Apple: Rising Revenue, Falling Costs Per Revenue Dollar

For the 14-week period ended December 31, 2011, Apple reported record revenue in the fiscal quarter of $46.333 billion representing a 73% year-over-year gain. The company also reported a 115.7% rise in earnings per share to $13.87. No one can dispute the success of the company's popular products. But Apple's extraordinary eps growth in the December quarter and eps growth over the past two fiscal years was influenced by more than revenue growth alone. The company's focus on cost discipline is generating earnings growth at a much faster pace than the underlying rate of growth in revenue. 

Apple's Net Income Per Revenue Dollar

The graph below illustrates the rising percentage of reported revenue that has flowed to the net income line over the most recent nine fiscal quarters. In the December quarter 27.90% of reported revenue flowed to the net income line. This does not include the beneficial impact on net income from interest and other returns on the company's holdings in cash and marketable securities. The value of those assets totaled $97.6 billion at the end of the December quarter. 

Apple's Expenses Per Revenue Dollar

Over the most recent nine fiscal quarters, the percentage of reported revenue consumed by expenses has fallen from a high of 79.60% in the 3rd quarter of FY2010 to a low of 72.10% in the recent 1st quarter of FY2012. The graph below illustrates the percentage of revenue consumed by cost of sales (the inverse of gross margin), operating expenses and taxes.

Cost Discipline: Apple's Potent Pathway To Profits

In Apple's third fiscal quarter ended in June, the company reported record revenue of $28.571 billion and record earnings per share (eps) of $7.79. Fueling the record eps performance was the record high 25.5% of each revenue dollar that flowed to the net income line. 

On July 24th I published an article titled Apple's Net Income Relative To Revenue Continues To Rise. In that article I reviewed the company's net income to revenue performance over the most recent eleven fiscal quarters. Today I'm continuing my analysis of Apple's quarterly results with a review of the company's operating expenses (OpEx) and the declining percentage of revenue consumed by its two components: Selling General and Administrative (GS&A) expenses and Research & Development (R&D) expenses. 

The graph below illustrates the differences in the rates of growth in revenue and operating expenses on a quarterly basis from FQ1 2010 that ended in December 2009 through FQ3 2011 that ended in June of this year. The difference in the rates of growth between revenue and operating expenses is unmistakable and the resulting benefit to net income and earnings per share is remarkable.

Operating Expenses As A Percent of Revenue

Since the beginning of FY 2009, the percentage of revenue consumed by operating expenses has declined from a high of 14.35% in FQ2 2009 to a low of 8.90% of revenue in the recent June quarter (FQ3 2011). As revenue has scaled significantly higher over the most recent eleven fiscal quarters, the falling percentage of revenue consumed by operating expenses is now delivering literally billions of additional dollars to Apple's pre-tax income line on a quarterly basis. The drop in operating expenses as a percentage of revenue can have a bigger impact on Apple's net income and earnings per share than variations in each fiscal quarter's gross margins. 

The graph below illustrates the dramatic drop in the percentage of revenue consumed by operating expenses as revenue has risen significantly over this eleven-quarter period. 

Apple's Net Income Relative To Revenue Continues To Rise

On July 19th Apple reported record revenue and earnings for the three-month period ended in late June. The third fiscal quarter's 82% revenue growth to $28.571 billion and 122% earnings per share (eps) growth to $7.79 represented surprisingly strong results due to better than expected sales of Apple iPhones and Apple iPads. 

Apple's Nine-Month Performance

For the first nine months of the fiscal year ending in late September, Apple has realized revenue growth of 78.2% to $79.979 billion and eps growth of 96.3% to $20.63. Considering the continuing "share creep" in the fully diluted share count, the company's eps performance over this nine-month period becomes even more impressive as the numbers are analyzed. 

Rising Net Income As A Percentage Of Revenue

Underpinning the exceptional rates of eps growth is the rising percentage of each revenue dollar that flows to the company's net income line. The graph below illustrates the growth in net income relative to revenue over the most recent eleven fiscal quarters. 

Apple June Quarter Results: Numbers To Watch

On April 23, 2011 I published an article titled Posts At Eventide: AAPL June Quarter Trends To Track. In that article I mentioned several factors that will impact Apple's quarterly performances through the balance of the current fiscal year and throughout FY 2012 that begins in late September.

Today I'd like to revisit each of these factors ahead of the release of Apple's June quarter results on Tuesday and following the recent rise in the company's share price. I maintain a $590 price target on AAPL. On Friday the shares set a record closing high of $364.92. However, this recent rise in the share price has only been a retracing of ground since the previous all-time closing high of $363.13 set on February 16th. 

AAPL June Quarter Estimates

For the June quarter I'm estimating a 70% rise in revenue to $26.619 billion and a 90% rise in earnings per share to $6.67. During the first six months of the current fiscal year revenue rose 76.2% and eps 83.2% over the corresponding prior-year period. 

Declining Operating Expenses As A Percentage of Revenue

Due to the influence of the Apple iPad for the first time in prior-year comparisons, I'm expecting a slight moderation in the June quarter's rate of revenue growth. However, the continuing decline in operating expenses as a percentage of revenue will favorably impact the earnings per share results. The graph below illustrates the rates of revenue growth versus the rates of growth in operating expenses for the most recent ten fiscal quarters. I expect net income to reach above 23.5% of reported revenue in the June quarter versus the 23.33% of revenue that flowed to the net income line over the first six months of the current fiscal year. I also expect operating expenses to fall below 9.5% of reported revenue in the quarter. 

Factors That Will Positively Impact Apple's Performance Moving Forward

The Global Tablet Market: I've said several times outside of the Apple iPad, a global consumer market for tablet devices does not currently exist. While iPad unit shipments in the March quarter were below the expectations of most analysts due primarily to supply constraints, the tablet market is in a nascent phase of development. The Apple iPad will remain the undisputed leader in the tablet market well into CY 2012. The market can not at this time economically support a large number of potential competitors and Apple's global retail store presence is a competitive advantage competitors simply can not match. 

I estimate iPad unit sales in the June quarter of 8 million units, representing a 157% unit sales increase over prior-year sales. Constrained supplies of the iPad 2 will have a slight impact on the quarter's unit sales outcome. Moving forward into the September and December quarters, iPad supply constraints will evaporate leading to record revenue and earnings in the September quarter and FY 2011 revenue at or above $112 billion and eps for the fiscal year at or above $27.50.

The AFB AAPL FQ3 Estimate Index

The Apple Finance Board (AFB) is home to many AAPL traders, investors and Apple product enthusiasts. Among the members of the AFB are well know independent analysts Daniel Tello (deagol), Horace Dediu (aysmco), Turley Muller and Andy Zaky. I serve as the moderator of the AFB under the DawnTreader moniker. 

AFB AAPL FQ3 Estimates

Each fiscal quarter active members of the AFB are polled for their estimates of Apple's quarterly performance based on product unit sales and financial outcome. This article highlights the anticipated financial outcome for the three-month period ended in late June (Apple's FQ3 2011). Tomorrow I will post the unit sales estimates from each index participant by product line that underpin these financial performance estimates. 

On average the 30 active AFB members participating in the June quarter index estimate Apple will report the following results for the company's third fiscal quarter:

AFB Member AAPL FQ3 Estimate Averages:

Revenue			$26,556	69.14%	(% YOY Revenue Growth)
Gross Margin			10,714	40.35%	(% of Reported Revenue)
Operating Expenses			2,542	9.57%	(% of Reported Revenue)
Pre-Tax Income			8,235	31.01%	(% of Reported Revenue)
Tax Expense			1,987	24.12%	(% of Pre-Tax Income)
Net Income			6,248	23.53%	(% of Reported Revenue)
EPS			6.66	89.61%	(% YOY EPS Growth)

All numbers in thousands except per share data.

During the first six months of the current fiscal year Apple's revenue rose 76.2% and eps rose 83.2% in year-over-year comparisons. As a group AFB members estimate the pace of revenue growth in the June quarter will have slowed slightly to 69.14%. However, the pace of eps growth is estimated to rise above the performance of the first six months of the current fiscal year to 89.61%.

Factors Impacting the June Quarter Financial Performance

The June quarter represents the first fiscal quarter in which Apple iPad sales are a factor in the prior-year performance. This factor alone will will have an impact on year-over-year revenue growth. iPad unit sales and the resulting revenue were not a factor in the prior-year financial performance comparisons in the December (FQ1) and March (FQ2) quarters.

Apple has effectively managed the growth in operating expenses relative to revenue growth. The company's ability to keep this major expense segment under 10% of reported revenue and the rate of growth of operating expenses well below the rate of growth of revenue is having a significant and positive impact on the company's earnings per share performance. AFB members are estimating the percentage of revenue that flows to the net income line will reach above 23.5%.

Robert Paul Leitao

Disclosure: The author is long AAPL shares

Apple: 10-Quarter Review of Revenue vs. Operating Expenses

One of the less heralded trends in Apple continuing revenue and earnings per share growth story is the recent and dramatic drop in operating expenses relative to revenue. 

On December 21, 2010 I published a blog post titled Apple: Revenue Growth vs. Growth in Operating Expenses. Today I'm updating the data to include the first quarters of fiscal year 2011. What the numbers indicate is over the most recent three-quarter period revenue consumed by operating expenses (Research and Development and General, Selling and Administrative expenses) has dropped dramatically, contributing to a rate of growth in eps exceeding the rate of growth in revenue. I will provide a fresh analysis of Apple's rate of eps growth in an upcoming post at Posts At Eventide. 

			YOY Rev.	Operating	YOY OpEx	OpEx %
	Quarter	Revenue	Growth	Expenses	Growth	of Revenue
	FQ1 ’09	11,880		1,406		11.80%
	FQ2 ’09	9,084		1,304		14.40%
	FQ3 ’09	9,734		1,351		13.90%
	FQ4 ’09	12,207		1,421		11.60%
	FQ1 ’10	15,683	32.0%	1,686	19.9%	10.80%
	FQ2 ’10	13,499	48.6%	1,646	26.2%	12.20%
	FQ3 ’10	15,700	61.3%	1,902	40.8%	12.10%
	FQ4 ’10	20,342	66.6%	2,065	45.3%	10.20%
	FQ1 ’11	26,741	70.5%	2,471	46.6%	9.24%
	FQ2 ’11	24,667	82.7%	2,344	42.4%	9.50%

Posts At Eventide FQ1 AAPL Estimates

Posts At Eventide AAPL FQ1 Estimates

As an independent analyst and moderator of the Apple Finance Board I enjoy the opportunity to prepare estimates of Apple's anticipated performance on a quarterly basis.

My estimates rely heavily on Apple's recent quarterly results and I actively track trends that emerge over the most recent eight-quarter periods. For more information on the quarterly data I compile and the results I track, please see the Posts At Eventide Resource Guide for Independent AAPL Analysts. 

FQ1 Revenue and Earnings Estimates

For the December quarter my models forecast revenue of $26.425 billion and earnings per share of $6.27. This represents anticipated revenue growth of 68% over the prior-year period and eps growth of 70.8%.

I expect eps growth to slightly exceed revenue growth in the quarter due to lower tax rates and a drop in operating expenses relative to revenue. For a comparison of the rates of growth in Apple's revenue and operating expenses, please see my recent blog post titled Apple: Revenue Growth vs. Growth in Operating Expenses. The drop in tax rates and the drop in operating expenses relative to revenue will mitigate the impact of lower gross margins in the quarter versus the prior-year period. 

Apple has become more aggressive on product pricing relative to manufacturing costs. It's my view the moderation in gross margins seen in FY2010 and expected in the December quarter is intended to gain market share through higher unit sales and promote growth in post-purchase revenue from the sales of apps and digital content. The more units sold, the greater the growth in post-purchase revenue. 

Apple's Dynamic Revenue Mix

In late October I published blog post titled Apple's FY2010: A Retrospective. In that post I illustrated the contributions of each of Apple's revenue segments to the company's overall results. In the December quarter and throughout FY2011 the Apple iPad will continue to dramatically change the percentage of revenue contributions from each of Apple's major product lines. I estimate in the December quarter the Apple iPad will represent about 17% of Apple's reported revenue and represent almost 42% of the quarter's estimated growth in revenue. 

Apple: FY 2009 & FY 2010 Results By Quarter

Apple's FY 2009 & FY 2010 Quarterly Revenue and EPS Results

In response to interest from members of the Apple Finance Board, I am posting Apple's quarterly results for the past eight quarters, comprising fiscal years 2009 & 2010.

The numbers reflect Apple's post-retrospective adjustments for FY 2009 and combined the eight quarters represent perhaps the most dynamic two-year period in Apple's history. 

From revenue of $37.491 billion in FY 2008 to $65.225 billion in revenue in FY 2010, this eight-quarter period of revenue and earnings growth encompasses the first holiday quarter of subsidized iPhone contracts through AT&T to the second quarter of sales for the Apple iPad. 

Data Relevance In Current AAPL Estimates

As an independent analyst this eight-quarter period and its associated expense ratios are benchmarks for developing revenue and earnings models for the four fiscal quarters of FY 2011 (the current fiscal year) and in developing early estimates for FY 2012 that begins in late September 2011. Quarterly data from periods pre-dating this two-year period yield little relevant information due to dramatic changes in Apple's overall revenue mix from the end of fiscal year 2008 to today.

FY 2009 & FY 2010 Data Table

The information in the table below is derived from Apple's quarterly reports. The FY 2009 data reflects the retrospective adoption of new accounting principles for the recognition of revenue for the Apple iPhone. This change in approach to iPhone revenue recognition provides for much more accurate reporting of revenue and corresponding earnings from iPhone sales activity in the quarter in which it occurs. Please note the FY 2009 information differs from the quarterly recognized revenue and earnings reports originally issued by Apple prior to the adoption of the new accounting principles beginning with the first quarter of FY 2010. The new accounting principles were applied retrospectively for fiscal years 2007 through 2009.

For a more detailed look at Apple's most recent revenue performance please see my October blog post titled Apple's FY2010: A Retrospective. 

Robert Paul Leitao

Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue

Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue

Last week I published an overview of Apple's profitability by quarter and the influences of gross margins, tax rates and operating expenses. In that post I stated while much attention is paid to the impact of gross margins, there are other cost components relative to Apple's financial performance that can have a greater influence on net results than the quarterly fluctuations in the gross margin ratios. 

In this post I will illustrate using graphs and corresponding table data the changing relative importance among Apple's reported cost components to the company's net results over the the past eight quarters. 

Expenses Per Revenue Dollar: An 8-Quarter Comparison

The graph below illustrates the reported expenses per revenue dollar for costs of sales, operating expenses and taxes. To present the data I converted the reported tax expense to a percentage of revenue and used the inverse ratio of gross margin which represents cost of sales.