Sunday, November 24, 2013

Apple’s Scenic Detour On The Road To Reported Growth

Apple’s December quarter will be the highest reported revenue quarter in the company’s history and earnings per share will reach a new high as well. During this quarterly period Apple will sell over eighty million iPhones and iPads combined while setting new records for unit sales of the company’s two most popular product lines. Despite these superlatives, Apple is taking a scenic detour on the road to reported growth. 

Long gone are the meteoric rates of growth of fiscal years 2011 and 2012. In FY2011 revenue rose 65.96% and in FY2012 revenue advanced at a 44.48% rate. In the fiscal year ended in September, Apple’s reported rate of revenue growth was a dawdling 9.20%. For the first time in years, Apple reported negative earnings per share growth in FY2013 following a 59.60% rise in eps in FY2012 and an astonishing eps growth rate of 82.64% in FY2011. 

The graphs below illustrate the company’s slowing rates of reported revenue growth and the impact of slowing rates of revenue growth on Apple’s earnings per share.

Since the third fiscal quarter of FY2012, there’s been a marked decline in Apple’s quarterly rates of revenue growth. Although the company continues to deliver record revenue each fiscal year and so far has escaped a year-over-year decline in quarterly revenue, there’s no mistaking the dramatic drop in revenue growth rates over the most recent six fiscal quarters.
Apple’s earning per share has been negatively impacted by the slowing rates of revenue growth. In each quarter of FY2013, Apple reported negative eps growth despite a continuing reduction in the number of fully diluted shares from the ongoing $60 billion share repurchase plan.

Gross Margin Matters
In an article published last month, I discussed Apple’s average selling prices by product line and Apple's declining rates of iPhone and iPad unit sales growth. Today I’m illustrating Apple’s declining gross margin. 
The influence of a dynamic unit sales mix and management’s efforts to deliver competitively priced products have led to an unmistakeable decline in gross margin on products sold. From a high of 47.37% in FQ2 2012 to a low of 36.90% in FQ3 2013, Apple’s gross margin has been on a steady decline over the last six quarters. The introduction of the lower-margin iPad mini in the fall of 2012, negative Mac unit sales growth over the most recent four fiscal quarters and more aggressive iPhone sales efforts in emerging markets have combined to reduce the company’s gross margin performance.