Sunday, February 20, 2011

Apple's SG&A Expenses Versus Revenue

Apple's SG&A Expenses Versus Revenue
On Saturday, February 12th I published a blog post titled Apple's Rising R&D Expenses in which I compared the rise in Apple's R&D expenses to the company's growth in revenue. Apple's operating expenses are comprised of two major expense segments including R&D expenses and Selling, General and Administrative expenses (SG&A). Today I'm completing this two-part series by comparing the growth in Apple's SG&A expenses to the company's growth in revenue. 
Apple's Rates of Revenue and EPS Growth
In the December quarter Apple's revenue rose 70.5% to $26.741 billion and earnings per share rose 75.2% to $6.43 per share. This performance followed a strong FY2010 in which revenue rose 52% and eps rose about 67%. Apple's eps continues to rise more quickly than revenue due in part to the fact the pace of growth in operating expenses is below the pace of growth in revenue.
Operating Expenses As A Percentage of Revenue
In Apple's two most recent fiscal quarters (FQ4 2010 and FQ1 2011) the percentage of revenue consumed by SG&A expenses fell below 8% of reported revenue. Combined, R&D expenses and SG&A consumed less than than 10% of reported revenue in the company's most recent quarter. This has contributed to the rate of eps growth exceeding the rate of revenue growth. The less revenue consumed by expenses the more revenue that flows to the net income line. Please see my November post titled Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue for more information on Apple's recent revenue versus overall costs trends. 

The graph below illustrates the rise in SG&A expenses and the expense segment's decline in the percentage of revenue it consumes:






% of 
Sequential
YOY
% YOY

Quarter
SG&A
Revenue
Rise
Rise
Rise

FQ1 ’09
1,091,000,000
9.18%
92,000,000
131,000,000
13.65%

FQ2 ’09
985,000,000
10.84%
-106,000,000
99,000,000
11.17%

FQ3 ’09
1,010,000,000
10.38%
25,000,000
94,000,000
10.26%

FQ4 ’09
1,063,000,000
8.71%
53,000,000
64,000,000
6.41%

FQ1 ’10
1,288,000,000
8.21%
225,000,000
197,000,000
18.06%

FQ2 '10
1,220,000,000
9.04%
-68,000,000
235,000,000
23.86%

FQ3 ’10
1,438,000,000
9.16%
218,000,000
428,000,000
42.38%

FQ4 ’10
1,571,000,000
7.70%
133,000,000
508,000,000
47.79%

FQ1 ’11
1,896,000,000
7.10%
325,000,000
608,000,000
47.20%


SG&A And Its Relationship To Reported Revenue
Since FQ2 2009 the percentage of revenue consumed by SG&A activity has consistently declined in year-over-year comparisons. Although SG&A expense activity has continued to rise, it is consuming a smaller percentage of revenue as the pace of revenue growth has exceeded the pace of expense growth in this major cost component. 
SG&A Expenses Quarter By Quarter
The pace of growth in Apple's SG&A expense activity has quickened since the start of FY2010, reaching over 40% growth in the three most recent fiscal quarters. The dramatic rise in SG&A expense activity beginning in FQ3 2010 coincides with the launch of the Apple iPad and is also due in part to Apple's expanding global footprint. Rising revenue activity and a broadening of the company's product portfolio will necessitate growth in selling, general and administrative expenses. Managing the pace of growth in this cost component relative to the growth in reported revenue is essential to maintaining eps growth at a pace faster than the pace of growth in revenue and to keep costs from consuming a greater percentage of each revenue dollar. 
Apple's Revenue and Expense Components
This post is among a series of posts examining Apple's revenue and expense components. For a more comprehensive look at Apple's rates of revenue, earnings and expense growth over the past two fiscal years, please see my December post titled Posts At Eventide Resource Guide for Independent AAPL Analysts

Robert Paul Leitao

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