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