Saturday, November 19, 2011

Understanding Apple's Rates Of Growth

Apple's 21st Century Renaissance
Since the start of the new millennium, Apple has become among the nation's most highly valued enterprises measured by market cap, the world's largest distributor of music, a major global retailer and the biggest mobile device maker when ranked by revenue. Apple's rates of growth over the past six years have been so strong, in FY 2011 revenue surpassed $100 billion. By the end of the company's FY 2013 in September of that year, revenue will surpass $200 billion. This article is intended to assist readers in understanding Apple's recent and near-term rates of revenue and earnings growth.

Apple's Frenetic Rates of Growth
In the six fiscal years since FY 2005, Apple's annual revenue rose 677% to FY 2011's $108.249 billion. During this six-year period earnings per share rose an astonishing 1,686% to FY 2011's $27.68. 
To put the current rates of growth in perspective, in each quarter of FY 2011, revenue exceeded the company's total revenue of $24.578 billion FY 2007.  Earnings per share in FY 2011 reached the combined eps totals for fiscal years 2006 through 2009 with over $5 per share to spare.
Beyond doubt, Apple is an extraordinary success story of the early 21st Century. It was only ten years ago the first iPods came to market and it's been less than five years since the iPhone was initially announced. While understanding Apple's success seems simple when viewing six-year growth charts, over the past few years Apple's success story has become more complex.

Apple's Recent Quarterly Rates of Growth
Apple's frenetic rates of growth have become as challenging to understand as they are to accurately forecast. Graphs of the company's quarterly revenue and eps performance over the most recent eight fiscal quarters are posted below to illustrate the changes in Apple's quarterly revenue and earnings growth cycle:

The Impact of iOS Devices on Apple's Rates of Growth
In a recently published article titled Apple's 25% Solution, I suggested Apple is and will remain primarily a device maker. Constituent products and services such as iTunes and iCloud are designed to support product pricing control and high product margins. iCould is considered an integral component of the device use experience while iTunes and the app stores provide content to drive device unit sales. In FY 2011, roughly 90% of Apple's reported revenue was derived from device sales. The success of the company's software and service products are best viewed in the ways they support device sales and not by the revenue they generate through sales of products for the devices. Of the 90% of revenue derived from device sales, 70% of that revenue was sourced from the iPhone and iPad. When the iOS-based iPod touch is added to the mix, 73% of device revenue was generated by iOS products. 
The eight-quarter revenue and earnings charts above reflect the impact of Apple's iOS device refresh cycles. The rates of Apple's revenue and earnings growth are highly dependent on the release of updated handheld products. For example, in  FQ2 2011 and FQ3 2011, revenue and earnings growth were driven by sales of the iPad 2 released in March and the iPhone's availability on the Verizon network. In FQ4 2011, Apple's negative sequential revenue and earnings growth were due to the release of the new iPhone 4S three weeks after the close of the quarter. Anticipation of the new iPhone handset dramatically reduced iPhone demand in the September period. For detailed information on Apple device unit sales, please see the Posts At Eventide Apple Unit Sales page. 

Seasonality and Product Refresh Cycles
Posted below are graphs of Apple's quarterly revenue and earnings per share results for the most recent three fiscal years.  Seasonal factors such as the holiday quarter which produces the annual high point for iPod sales and the release dates of new products and product refreshes significantly impacted results. The opening of the Apple App Store in early 2009 which continues to boost iPhone unit sales, the company's global expansion and the release of the Apple iPad have produced changes in the company's quarterly revenue and earnings growth cycle. FQ3 2011 was the highest revenue and earnings period in the most recent fiscal year due in part to the popularity of Apple products in the Asia-Pacific region and the successful launch of the iPad 2.

Similar to FY 2011, in fiscal years 2012 and 2013 Apple's rates of revenue and earnings growth will be principally dependent on the annual refreshes of the iPhone and iPad lines. More than any other factors, these product refreshes will determine each quarter's revenue and earnings growth performance. 
FY 2012 and Beyond
In FY 2011 Apple reported revenue growth of 66% and earnings per share growth of 82.7%. Those results foreshadow at least two more years of strong revenue and earnings growth for the company. Although the rates of quarterly revenue and earnings growth will differ each period due to the influences outlined in this article, growth over the next eight quarters will propel Apple's annual revenue above $160 in FY 2012 and well beyond $200 billion in FY 2013.  FY 2013 eps will most likely surpass $50 per share. 
I will soon post my preliminary FY 2012 revenue and earnings forecast. The successful launch of the iPhone 4S, the 14-week December quarter and Apple's continuing global expansion may yield some surprising results. While the revenue and earnings growth performance each quarter will differ, I forecast aggregate revenue and eps growth will remain strong through FY 2013. Both the iPhone and iPad remain in early stages of global market development. 

Robert Paul Leitao

Disclosure: The author is long Apple shares