Last week in an article titled, Apple's Revenue Growth: A Dual-Track Bullet Train, I analyzed Apple's rates of revenue growth and the company's relentless geographic expansion that supports the fast rates of growth. In today's article, I am providing an overview of Apple's net income growth and the influences on the company's rising profitability.
Apple's Net Income Thrill Ride
Apple is not only a fast-growing mega-cap, the company has defied conventional wisdom by increasing the percentage of revenue that flows to the net income line while revenue and in many cases market share, continue to rise across the company's major product lines.
Apple is not only a fast-growing mega-cap, the company has defied conventional wisdom by increasing the percentage of revenue that flows to the net income line while revenue and in many cases market share, continue to rise across the company's major product lines.
The graph below illustrates the rising percentage of each revenue dollar that flows to the company's net income line:
Over the most recent ten fiscal quarters, the percent of revenue that has reached the net income line has leaped from 21.54% of revenue in FQ1 2010 to 29.66% of revenue in FQ2 2012. Rising gross margin due to superb supply chain management, economies of scale, operating expense discipline and moderating tax rates have all factored into Apple's impressive percentages of revenue that have flowed to the net income line.
Apple's Gross Margins
The graph below illustrates Apple's gross margins over the most recent ten fiscal quarters.
There's no disputing the fact the iPhone 4S has delivered very high gross margins. However, the high gross margins delivered by the iPhone 4S over the two most recent quarters were due primarily to economies of scale and not increases in average revenue per unit sold. In FQ1 2010, average revenue per iPhone unit was $638 versus $647 per unit in FQ2 2012. In FQ4 2011, average revenue per iPhone handset sold was $643. Revenue per handset includes the revenue generated by Apple through the sales of Apple-branded and third party iPhone accessories. My Apple Unit Sales page chronicles the unit sales growth of each of Apple's major device lines over the most recent fourteen fiscal quarters.
The iPhone's high gross margins exemplify Apple's extraordinary supply chain management and the benefits of economies of scale. This is not an issue of rising revenue per handset. It's primarily an issue of unit sales growth.
Apple's Operating Expenses
Over the most recent ten fiscal quarters, Apple's operating expenses as a percent of revenue have fallen from 10.75% of revenue in FQ1 2010 to 8.12% of revenue in FQ2 2012.
The graph below illustrates Apple's operating expenses per revenue dollar over this ten-quarter period:
On December 4, 2011, in an article titled, Where Apple Makes Its Money, I analyzed Apple's FY2011 operating income by geographic revenue segment. Operating expenses are comprised of R&D and selling, general and administrative expenses (SG&A). In the recent March quarter, R&D expenses represented 2.15% of revenue versus 2.54% of revenue in FQ1 2010. In contrast, selling, general and administrative expenses have fallen dramatically as a percentage of revenue over this ten-quarter period. In FQ2 2012, SG&A represented 5.97% of reported revenue versus 8.21% of revenue in FQ1 2010.
Apple's effective management of operating expenses has delivered strong net income results. The Apple retail stores as sales, service and marketing centers continue to deliver cost savings along with attractive retail margins on products sold. In FQ1 2012, retail segment margin reached over $1.8 billion dollars. In the March quarter retail segment margin was in excess of $1.1 billion, establishing a March quarter performance record.
Pulling It All Together
The graph and table data below illustrate and delineate the percentages of revenue consumed by Apple's major expense segments over the most recent ten-quarter period. Cost of sales (COS) represents the inverse of gross margin. Economies of scale and effective operating expense management have dramatically increased the percentages of revenue that have flowed to the net income line.
Taxes as a percent of revenue have risen from 8.80% in FQ1 2010 to 9.98% in FQ2 2012. This is due to rising operating income per revenue dollar and despite a gradual drop in the effective tax rate over the period.
Fiscal
|
% of Revenue
|
% of Revenue
|
% of Revenue
|
% of Revenue
|
|
Quarter
|
OpEx
|
COS
|
Taxes
|
Net Income
|
|
FQ1 2010
|
10.75%
|
59.12%
|
8.80%
|
21.54%
|
|
FQ2 2010
|
12.19%
|
58.33%
|
7.07%
|
22.77%
|
|
FQ3 2010
|
12.11%
|
60.92%
|
6.62%
|
20.72%
|
|
FQ4 2010
|
10.15%
|
63.08%
|
5.67%
|
21.17%
|
|
FQ1 2011
|
9.24%
|
61.49%
|
7.33%
|
22.45%
|
|
FQ2 2011
|
9.50%
|
58.58%
|
7.76%
|
24.27%
|
|
FQ3 2011
|
8.90%
|
58.27%
|
7.85%
|
25.58%
|
|
FQ4 2011
|
9.44%
|
59.75%
|
7.67%
|
23.43%
|
|
FQ1 2012
|
7.26%
|
55.32%
|
9.52%
|
28.20%
|
|
FQ2 2012
|
8.12%
|
52.63%
|
9.98%
|
29.66%
|
Conclusions
Apple's extraordinary rates of net income growth and rates of net income growth greater than the rates of growth in revenue are due to economies of scale and rising unit sales, not increases in average revenue per unit sold.
Although there has been a slight increase in average revenue per iPhone sold over this ten-quarter period, average revenue per Mac unit sold has fallen from $1,324 in FQ1 2010 to $1,263 in FQ2 2012. Average revenue per iPad sold has fallen from $662 in the quarter it was introduced to $559 in the recent March quarter.
At this time Apple is addressing only a fraction of the global market for the company's products. Relentless geographic expansion, economies of scale, strong supply chain management and operating expense discipline are delivering rising rates of net income per revenue dollar. Apple's net income thrill ride will continue even if average revenue per unit sold among the company's major product lines have quarterly ups and downs of their own.
Robert Paul Leitao
Disclosure: The author is long Apple shares
