Saturday, June 16, 2012

Apple's Revenue Growth: A Dual-Track Bullet Train

Apple is unique among the world's mega caps due in part to the company's extraordinary rates of revenue growth and extraordinary rates of revenue growth matched with consistently high gross margin. Over the most recent six fiscal years, Apple's recognized revenue rose nearly sixfold and earnings per share rose more than twelvefold. In the first six months of the current fiscal year alone, Apple's revenue rose 66.35% to $85.52 billion and eps rose 104% to $26.17 per share. 
At Friday's closing price of $574.13, the shares are trading at a conservative 14 times trailing 12-month earnings of $41.04 with more than $115 in cash standing behind each outstanding share. For investors, understanding Apple's potential for continuing strong growth is at least as important as an appreciation for the company's growth performance over the past six and one-half years. At Friday's closing price and lowly earnings valuation, the market is discounting Apple's continuing growth potential. 
Apple: A Dual-Track Bullet Train
There's no disputing the fact Apple designs and markets some of the world's most sought after consumer products. But Apple's success is driven by more than smart product designs and technological innovation. Relentless geographic expansion is an important catalyst for the company's fast rates of growth. If Apple were a bullet train, it would be a bullet train powered by two parallel tracks. The first track is exceptional product design and the consequential product popularity. The second track is expansion of product sales into new and emerging markets. 
On December 4, 2011, I published an article titled Where Apple Makes Its Money. In that article I looked at Apple's revenue by region for the fiscal year that ended last September. In this article I'm presenting Apple's revenue growth by region for the first six months of the company's current fiscal year. 
Apple's Expanding Global Presence
Apple is now the world's largest distributor of music, a global bricks and mortar retailer and has more than 400 million iTunes customers around the world with online accounts backed by credit cards. By the end of the month iTunes-based app stores will be available to consumers in 155 countries and Apple's fastest rates of revenue growth are occurring in regions outside the United States. 

The chart below illustrates the percentage of revenue contributed by each of Apple's geographic revenue segments during the first six months of the fiscal year that ends on September 29, 2012: 

Asia-Pacific and Japan
Apple's Asia-Pacific region continues to grow revenue at a torrid pace. In FY2011, revenue in the Asia-Pacific region rose by 174% to nearly $22.6 billion or 20.8% of reported revenue. In the first six months of FY2012, Asia-Pacific revenue rose 84.45% to $17.85 billion or nearly 21% of reported revenue. Notably, the iPhone 4S was not available on China's mainland through China Unicom until early in the March quarter and did not become available on China Telecom until late in the period. Due to the introduction of the iPhone 4S on the mainland through authorized carriers in the March quarter, Asia-Pacific surpassed Europe in revenue generation in the quarter to become Apple's second largest revenue region. In the March quarter, the Asia-Pacific region delivered 26% of Apple's reported revenue of $39.186 billion. In FY2011, China was the only country outside the US to contribute more than 10% of Apple's reported revenue total. 
Asia-Pacific, inclusive of China, may eventually surpass the Americas in revenue generation to become Apple's largest revenue region. Combined, Asia-Pacific and Japan represented 28% of Apple's revenue in the first six months of the fiscal year versus 36% of reported revenue generated in the Americas. During this two-quarter period the rate of revenue growth in Japan exceeded 100%. In the March quarter, revenue in Asia-Pacific rose 114% in contrast to 54% revenue growth in the December quarter and prior to release of the iPhone 4S through authorized carriers on the mainland.

The graph and table below illustrate and delineate revenue and revenue growth by geographic revenue segment: 

6 Months
6 Months





Asia Pacific



A day doesn't go by that the fiscal crisis in the Eurozone isn't in the news. Apple's European revenue segment has fallen from 25.66% of recognized revenue in FY2011 to 23.46% of revenue in the first six months of FY2012. Still, the region reported 51% revenue growth in the first half of the current fiscal year, down from the 58% revenue growth rate last fiscal year. While it will take years for several EU states to overcome their current economic challenges, the region remains a fertile market for continuing growth even as Asia-Pacific overtakes the region in revenue generation for Apple.
Apple continues to open new retail stores and there are plans for the opening of two new large stores in China. Because iPhones are sold through a vast global network of carriers, the revenue growth rate at the retail stores will continue to rise at a slower rate than overall revenue. However, the retail stores serve as the company's primary marketing and service centers and introduce Apple products to millions of new customers each year. Roughly 50% of Mac sales at the retail stores are to customers new to the platform. As sales, marketing and service centers, the stores are an efficient means for the company to grow its customer base while assisting in keeping operating expenses below 10% of reported revenue. 
Brazil, Russia and India
Looming large in the years ahead are Apple's efforts to establish secure revenue footholds in Brazil, Russia and India. Each of these territories present unique challenges and opportunities and success will be measured in years, not fiscal quarters. The size of these markets and Apple's efforts to open these markets increase the likelihood Apple can sustain 40%+ revenue growth over the next few years. 
In the first six months of the current fiscal year, roughly 54% of Apple's revenue growth occurred outside of the Americas and Apple's retail store network. In the two-quarter period, Asia-Pacific, Europe and Japan represented 52% of reported revenue. This is despite the fact the iPhone became available through authorized carriers on China's mainland in the March quarter and the new iPad was in an early stage of its global rollout at the end of the quarter. International sales will continue to drive Apple's impressive rates of revenue growth for the next several years.

Apple's Revenue By Product Line
Over the most recent 14 fiscal quarters ranging back to the beginning of the 2009 fiscal year, Apple sold over 200 million iPhones and more than 67 million iPads. Over this same 14-quarter period, Apple also sold more than 50 million Macintosh personal computers. In the current fiscal year, revenue generated from Macintosh sales alone may approach $25 billion while representing less than15% of the company's reported revenue.

The graph and table data below illustrate and delineate revenue and revenue growth by product line:

The first six months of the current fiscal year represent the high point in the annual cycle for iPhone unit sales growth and includes only the first couple of weeks of sales for the new iPad. While Apple's annual product cycles will produce unit sales growth, it's the pace of the company's geographic expansion that will govern the rates of unit sales growth. 

6 Months
6 Months








The Apple iPad
The iPad is only now emerging from a nascent phase of global market development and only recently the new iPad received regulatory clearance for sales in mainland China. For the June and September quarters, the iPad will be Apple's revenue growth story.

The Apple iPhone
Sprint was added as a domestic iPhone carrier at the start of the fiscal year and China Telecom commenced sales in the waning weeks of the six-month period. The iPhone is now available through both China Unicom and China Telecom. China's largest carrier, China Mobile, will eventually become an authorized carrier. The addition of China Mobile as an authorized carrier will catapult iPhone unit sales and revenue growth to levels not seen before and unit sales will ramp immediately following the addition of this major carrier.

The Apple iPad
Although the iPhone is Apple's primary revenue product, the rollout of the new iPad and the expected unit sales crescendo for the model in this calendar year's holiday quarter will boost the line's strong revenue contributions through the remainder of the calendar year.
The Macintosh
In the second week of June, Apple updated its portable Macintosh product lines to include MacBook Pro models with what Apple calls a Retina display. This foreshadows the eventual adoption of Apple's display technology throughout the Macintosh product line. In the first six months of the fiscal year, the iPhone and iPad represented 73% of Apple's reported revenue. The two product lines will continue to garner around 75% of reported revenue as new iPhone carriers are added and the iPad's global roll out continues.
The global PC market is in a state of economic decline. The Mac's continuing growth is in contrast to an industry that will shrink in size and economic importance with each passing quarter. The ascent of the Apple iPad and the mass adoption of smartphones are diminishing demand for traditional PCs. Apple's retail store network and expanding customer base will support continued unit sales growth for the foreseeable future. The Mac's continuing growth exemplifies what I call the "Apple product mutual halo effect." In a way the Mac has become a lagging indicator of Apple's global growth and will benefit from the company's relentless geographic expansion.

For purposes of this article I have consolidated Apple's iPod sales with sales of software and peripherals to highlight the growth in the revenue segment inclusive of iTunes and demonstrate the dynamic nature of Apple's revenue mix.
In the first six months of the current fiscal year, the iTunes revenue segment realized over 36% revenue growth. The sales of music, apps and other content for Apple's iOS-based devices will continue to rise as the number of iTunes customers increases and consumers purchase additional Apple-branded devices. iTunes has become a de facto proxy for gauging the growth in Apple's customer base and the success of the company's expansive eco-system.
I have said several times yield per customer and the increasing number of customers is a much better gauge of Apple's continuing success than the number of individual units sold in any given quarter. 
Although Apple's annual cycle of product refreshes will influence and promote new product sales, the company's continuing global expansion will govern the pace of unit sales and revenue growth.
At 14 times trailing 12-month earnings, more than $115 in cash standing behind each outstanding share and management's relentless approach to global market expansion, Apple represents an attractive long-term buy at the current valuation. Product innovation will promote growth. Global expansion will sustain strong growth for the next several quarters. 

Apple is a revenue growth bullet train powered by two parallel tracks. 

Robert Paul Leitao

Disclosure: The author is long Apple shares.