Tuesday, December 21, 2010

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.






YOY Rev.
Operating
YOY OpEx
OpEx %

Quarter
Revenue
Growth
Expenses
Growth
of Revenue

FQ1 ’09
11,880

1,406

11.8%

FQ2 ’09
9,084

1,304

14.4%

FQ3 ’09
9,734

1,351

13.9%

FQ4 ’09
12,207

1,421

11.6%

FQ1 ’10
15,683
32.0%
1,686
19.9%
10.8%

FQ2 ’10
13,499
48.6%
1,646
26.2%
12.2%

FQ3 ’10
15,700
61.3%
1,902
40.8%
12.1%

FQ4 ’10
20,342
66.6%
2,065
45.3%
10.2%


The graph and table data above illustrate and detail the differing rates of growth of revenue and operating expenses. In fiscal year 2010, revenue rose 52% while operating expenses grew 33% year-over-year. It's interesting to note as the pace of revenue growth increased sequentially through fiscal year 2010, Apple maintained a relatively consistent differential between the two growth rates in fiscal quarters 2, 3, and 4.
FY2011 Revenue vs. Operating Expenses
In the first fiscal quarter of FY 2011 I forecast revenue growth of about 70% and I currently forecast the pace of revenue growth for all of FY 2011 at close to the first fiscal quarter's pace of growth. Consequently, I expect operating expenses to fall below 10% or reported revenue in FY 2011, further fueling eps growth at a rate that exceeds revenue growth. My updated first fiscal quarter estimates will be posted early next week. 
For a comprehensive review of Apple's financial performance over fiscal years 2009 & 2010, please see the Posts At Eventide Resource Guide for Independent AAPL Analysts posted on Sunday. 

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