On July 19th Apple reported record revenue and earnings for the three-month period ended in late June. The third fiscal quarter's 82% revenue growth to $28.571 billion and 122% earnings per share (eps) growth to $7.79 represented surprisingly strong results due to better than expected sales of Apple iPhones and Apple iPads.
Apple's Nine-Month Performance
For the first nine months of the fiscal year ending in late September, Apple has realized revenue growth of 78.2% to $79.979 billion and eps growth of 96.3% to $20.63. Considering the continuing "share creep" in the fully diluted share count, the company's eps performance over this nine-month period becomes even more impressive as the numbers are analyzed.
Rising Net Income As A Percentage Of Revenue
Underpinning the exceptional rates of eps growth is the rising percentage of each revenue dollar that flows to the company's net income line. The graph below illustrates the growth in net income relative to revenue over the most recent eleven fiscal quarters.
Expenses Per Revenue Dollar
Apple's net income performance is influenced by three major expense segments that include cost of sales (the inverse of gross margin), operating expenses and taxes. Due to rising international sales and generally lower international tax rates, taxes as a percentage of revenue have moderated even as gross margins have risen to over 40% of reported revenue and operating expenses (R&D and selling, general and administrative expenses) have fallen as a percentage of reported revenue consumed. The graph and table data below illustrate the company's rising net income per revenue dollar and the percentages of revenue consumed by the three major expense segments.
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 | |
FQ3 ’11 | 0.583 | 0.089 | 0.079 | 0.750 |
Apple's Gross Margins
In both the March and June quarters of the current fiscal year (FQ2 and FQ3) gross margins have exceeded 40% of reported sales revenue. Economies of scale and changes in product refresh cycles (for example the change in the annual refresh of the Apple iPhone now anticipated in the September quarter), as well as the company's ability to strategically use the more than $76 billion in cash and marketable securities now on the books to sign advantageous component supply and pricing agreements, have contributed to the company's attractive gross margin performances.
During the conference call with Wall Street analysts that followed the release of June quarter results, management suggested gross margins would fall in the September quarter as unspecified product refreshes (presumably including the Apple iPhone 5 but it was not specifically cited) would impact cost of sales per revenue dollar. However, the release of Mac OS X, 10.7 last week and its accompanying high margins, the attractive retail margins produced by product sales through Apple's global chain of retail stores and the anticipated economies of scale on the iPhone 5 with expected simultaneous releases on both the AT&T and Verizon networks suggest gross margins will remain high in the September quarter.
Operating Expenses
Over the first nine months of the current fiscal year operating expenses have consumed less than 10% of reported revenue. This level of operating efficiency continues to benefit the company's bottom line performance. With reported revenue growth of 78.2% in the nine-month period and anticipated record revenue in both the current September quarter and the upcoming holiday quarter, the percentage of reported revenue consumed by operating expenses should continue to fall.
Apple's Effective Tax Rate
As mentioned above, the rising percentage of Apple's revenue sourced from international or non-domestic sales has had a positive impact on the company's net income line. For the first nine months of the current fiscal year Apple's effective tax rate has fallen to 24.1% from 29.1% in the first nine months of FY 2010. Expressed as a percentage of reported revenue, the drop in the effective tax rate has had a significant impact on the company's net income and resulting eps lines.
The graphs and table data below illustrate the changes in the percentage of total expenses consumed by each of the three major expense segments over the most recent eleven 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% | |
FQ3 ’11 | 77.67% | 11.86% | 10.46% | 100% |
Implications of Deferred Revenue On Future Quarters
Please note the revenue and net income numbers depicted in today's graphs and table data for the four quarters of FY 2009 reflect the post retrospective adjustments for the elimination of the material portion of the deferred revenue accounting for the Apple iPhone that was in place from the product's initial launch in 2007 through FQ4 2009. The retrospective adjustments for FY 2009 were announced with the FQ1 2010 results in January, 2010.
The June quarter results released last week include the impact of new and partial deferred revenue on hardware devices sold on and after June 6, 2011. In addition to the slight amount of revenue deferred on each iOS device sold due to the company's commitment to provide no-cost iOS updates to device owners over the anticipated economic life of each handset, the company will now defer $22 per Macintosh personal computer sold, $16 per Apple iPhone and Apple iPad sold and $11 per iPod touch sold as of the June 6, 2011 date because of the benefit of free iCloud services that will soon be available to customers. The $22 in deferred Macintosh revenue will be recognized on a four-year schedule from time of sale and the deferrals on iOS devices (Apple iPhone, Apple iPad and Apple iPod touch) will be recognized over two years from time of sale. The deferrals will have a slight dampening effect on reported revenue and eps growth over the next several quarters.
Conclusions
The current September quarter and the upcoming holiday quarter will yield consecutive quarters of record revenue and eps for Apple. Operating expenses will continue to decline as a percentage of revenue during this six-month period. Unit sales of Apple iPhones and Apple iPads will continue to produce attractive economies of scale supporting high gross margins well into FY 2012. For the current fiscal year ending in late September, Apple is on track to report revenue approaching $115 billion and eps approaching $30 per share, representing greater than 75% revenue growth and close to 100% eps growth for the four-quarter period.
Disclosure: The author is long AAPL shares
Robert Paul Leitao
