Saturday, October 25, 2014

Apple’s Magical Mystery Year

On October 20, 2014, Apple announced results for the fiscal quarter ended September 27, 2014 and for the fiscal year that ended the same day. For the fiscal year, Apple’s revenue rose about 7% to $182.795 billion while earnings per share rose about 13.6% to $6.45 due to year-over-year growth in net income and the ongoing $90 billion share repurchase program.

For the fiscal year, Apple set records for revenue and earnings per share. Although net income rose about 6.7% year-over-year to $39.51 billion, the current high water mark for net income was set in FY2012 at $41.733 billion on outsized gross margin. However, Apple may come within striking distance of a new net income record in FY2015 as we watch the fiscal year unfold.

The Trend Is Again Apple’s Friend
The graph below illustrates Apple’s net income on a quarterly basis and the corresponding percentage of revenue that flowed to the net income over the most recent twenty fiscal quarters. 

After a peak of 29.66% of revenue flowing to the net income line in FQ2 2012, Apple’s net income as a percentage of revenue has begun to gradually recover from the nadir of 19.53% set in FQ3 2013.

Since returning to net income growth in the March quarter, Apple’s share price has risen from a split-adjusted price of $74.96 on April 23rd immediately prior to the release of March quarter results to $105.22 on Friday, October 24th. This 40% rise in the share price in six months correlates to the market’s anticipation of rising net income and rising earnings per share amplified by the ongoing share repurchase program.

The graphs below depict Apple’s revenue and earnings per share performances over the most recent twenty fiscal quarters. 

Apple’s Revenue Growth
Apple’s revenue growth rates have moderated since the torrid rates of growth experienced in fiscal years 2010 through 2012. From a high of 66% revenue growth in FY2011, which included the first full fiscal year of iPad unit sales, to about 7% revenue growth in the fiscal year ended in late September, Apple’s revenue growth rates sharply declined over the two most recent fiscal years. FY2014’s revenue growth rate performance represents Apple’s slowest rate of revenue growth in over a decade. However, the revenue growth rate in the recent September quarter of 12.4% to $42.123 billion represents a reversal of that recent revenue growth rate trend.
For the December quarter (FQ1 2015) Apple is guiding to revenue of between $63.5 billion to $66.5 billion. This represents an expected revenue growth rate of between 10.25% and 15.5% in the period. To put Apple’s revenue guidance for the December quarter in perspective, Apple’s revenue total for all of FY2010 was $65.225 billion. 

Apple’s Earnings Per Share Growth
FY2013 coincided with a four-quarter slide in earnings per share. Due in part to the ongoing share repurchase program as well as a firming of gross margin combined with modest rates of revenue growth, Apple’s earnings per share growth rates steadily rose on a year over year basis in FY2014 and reached 20.3% year-over-year growth in the recent September quarter. 
Apple’s Fully Diluted Share Count
The graph below details Apple’s fully diluted share count on a split-adjusted quarterly basis over the most recent twenty four fiscal quarters.
The graph below illustrates the quarterly percentage change in the fully diluted share count over the same twenty four quarter period. Apple’s ongoing $90 billion share repurchase program will continue to benefit year-over-year earnings per share growth through at least FY2016. 
Apple’s Magical Mystery Year
Coming off the best quarter of FY2014 for both revenue and earnings per share growth rates, Apple enters the December quarter with management projecting between 10.25% and 15.5% revenue growth. At present, the Street is expecting $65.83 billion in revenue for the quarter and $208.99 billion in revenue for the fiscal year. At this time, the Street’s expected revenue growth rate for the fiscal year of about 14.3% suggests a revenue growth rate more than twice the FY2014 revenue growth rate of about 7%.

With the Apple Watch line yet to debut, the Macintosh line of personal computers in a renaissance phase of growth, the Apple-IBM deal yet to reveal its big data iOS apps for enterprise and a very strong start to iPhone 6 handset sales, Apple's magical mystery year will unfold over the next twelve months with several catalysts for growth yet to be fully disclosed. The Street’s current revenue and revenue growth estimates will prove to be decidedly conservative. Earnings per share will rise faster than the rates of revenue and net income growth as Apple's share repurchase program will continue through all four quarters of the fiscal year.

With even modest success of the Apple Watch line, Apple can achieve a revenue growth rate this fiscal year of 20% or greater with revenue reaching or exceeding $220 billion. Apple exited FY2014 and begins FY2015 with the growth trend once again the company’s friend. 

Robert Paul Leitao

Disclosure: The author is long Apple shares