Apple: 10-Quarter Review of Expenses Per Revenue Dollar

It's no secret Apple is in an era of extraordinary revenue and earnings growth. This is due to the company's ability to establish leadership in new and emerging product markets. In Apple's March quarter over 60% of reported revenue was sourced from products that did not exist in the market four years prior. 

On December 5, 2010 I published a post titled Apple's Startling Rates of Growth: A Five-Year Overview. Since that publication date and in the first two quarter's of FY 2011 Apple's pace of revenue and earnings growth has quickened. For the first six months of FY 2011 (the December and March quarters), Apple's revenue has risen over 76% and the rate of eps growth topped 83%. 

While it's common knowledge Apple continues to grow revenue and earnings at a frenetic pace, the company's expense ratios relative to revenue in this era of extraordinary growth have also become dynamic.

10-Quarter Review of Expenses Per Revenue Dollar

On May 14th in a post titled Apple: 10-Quarter Review of Revenue vs. Operating Expenses I compared the rate of Apple's revenue growth to the rate of growth in operating expenses. Today I'm following up that post with a review of Apple's expenses per revenue dollar. 

	Quarter	Cost of Sales	OpEx	Taxes	Total
	FQ1 ’09	0.621	0.118	0.085	0.824
	FQ2 ’09	0.601	0.144	0.084	0.828
	FQ3 ’09	0.591	0.139	0.089	0.819
	FQ4 ’09	0.582	0.116	0.098	0.796
	FQ1 ’10	0.591	0.108	0.088	0.787
	FQ2 ’10	0.583	0.122	0.071	0.776
	FQ3 ’10	0.609	0.121	0.066	0.796
	FQ4 ’10	0.631	0.102	0.057	0.789
	FQ1 ’11	0.615	0.092	0.073	0.781
	FQ2 ’11	0.586	0.095	0.078	0.758

From a high of $.828 of each revenue dollar consumed by the costs of products sold, operating expenses and taxes in FQ2 2009, to a low of $.758 or each revenue dollar consumed by these expense segments in FQ2 2011 (the recent March quarter), Apple has been gradually increasing the amounts of each revenue dollar that flows to the net income line. This reduction in expenses relative to revenue has been a material factor in the company's ability to maintain a pace of earnings per share growth greater than the pace of growth in revenue. 

The graph and table data above illustrate the amount of revenue consumed by the company's major expense components over the most recent ten fiscal quarters. 

	Quarter	Cost of Sales	OpEx	Taxes	Total
	FQ1 ’09	75.32%	14.37%	10.32%	100%
	FQ2 ’09	72.53%	17.33%	10.14%	100%
	FQ3 ’09	72.17%	16.96%	10.87%	100%
	FQ4 ’09	73.07%	14.62%	12.31%	100%
	FQ1 ’10	75.15%	13.66%	11.19%	100%
	FQ2 ’10	75.15%	15.70%	9.15%	100%
	FQ3 ’10	76.50%	15.21%	8.29%	100%
	FQ4 ’10	79.92%	12.86%	7.22%	100%
	FQ1 ’11	78.78%	11.84%	9.39%	100%
	FQ2 ’11	77.24%	12.53%	10.23%	100%

Percent of Total Expenses

One of the lesser-mentioned sources of Apple's continuing net income growth (and resulting eps growth) is the reduction in the amount of revenue consumed by operating expenses. Operating expenses as a percentage of total expenses have fallen during the  period under review from a high of 17.33% in FQ2 2009 to a low of 11.84% in FQ1 2010 (the recent December quarter. Additionally, the company's gross margin (the inverse of cost of sales) has improved over this 10-quarter period. However, as operating expenses have fallen as a percentage of revenue consumed, costs of sales have risen as a percentage of total expenses. This indicates greater efficiency in Apple's management of revenue following the costs of product manufacture. 

Due to rising non-domestic sales, Apple has lessened the percentage of net income consumed by taxes. Foreign tax rates are generally lower than US corporate tax rates and this change in the percentage of pre-tax income consumed by taxes has also contributed to an improvement in Apple's net income performance. In FQ4 2009, Apple had an average tax rate on pre-tax income of about 32% or 12.31% of total expenses. In FQ4 2010 the average tax rate on pre-tax income fell to a ten-period low of 21.1% or 7.22% of total expenses. In the recent March quarter (FQ2 2011) the average tax rate on pre-tax income was 24.2%. The fall in Apple's average net income tax rate will continue to benefit the company's bottom line as non-domestic sales continue to rise and rise as a percentage of the company's reported revenue. 

Posts At Eventide Resource Guide

The objective of the Posts At Eventide Web presence is to benefit readers seeking to understand Apple's financial performance and to serve as a repository of information and analysis for other independent AAPL analysts preparing quarterly estimates and share price forecasts. Please see the Posts At Eventide Resource Guide for more information. 

Robert Paul Leitao