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.