supplant the Macintosh as Apple's revenue and earnings driver. As recently as the first fiscal quarter of 2007, only four short years ago, the Apple iPod line of digital music players, iTunes music sales and iPod-related products represented 57% of Apple's reported revenue versus about 43% of revenue generated by the Macintosh line of personal computers and Macintosh-related peripherals and software. The iPod's success proved critical to Apple's ability to successfully complete what might be best described as an awkward transition from the PowerPC chip architecture to Intel chips. 

In late June of 2007, Apple released the original iPhone which further subordinated the revenue contribution from the Macintosh line and in April of this year the company released the Apple iPad. In Apple's most recent fiscal quarter, the fourth quarter of fiscal year 2010, the Apple iPod, iPhone, iPad and related product sales represented 70.5% of Apple's reported revenue, despite the fiscal year's 30% gain in Mac unit sales and 27% rise in unit sales in the quarter. Mac unit sales, software and peripherals represented 29.5% of the quarter's revenue results. 

The charts and associated table data below illustrate and indicate the Macintosh line's diminishing contribution to Apple's revenue totals while Macintosh unit sales continue to rise. Below the graphs we'll look at a few of the factors involved. 

Apple's Startling Rates Of Growth: A Five-Year Overview

Apple's Startling Rates Of Growth: A Five-Year Overview

Apple is a company known as much for defying conventional wisdom as it is known for several years of seemingly unbridled success. Already among the most highly valued enterprises in the world when measured by market capitalization, Apple is poised for perhaps the greatest year of revenue and earnings growth in the company's storied history. 

Apple's Rates of Growth Unmasked

In the current fiscal year that began in late September, more than 60% of the company's revenue may be sourced from products that did not exit in the marketplace four years ago today. Apple's ability to grow revenue and earnings at rates that startle the financial markets is sourced in the development of new products that expand the company's revenue and earnings range and disrupt established industries. The Apple iPhone and the Apple iPad are the two most recent examples of Apple's approach to growth.

From the original iPhone's release in 2007 to the end of fiscal year 2009 in September of that year, Apple's revenue and earnings growth from the iPhone was masked by the deferral of revenue and earnings over the anticipated economic life of each handset sold. Beginning with the first quarter of fiscal year 2010, Apple adopted new accounting principles that essentially eliminated the deferred revenue and earnings recognition on iPhone sales and released retrospective adjustments to the company's financial statements. The adoption of new accounting principles unmasked Apple's rates of revenue and earnings growth from the original introduction of the iPhone through fiscal year 2009.

Apple's Five-Year Rates of Revenue Growth

The graph below and its associated data table illustrate Apple's rates of revenue growth over the last five fiscal years beginning in late September 2005. The numbers incorporate the retrospective adjustments to recognized revenue from iPhone handset sales. 

Apple: A Comparison of Eight Quarters of Revenue and Earnings Per Share

Apple: A Comparison of Eight Quarters of Revenue and Earnings Per Share

Earlier today I posted the financial results for Apple's most recent eight fiscal quarters comprising fiscal years 2009 and 2010. The data for fiscal year 2009 is post the retrospective adjustments that followed Apple's adoption of new accounting principles for the Apple iPhone in the first quarter of fiscal year 2010. Apple's fiscal year begins at the end of September. 

Apple's Revenue Growth By Quarter

The graph below illustrates Apple's revenue performance by quarter for the same two fiscal years. The table data associated with the graph includes the rates of year-over-year and sequential revenue growth for fiscal year 2010. In both fiscal years fourth quarter revenue exceeds first quarter revenue (the holiday quarter) due to iPhone's annual upgrade cycle and the popularity of Macintosh computers on college campuses. The sharp rise in year-over-year revenue growth in the third and fourth quarters of fiscal year 2010 reflects the revenue benefit of the Apple iPad. 

For more information on Apple's revenue mix in fiscal year 2010, please see my October blog post titled Apple's FY2010: A Retrospective. 

Apple: FY 2009 & FY 2010 Results By Quarter

Apple's FY 2009 & FY 2010 Quarterly Revenue and EPS Results

In response to interest from members of the Apple Finance Board, I am posting Apple's quarterly results for the past eight quarters, comprising fiscal years 2009 & 2010.

The numbers reflect Apple's post-retrospective adjustments for FY 2009 and combined the eight quarters represent perhaps the most dynamic two-year period in Apple's history. 

From revenue of $37.491 billion in FY 2008 to $65.225 billion in revenue in FY 2010, this eight-quarter period of revenue and earnings growth encompasses the first holiday quarter of subsidized iPhone contracts through AT&T to the second quarter of sales for the Apple iPad. 

Data Relevance In Current AAPL Estimates

As an independent analyst this eight-quarter period and its associated expense ratios are benchmarks for developing revenue and earnings models for the four fiscal quarters of FY 2011 (the current fiscal year) and in developing early estimates for FY 2012 that begins in late September 2011. Quarterly data from periods pre-dating this two-year period yield little relevant information due to dramatic changes in Apple's overall revenue mix from the end of fiscal year 2008 to today.

FY 2009 & FY 2010 Data Table

The information in the table below is derived from Apple's quarterly reports. The FY 2009 data reflects the retrospective adoption of new accounting principles for the recognition of revenue for the Apple iPhone. This change in approach to iPhone revenue recognition provides for much more accurate reporting of revenue and corresponding earnings from iPhone sales activity in the quarter in which it occurs. Please note the FY 2009 information differs from the quarterly recognized revenue and earnings reports originally issued by Apple prior to the adoption of the new accounting principles beginning with the first quarter of FY 2010. The new accounting principles were applied retrospectively for fiscal years 2007 through 2009.

For a more detailed look at Apple's most recent revenue performance please see my October blog post titled Apple's FY2010: A Retrospective. 

Robert Paul Leitao

Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue

Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue

Last week I published an overview of Apple's profitability by quarter and the influences of gross margins, tax rates and operating expenses. In that post I stated while much attention is paid to the impact of gross margins, there are other cost components relative to Apple's financial performance that can have a greater influence on net results than the quarterly fluctuations in the gross margin ratios. 

In this post I will illustrate using graphs and corresponding table data the changing relative importance among Apple's reported cost components to the company's net results over the the past eight quarters. 

Expenses Per Revenue Dollar: An 8-Quarter Comparison

The graph below illustrates the reported expenses per revenue dollar for costs of sales, operating expenses and taxes. To present the data I converted the reported tax expense to a percentage of revenue and used the inverse ratio of gross margin which represents cost of sales. 

Preliminary AAPL FQ1 Estimates (Updated 11/27/10)

Update: Please see the Posts At Eventide AAPL FQ1 Estimates Posted January 2, 2011


Preliminary AAPL FQ1 Estimates (Updated 11/27/10)

On November 13th I published my preliminary AAPL FQ1 estimates. Please see this original post for a comprehensive overview of my estimates for each of Apple's major revenue segments. 

In this post I'm covering the updates to my preliminary mid-November estimates. As an independent analyst and moderator of the Apple Finance Board I'm posting estimates and my updates as a catalyst for discussion of anticipated December quarter results. These estimates are subject to change and most likely will be revised in the coming weeks as we approach the end of the quarter. These updates are being published with roughly one month remaining in the three-month fiscal period. 

FQ1 Revenue and Earnings Estimates

For the December quarter my updated models forecast revenue of $26.511 billion and earnings per share of $6.00. This represents an expected 69% jump in revenue and a 63.5% rise in earnings per share.

The pace of eps growth trails revenue growth due to the estimated 37.5% gross margin this December quarter versus the 40.9% gross margin in the prior-year period. This drop in the gross margin ratio has a material impact on the relationship between revenue and earnings growth. The eps performance in the December quarter includes a benefit from a drop in effective tax rates from the December quarter one year ago.

Apple has become more aggressive on product pricing relative to build costs. It's my view the moderation in gross margins is intended to promote growth in after-purchase revenue from the sales of apps and content. The more units sold the more future revenue generated from units sold. 

Apple's Profitability and the Influences of Gross Margins, Tax Rates and OpEx

Apple's Profitability and the Influences of Gross Margins, Tax Rates and OpEx

Each fiscal quarter Wall Street analysts, tech industry journalists and AAPL investors hone in the company's gross margins as a percentage of revenue as if this one ratio has the greatest influence on the company's success.

As an independent blogger/analyst I'm not one to dismiss the importance of gross margins in Apple's financial performance. But there are other factors such as tax rates and operating expenses that weigh heavily on Apple's bottom line results.

Gross Margins

The graph below illustrates Apple's gross margin as percentage of revenue and and net income as percentage of revenue for the most recent eight fiscal quarters or two fiscal years by quarter. There's obviously a relationship between gross margin and net income performance. But the quarterly periods with the highest gross margin results are not necessarily the quarters in which Apple reported higher net income relative to reported revenue. 

For example, in the fourth fiscal quarter of fiscal year 2009 (the September quarter) Apple reported the highest gross margin in the eight quarters measured yet did not report the highest percentage of net income relative to revenue. In the forth fiscal quarter of fiscal year 2010 Apple reported the lowest gross margin in the eight quarters measured yet reported the second highest net income relative to revenue over the same eight quarters. Gross margin is an important ratio and performance metric yet to produce high ratios of net income relative to revenue other factors come into play.

CY 2011 AAPL Price Forecasts and Price Targets

Please see my updated 12-month price forecasts and price targets posted February 7, 2011.


CY 2011 AAPL Price Forecasts and Price Targets

Yesterday I posted my preliminary estimates for Apple's revenue and earning performance in the December quarter (Apple FQ1 2011). I'm following up that post today with my early calendar year 2011 share price forecasts and price targets. By this time next year I expect AAPL to be trading above $500 per share. 

FY 2011 Revenue and Earnings Estimates

It's challenging to forecast Apple's revenue and earnings twelve months out from today considering the dynamic nature of the company's revenue mix. My early revenue and earnings estimates have a conservative bias. I expect to update these price forecasts and price targets on a periodic basis as we move through the fiscal year.

In FY 2010 (ended in September) Apple achieved revenue growth of 52% and earnings per share growth of 67%. The earnings performance benefitted from comparatively high gross margins in the first three quarters of the fiscal year and dramatic reductions in the company's effective tax rate to an average of 24.5% for the year. 

For  FY2011 I estimate Apple will achieve roughly a 60% increase in revenue to about $105 billion with a fairly commensurate rise in earnings per share to about $24. Although we will witness a reduction of operating expenses relative to revenue, lower gross margins and tax rates similar to the rates realized in FY2010 will moderate the rise in eps relative to revenue growth in FY2011.

The Apple iPad Factor

Although Apple achieved a 52% rise in revenue in FY2010, the Apple iPad (device sales and related accessories) represented 7.6% of the company's reported revenue for the fiscal year and contributed about 11.6% of the 52% growth in revenue. In other words, absent the Apple iPad from the revenue mix, revenue growth for the fiscal year from product lines in the marketplace at the start of the fiscal year was a little over 40.4%. In fiscal year 2011 Apple iPad-related activity will fuel revenue growth above FY2010's pace of growth and will represent between 17% and 20% of this fiscal year's reported revenue. Combined, the Apple iPad and the iPhone will represent over 60% of the fiscal year's reported revenue. 

Preliminary AAPL FQ1 Estimates

Update: Please see the Posts At Eventide AAPL FQ1 Estimates Posted January 2, 2011


Preliminary AAPL FQ1 Estimates

As an independent analyst and moderator of the Apple Finance Board I'm posting preliminary FQ1 estimates for Apple as a catalyst for discussion of anticipated December quarter results. These estimates are subject to change and most likely will be revised in the coming weeks as we approach the end of the quarter. These estimates are being published at roughly the half-way point in the 13-week fiscal period.

FQ1 Revenue and Earnings Estimates

For the December quarter my current models forecast revenue of $26.221 billion and earnings per share of $5.80. This represents an expected 67% jump in revenue and a 58% rise in earnings per share.

The pace of eps growth trails revenue growth due to the estimated 37% gross margin this December versus the 40.9% gross margin in the prior-year period. This nearly 400 basis point drop in the gross margin ratio has a material impact on the relationship between revenue and earnings growth. 

Apple has become more aggressive on product pricing relative to build costs. It's my view the moderation in gross margins is intended to promote growth in after-purchase revenue from the sales of apps and content. The more units sold the more future revenue generated from units sold. 

Apple's Dynamic Revenue Mix

Two weeks ago I posted an FY2010 retrospective that illustrated the percentage revenue contributions from each of Apple's major product lines. Apple's overall revenue mix remains dynamic and changes by the quarter. The emergence of the Apple iPad will again change the percentage of revenue contributions from each product line to Apple's reported results. In the December quarter I expect the Apple iPad's revenue contribution to approach 16% of reported revenue. Each revenue dollar from Apple iPad sales in the December quarter is a gained revenue dollar relative to prior-year comparisons. My estimates suggest the Apple iPad will represent more than 50% of the estimated growth in revenue for the period. 

Apple's FY2010: A Retrospective

Apple's FY2010: A Retrospective

In preparing my December quarter and FY2011 estimates for Apple, I'm looking to the company's FY2010 results for benchmarks and clues concerning revenue growth trends. FY2010 was a year of extraordinary growth for Apple, delivering revenue growth of about 52% and eps growth of roughly 67%. 

Fiscal Year Unit Sales

The emergence of the Apple iPad in the revenue mix for the June and September quarters was crucial to Apple's ability to deliver the growth numbers mentioned above. For the fiscal year iPhone unit sales grew about 90%, Mac unit sales grew about 30% and the Apple iPad (device sales and related accessories) represented 7.6% of the company's reported revenue for the fiscal year and contributed about 11.6% of the 52% growth in revenue. This was an extraordinary outcome for a product that was in the market for only six months and for much of that time in constrained supply. Although the Apple iPod line experienced a decline of about 8.5% in unit sales in the fiscal year, revenue grew almost 2.3% due to the sales performance of the iPod touch during the 12-month period. 

FY2010 Revenue Mix

The chart below illustrates Apple's product line revenue mix for the fiscal year. Due to strong growth in iPhone unit sales and an average selling price hovering around $600 per unit, the iPhone and related accessories delivered almost 40% of Apple's revenue in the fiscal year.

AAPL FY2011 Estimates and Forecasts

AAPL FY2011 Estimates and Forecasts

In late July I posted a preliminary Apple FY2011 revenue forecast of $100 billion. Following the September quarter results I'm beginning my first set of estimate revisions. In reviewing my unit sales numbers following the September quarter I've become more emphatic about my current AAPL price target of $450 per share. I will be revising my revenue and earnings forecasts for FY 2011 over the next two weeks with a bias toward increasing the revenue forecast. Below are the factors by product line that are influencing the outcome of my work:

Mac Unit Sales

In FY 2011 I expect Mac unit sales growth to moderate from the 31% growth rate in FY2010. I expect Mac sales to growth a rate at least 2x the pace of growth of the industry. In fact, I expect Mac PC unit sales growth to represent more than 50% of the growth seen in the domestic market.

In my view tablet products such as the Apple iPad will force a continued deceleration of PC industry growth in the domestic market and increasing revenue share of all PC sold for Apple. Rising enterprise adoption, aggressive product pricing and Apple's efforts at refreshing the Mac product lines more frequently are counter-weights to unit sales growth falling below 25% for the fiscal year. I expect Apple to at least maintain its current 20.7% share of consumer PC sales in the domestic market.

iPod Unit Sales

In the 4th fiscal quarter of FY2010 both unit sales and revenue for the iPod line fell below prior-year levels. I expect this trend to continue into FY2011. For now I anticipate a 10% to 12% fall in unit sales for the fiscal year with the iPod touch partially offsetting a commensurate fall in revenue from the line. 

iPhone Unit Sales

To the surprise of all analysts, iPhone unit sales growth in the September quarter roughly matched the pace of growth for the first nine months of the fiscal year. I expect this strong pace of 90% growth in unit sales to continue through FY2011. Apple ended the September quarter with only 3.2 million iPhones in the global channel, representing about 2.5 weeks of expected unit sales in the quarter. As supply reaches demand, the FQ1 numbers will benefit from an increase in channel supply as Apple exits the quarter with more iPhones in the channel than when the quarter began. 

The September Quarter Outcome: Apple Prepares For Battle

September Quarter Results

Earlier today Apple reported results for the fourth fiscal quarter ended September 25, 2010 and the fiscal year ended the same day. The fiscal quarter's results were well above published analyst expectations. For the quarter Apple reported a 67% gain in revenue to $20.343 billion and a 67.5% rise in earnings per share to $4.64. For the fiscal year Apple reported a revenue gain of 52% to $65.225 billion and an earnings per share rise of about 66.9% to $15.15. These results are inline with my May forecasts for the fiscal year. 

The iPhone 4 Goes To War

The fiscal fourth quarter's results were lead by strong sales of the Apple iPhone. The 14.102 million units sold represents a 91% increase in unit sales, tracking inline with the fiscal year gain of 92.9% or 39.989 million units sold. This compares with estimated global smartphone unit sales growth of 64% for the industry. Tim Cook, Apple's COO, called demand for the iPhone 4 "staggering."

In the conference call with analysts following the earnings release, Apple CEO Steve Jobs was impassioned in his comparison of the iOS and Android platforms calling the iPhone's platform, based on Apple's iOS, "integrated" and the Android platform "fragmented." This was the CEO's nomenclature in response to Google's claims the Android  platform is "open" and the iPhone platform is "closed." Illustrating the fragmentation of the Android platform Mr. Jobs made reference to the many versions of Android with which app developers must contend and the proprietary interfaces some Android device makers will deploy to boost sales and create after-purchase revenue opportunities. This, he suggests, make the Android platform "fragmented." 

Apple's iOS Versus the Competition

Mr. Jobs also noted in his comments that in Apple's September quarter the company sold more smartphones (14.102 million units) than Research In Motion sold more smartphones in its most recent fiscal period ended in August (12.1 million units). In comparing the success of iOS-based products to the reported success of Android-based products, he stated Apple activated in September on average 275,000 iOS-based devices per day compared to an average of about 200,000 Android-based devices as reported by Google. In comparing activations one must note iOS-based device activations include the Apple iPhone, Apple iPad and Apple iPod touch. 

Apple: Do You See What I See?

Apple: Do You See What I See?

On Monday afternoon Apple releases the company's September quarter results and results for the 2010 fiscal year that ended with the quarter. Yesterday Philip Elmer-DeWitt posted the comprehensive analyst estimates on Apple 2.0. I'm honored to be among the independent analysts selected for the quarterly analyst comparison.

Apple's quarterly results are essentially a static snapshot of a dynamic company that's growing at an astoundingly fast pace for an enterprise of its size. For the first nine months of fiscal year 2010 Apple's revenue has risen 46.2% and earnings per share have grown 66.8% over the prior-year period. Most likely Apple's September quarter revenue and eps growth performance will exceed the results of the first three quarters of the fiscal year.

Apple's Revenue Source Expansion

Even before the September quarter results are released we should already be looking beyond those numbers. I've mentioned before more than 50% of Apple's revenue in the September quarter and more than 50% of revenue in fiscal year 2011 will be derived from products that did not exist in the marketplace as recently as three and one-half years ago. Fully 25% of Apple's FY 2011 revenue will be derived from a product that's been in the market for less than eight months as of this writing. According to IDC September quarter estimates, Apple has regained the #3 spot among domestic PC vendors and has now secured a 10.6% share of the US market. In fiscal year 2010 Apple's iPod line of products will actually report out an increase in revenue despite a drop in unit sales due to the popularity of the iPod touch. It's easy to see why people would become enamored with the company's quarterly results. But there's more to the story than these 91-day snapshots of performance.

When I look at Apple, I don't see a company that develops popular products. I see a management team that is focused on revolutionizing the way we use technology to better our lives and better the world around us. Excellent quarterly results are one component of management's mission.

Top Line Management and Bottom Line Growth

Apple's results aren't produced by a bottom line-only approach to management. Obviously decisions must be made based on the economic viability of products. But Apple's bottom line growth comes primarily from top line growth. Without growth in revenue, Apple's bottom line growth can not be sustained nor improved. Cost management has amplified Apple's earnings from revenue growth, but cost management has not been the primary driver of Apple's superb earnings performance. There's a difference between cost management and efforts at outright cost containment. Management understands costs must rise to support growth in revenue.

Apple and R&D

Over the past several quarters Apple has invested about 3% of revenue in research and development. As revenue has risen so has the company's investment in R&D. These expenses lead to future products. Management has chosen smartly to increase its investment in future product development  as revenue from current products provides the resources. In other words, Apple is investing in new products at a rate proportional to the success of its current products. R&D as a percentage of revenue has not been scaled back for the sake of bottom line growth.

AAPL Estimates: Have The Wall Street Pros Gone Crazy?

One of the more interesting features of Philip Elmer-DeWitt's Apple 2.0 column is the recurring quarterly comparisons of the revenue and earnings estimates of a select group of independent analysts and bloggers and the numbers put up by the Wall Street pros. 

The comparison of estimates for Apple's fiscal fourth quarter that ended in September illustrates how differently the independent bloggers and analysts view Apple and the company's prospects for strong revenue and earnings growth in the iPhone and Apple iPad eras. In reviewing the numbers one question leaps to mind: Have the Wall Street pros all gone crazy or have they been wilderness camping together since the Apple iPad's release? 

A quick look at the average estimates of the 31 analysts and the averages of the two sub-groups:

Average Revenue Estimates

All Analysts (31):                  $19.34 Billion

Independent Analysts (9): $20.32 Billion

Wall Street Pros (22):         $18.95 Billion

Average EPS Estimates

All Analysts (31):                          $4.28 

Independent Analysts (9):          $4.71

Wall Street Pros (22):                  $4.10

Apple's Guidance For The September Quarter

For the September quarter Apple CFO, Peter Oppenheimer, offered guidance of $18 billion in revenue and earnings of $3.44 per share. Historically Apple's guidance isn't guidance at all. It's a statement of guaranteed results. Guidance has markedly trailed actual results over the last several quarters. 

Apple's guidance for the September quarter suggests revenue growth of about 47.5% and eps growth of 24.2% over the fourth fiscal quarter of 2009. This contrasts with revenue growth of 46.2% for the first nine months of fiscal year 2010 and earnings per share growth of 66.8% over the same period.

However, in the June quarter, the first quarter with Apple iPad revenue and earnings in the mix, Apple realized revenue growth of 61.3% and earnings per share growth of 74.6%. It appears management's September quarter guidance does not reflect anticipated revenue and earnings per share growth from the Apple iPad in the July to September period.

AAPL 4th Fiscal Quarter Estimates

My AAPL 4th Fiscal Quarter estimates:
Since my original post on Monday I've made some small adjustments to my AAPL 4th fiscal quarter estimates. The adjustments include the reallocation of certain revenue expectations from the Other Music segment and slight adjustments to certain hardware ASPs. Below are the updated estimates. 

Revenue

Macintosh unit sales growth continued at a strong 30% pace, iPhone unit sales increased roughly 67% in the September quarter, Apple iPad unit sales rose more than 80% sequentially due to expanding global availability and support from enterprise and education adoption. Additionally, I anticipate strong growth in iTunes-related revenue due to the popularity of Apple's iOS-based devices. My revenue estimate for the 4th quarter of FY 2010 is: $21,486,228,989. The estimated revenue total is based on my trend analysis and accompanying formulas. 

In preparing estimates the focus is of course on the dollars. But one of the things I find most intriguing is the changing revenue mix that will deliver record revenue and earnings per share for Apple in the quarter. Revenue from the Apple iPad and the iPhone, two products that did not exist in the marketplace as recently as three and one-half years ago, represent 55% of my estimated revenue for the quarter.

AAPL 4th Fiscal Quarter Revenue Mix

Based On Growth, AAPL Remains Undervalued

At Friday's closing price of $282.52 AAPL is trading at less than 22 times trailing 12-month earnings and at a significant discount to current rates of revenue and earnings growth. Factoring into the mix the roughly $50 in cash supporting each share, Friday's closing price represents a real opportunity for value and growth investors to enter the market and share in AAPL's appreciation potential. 

The Reasons Why AAPL Remains Undervalued

About three weeks ago in a blog post titled FY 2011 Analyst Estimates: Why AAPL Is Set To Pop I highlighted the disparity between analyst FY 2011 estimates for Apple's revenue and earnings performance and the company's current rates of revenue and earnings growth. The disparity remains. Current analyst consensus suggests revenue growth of just over 25% in FY 2011. For the fiscal year ended in late September, Apple will report roughly 50% revenue growth with revenue growth well above that rate in the second half of the fiscal year due to the release of the Apple iPad. I rate the risk of Apple's revenue growth decelerating by 50% in FY 2011 as remote. Analysts will revise their revenue and earnings estimates for FY 2011 following in the couple of weeks before and the weeks following the release of September quarter results on October 18th.

iPhone and Apple iPad Unit Sales Estimates

In reviewing the revenue and earnings estimates for the September quarter now being published by Wall Street analysts and independent bloggers, we are seeing a wide range of estimates for both iPhone and iPad unit sales.  Uncertainty over the strength of unit sales for both product lines may be impacting the current share price. Clarity will come with the release of Apple's September quarter results. 

The June quarter's 3.27 million iPad unit sales performance provides little insight into the September quarter's results due to limited distribution following the April 3rd release and constrained supply conditions that continued through much of the September quarter. The June quarter's iPhone unit sales performance was impacted by an aggressive drawdown of 3GS channel inventory ahead of the iPhone 4's release. In the June quarter iPhone unit sales rose 61% year-over-year versus unit sales growth of 93.7% for the first nine months of FY 2010, inclusive of the June period.

Apple's Growth Rates Delineated

No matter the interest in Apple's September quarter results and focus on the unit sales performance of the company's two fastest-growing product lines, understanding Apple's share price appreciation potential requires a more objective view of the company's current rates of growth as a whole:

AAPL Target Price: $450 Per Share

Please see my updated AAPL price targets dated February 7, 2011. 


AAPL Target Price: $450 Per Share

At Friday's closing price of $292.32, AAPL has risen about $29 or 11% in two weeks. The good news is there's much more room for the share price to rise. On September 11th in a Posts At Eventide entry titled FY 2011 Analyst Estimates: Why AAPL Is Set To Pop, I noted the modest analyst estimates for FY 2011 that begins this weekend. Wall Street pros are continuing to be conservative in their price targets. Readers of this blog know I have a long-standing price target of $400 by early May. According to Philip Elmer-DeWiit at  Apple 2.0, perennial Apple bull Gene Munster has recently raised his price target to $390 per share and for good reasons.

In evaluating and forecasting Apple one must look beyond the individual product lines and look at the performance of the company as a whole. In fiscal year 2011 Apple may have a second consecutive year of 50% revenue growth and 60%+ growth in earnings per share.

To put Apple's growth in perspective, in fiscal year 2011 revenue from iPad device sales and iPad-related accessories and services may equal or exceed Apple's total reported revenue in fiscal year 2007. Overall, in fiscal year 2011 Apple may reach $100 billion in revenue, a four-fold increase in revenue in four fiscal years. The Apple iPad is obviously a significant factor in Apple's revenue growth. But consider the Apple iPad may represent 25% of the company's FY 2011 revenue take. 

Assembling all of the product and services pieces should yield price targets well above current Wall Street projections and well beyond today's trading range. Continuing analyst upgrades and price target revisions will fuel further gains in the share price no matter the run up in the share price over the past two weeks. 

Apple's two fastest growing product lines (the iPhone and the Apple iPad) are having a pronounced halo effect on Mac sales. Mac unit sales growth for fiscal year 2010 will meet or exceed 30%. Even with the release of the Apple iPad, Mac unit sales will continue to rise at an impressive pace in fiscal year 2011. The iPad is taking revenue share from PC sales in the sub-$1,000 market, a market Apple barely addresses with the $999 MacBook. 

At AAPL's closing price on Friday of $292.32, the shares are trading at a multiple of 22 times trailing 12-month earnings. I expect this multiple to remain fairly consistent over the next twelve months. I am raising my AAPL price target to $450 per share. I expect that share price to be reached no later than early November 2011.

The Apple iPad: A Transcendent Device

The Apple iPad Transcends The PC

In June, in a blog post I titled Bunkum and Balderdash: The iPad Is Not A PC,  I commented on a Forrester Research report that suggested the Apple iPad is a PC in tablet form. The Apple iPad is not a PC or a PC replacement. The Apple iPad is a device that transcends the PC and it's a product that will hasten the PC's demise. The Apple iPad is a revolutionary device that is sparking an evolutionary change in the way we access information and communicate with the world around us and with one another. 

The Apple iPad's Impact On Notebook PC Sales

On Friday Philip Elmer-DeWitt published an Apple 2.0 column citing data from the NPD Group that was included in a report from Morgan Stanley's Katy Huberty indicating domestic notebook retail PC sales have decelerated since the release of the Apple iPad. The deceleration in sales has been so dramatic, it's estimated in August notebook PC sales experienced negative domestic sales growth. 

There are several factors, including the iPad's early success, that might be contributing to the negative growth in notebooks sales at retail. Among these factors are a possible slowdown in sales or sales growth following the release of Windows 7 last fall, the popularity of Apple laptops on America's college campuses and a change in consumer preferences about personal digital devices. 

Absent data on Apple iPad sales, it's challenging at best to accurately determine the direct impact Apple's tablet-sized digital device is having on domestic retail sales of PC notebook computers. But for Windows PC OEMs the early success of the Apple iPad may force an acceleration of plans to release competing tablet products in an effort to recapture revenue migrating to Apple due to the iPad's popularity. Until now the iPad's domestic distribution has been limited. As iPad distribution expands and competitors enter the tablet market it may quicken the pace of decline in notebook PC sales.  Retailers will chase this change in consumer preferences.

FY 2011 Analyst Estimates: Why AAPL Is Set To Pop

Overview

At Friday's closing price of $263.41 AAPL is trading at a price-earnings multiple of just under 20 times trailing 12-month earnings. Considering the company's huge cash position, 50% revenue growth this fiscal year and an anticipated 65% growth in earnings per share, Friday's closing price represents a deep discount to the company's current rates of growth.

Last month I detailed the basis of my forecast for AAPL to reach $400 per share by early May 2011. I've also stated reaching this price will not require a significant expansion of the nominal price-earnings multiple and continuing relative compression (the difference between the price-earnings multiple and continuing rates of growth) may continue. In other words, the discount between the current rates of growth and the valuation at which the share trade may continue to widen even as the share price appreciates. 

Fiscal Year 2011 Analyst Estimates

One of the factors impacting the share price is the lowly analyst estimates for the company's fiscal year 2011 performance. Apple's new fiscal year begins at the end of this month. Currently the analyst consensus estimate for FY 2011 revenue is $78.70 billion in revenue and the consensus estimate for earnings per share is $17.52. In late July I posted early FY 2011 estimates of $100 billion in revenue and earnings per share of over $23. The analyst consensus estimates for FY 2011 revenue and earnings will rise considerably following the September quarter's results. 

The consensus estimates of analysts for the September quarter are revenue of $18.50 billion and earnings share of $3.97. Apple will exceed the current consensus revenue estimate by at least 12% and the earnings per share estimate by 15% or more. For fiscal year 2011 the gap between the analyst consensus estimates and performance based on current rates of revenue and earnings growth continues to widen. 

The analyst consensus of $78.70 billion in FY 2011 revenue suggests a revenue growth rate of roughly 20% from the current fiscal year's performance. In fiscal year 2010 Apple will realize revenue growth of 50% over the prior fiscal year and earnings per share growth of over 65%.  The consensus earnings earnings per share estimate of $17.52 per share suggests growth of less than 17% over the current fiscal year. These estimates must undergo significant revisions because 

Not only are the consensus estimates for fiscal year 2011 revenue and earnings growth well below the rates of fiscal year 2010 growth, for the first two quarters of fiscal year 2011 there are no iPad revenue or earnings contributions in the prior-year comparisons. 

The Apple iPad: A Uniquely Personal Device, A Global Revenue and Earnings Monster

Overview

I'm taking time out today not to talk so much about Apple's finances, but to talk about an amazing product that is a catalyst for another era of spectacular growth for the maker of Macs, iPhones and iPods. It's the Apple iPad. I'm sold on this product today and I look forward to the feature and functionality enhancements in the years to come.

In July I posted a blog entry about My $1,000 iPad Purchase Odyssey. Since the moment I unwrapped and powered up this device the manner in which I do many things from read the news, surf the Web and organize my work day have changed in dramatic ways. 

In a recent Apple 2.0 column Philip Elmer-DeWitt quotes Morgan Stanley's Katy Huberty about her claim Apple has told suppliers to ramp up for a run rate of 3 million iPads a month. I believe the global market can support sales of at least 3 million iPads a month and more. This is the most immersive digital device I have ever owned and about the most productive digital device I could bring to my office. 

Assuming for a moment Katy Huberty's claim is accurate and Apple has told suppliers to ramp up for a 3 million unit a month run rate, in fiscal year 2011 Apple would generate more revenue from the iPad alone than the company generated from all sources as recently as three years ago in fiscal year 2007, including retrospective adjustments to revenue from iPhone sales. 

The Apple iPad is a revenue and earnings monster. It will chomp on netbook and laptop sales, sales of handheld gaming devices and drink up revenue from book and software sales as old economy industries such as newspapers and magazines adapt to the iPad economy and software developers migrate to the iOS devices.  

A Uniquely Personal Device

In the seven weeks I've owned an Apple iPad it's become my primary portal for news and information, for Web surfing and my favored device for concept development for projects at home and work. Beyond these necessary tasks the iPad is an excellent book reader and I'm discovering its many uses as a handheld theatre for home entertainment. This afternoon I downloaded Epic Citadel and explored this application as a preview of games to come.

My favorite news apps are: NPR for iPad, the BBC News, AP News and NYT Editors' Choice.  Each of these apps showcase why the Apple iPad is a news reader beyond compare.