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.
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.
Over the past four fiscal quarters Apple has realized a dramatic drop in its effective tax rate. As the graph below illustrates, through fiscal year 2009 Apple's tax rate remained fairly constant and above 30% of pre-tax income. In fiscal year 2010 the effective tax rate fell dramatically from fiscal year 2009 levels reaching a low of 21.1% in Apple's most recent fiscal quarter. The drop in tax rates during FY2010 contributed significantly to Apple's net income performance relative to revenue.
Operating expenses (or opex) consists of research and development expenses and general, selling and administrative expenses. The percentage of opex expenses relative to revenue will usually scale down as revenue rises. As the graph below illustrates, operating expenses as a percentage of revenue can vary significantly by quarter and materially impact each fiscal quarter's net income results.
I will tie together these cost factors in a blog post next weekend. Thank you to Sandy Leitao for her graph creation skills using Apple's Numbers software.
Robert Paul Leitao