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: 

Apple's March Quarter Results: The Good, The Bad and The Irrelevant

On April 24th, Apple announced results for the company's 2nd fiscal quarter ended March 31, 2012. For the quarter Apple reported revenue of $39.186 billion and earnings of $12.30 per fully diluted share. These results represent year-over-year revenue growth of 58.9% and eps growth of 92.2%. 

Apple's results for the March quarter exceeded Wall Street estimates by a country mile and in after hours trading the shares retraced recently lost ground and closed the session above $600.

Apple has transformed from being the maker of individual product lines to a purveyor of an integrated device and services eco-system. The March quarter results demonstrate the company's growing global dominance of the both the smartphone and emerging tablet device markets while extending Apple's leadership in offering a broadening array of content for these devices. 

I've titled this article Apple's March Quarter Results: The Good, The Bad and The Irrelevant. I'd like to take each of these qualifiers in turn.

The Good

In the March quarter Apple sold 35.064 million iPhones, representing an 88% year-over-year increase in units sold. The iPhone gained market share among subscribers at  Verizon and AT&T despite the sequential decline in domestic iPhone sales. 

In the March quarter, Apple shipped 11.798 million iPads, representing 151% year-over-year unit sales growth. 

Apple's Asia-Pacific Region delivered 114% revenue growth based on strong demand for the popular iPhone 4S handset with ongoing product demand.

The revenue segment inclusive of iTunes delivered 32% revenue growth to $2.151 billion and the revenue total exceeded revenue from iPod sales by 78%, signaling while the iPod line continues its decline, Apple's revenue generated from content sales and services for iOS-based devices continues to rise. 

Where Apple Makes Its Money

In the past ten years Apple has transitioned from being primarily a personal computer maker with annual revenue of just over $5 billion to a global enterprise with literally twenty times the revenue, retail store locations around the world and four major product lines including the popular iPhone line of smartphones. Today I'm taking a look at where the company now makes its money. Over 60% of Apple's revenue is currently sourced from the sales of products and services outside the United States.

Management By Geographic Region
According to the company's regulatory filings, Apple "manages its business primarily on a geographic basis." The company's geographic segments consist of the Americas, Europe, Japan, Asia-Pacific and Retail. For Apple's current fiscal year (FY2012) ending in September, I estimate revenue growth of 57% to $170 billion. This is following the 66% revenue rise to $108.249 billion that occurred last fiscal year. The company's strong rates of revenue growth are fueled in part by continuing international expansion.

The US and China: Apple's Revenue Leaders
When Apple retail store sales are assigned to the countries of sales origin, Apple's FY2011 revenue from US sales comes in at  $41.812 billion. This represents 38.6% of the fiscal year's total. I expect the US to deliver about 37% of reported revenue in FY2012 on revenue growth of at least 50% in the region. As early as FY2013, non-US revenue sources may deliver 67% or two-thirds of the company's top line number. China is the only country outside of the US to deliver over 10% of recognized revenue in FY2011. China's $12.472 billion in revenue represented 11.52% of the company's $108.249 billion total.

In fiscal years 2011 and 2010, revenue growth in the Asia-Pacific segment exceeded 150% and in FY2011 Asia-Pacific delivered almost 21% of the company's recognized revenue. In FY2012, I expect the Asia-Pacific region, inclusive of China, to surpass Europe in revenue generation and become Apple's second largest geographic revenue segment.

The pie chart below illustrates each geographic segment's percentage contribution to Apple's revenue in FY2011. The numbers include retail store sales as a separate geographic segment as formally reported by Apple:

Spaceship Apple Comes Down To Earth

Apple's September results were below most expectations. The $28.27 billion in revenue represented a $300 million sequential decline and a comparatively languid 39% year-over-year gain. On earnings per share, the 52% year-over-year rise to $7.05 was far below the 96.2% rate of eps growth realized over the first nine months of the fiscal year.

The Good News In The September Quarter

Mac Unit Sales: If there's good news to be found in the September quarter results it's the 26% growth in Mac unit sales against a global PC market with diminished prospects for continuing growth. In addition to strong unit sales growth, revenue from Mac sales rose 29%. 

Asia-Pacific: The Asia-Pacific region (exclusive of Japan) turned in a 139% increase in revenue. Although the September quarter's pace of revenue growth was below the rates of growth in the region realized in the previous two fiscal quarters (down from 247% growth in the June quarter), China is Apple's most important growth market at this point in time. Asia-Pacific's $6.53 billion revenue contribution represented 23.1% of Apple's total revenue in the period.

Apple's December Quarter Guidance: Management has guided to revenue of $37 billion or 38.4% revenue growth and eps of $9.30 or growth of 44.6% over the December quarter one year before. But keep in mind December quarter 2011 (FQ1 2012) includes an additional shipping week that occurs once ever six years to better align fiscal quarters with calendar quarters. The unusual 14th week is the week immediately after Christmas. Absent the additional shipping week, guidance would have been more conservative and it moves a high revenue week away from the following quarter. 

The Not-So-Good News In The September Quarter

Retail Stores: Despite a 25% increase in Mac unit sales at the stores in the September quarter and the first fiscal quarter in which the retail stores sold over 1 million Macs, overall store revenue rose only 1%. Apple ended the quarter with 357 stores open for business and new stores were opened in the fiscal period. This 1% revenue rise includes the revenue activity of new stores opened within the past year. Retail store traffic and revenue growth remain heavily influenced by seasonal factors and Apple product refresh cycles. 

iPhone Sales: Management stated during the conference call with analysts that September unit sales were materially impacted by a drop-off in demand ahead of the release of  the new iPhone 4S handset. iPhone unit sales growth remains heavily dependent on the company's product refresh cycle. The 16% sequential drop in unit sales is in light of surging global smartphone demand and the meager 21% year-over-year gain in unit sales is against a prior-year period in which Apple ended the quarter with constrained supplies of the then latest handset. Although Apple reported outsized unit sales growth for the iPhone of 142% in the June quarter, both Asia-Pacific and the Verizon agreement were big factors in that gain. 

Apple's Expanding Global Reach

Over the most recent four fiscal quarters ended in June, Apple reached $100 billion in revenue. In this four-quarter period revenue rose at the rate of 75.73% and eps rose 90.2%. Apple's revenue growth is fueled not only by the popular iPhone and iPad which accounted for 61% of the $100 billion in revenue, it's also fueled by a broadening of the company's global reach.

Apple manages its business on a geographic basis. In this article I'm providing an overview of Apple's sales by region for the first nine months of the current fiscal year ended in June. During this nine-month period revenue rose 78.2% to $79.979 billion and operating income increased 93.85% leading to an eps gain of 96.2% over the prior-year period. Apple's remarkable cost discipline kept operating expenses under 9% of revenue in the June quarter and sustains the rates of eps growth above the rates of growth in revenue.

While it's easy to view Apple and Apple's revenue and earnings growth as a function solely of the company's popular products, further study indicates the company's expanding global distribution of products, including new iPhone carriers and new retail stores are important components of the company's continuing success.

The graph and table data below detail sales and operating income by region and illustrate Apple's broadening global reach as the iPhone, iPad and Macintosh line of personal computers are made available to a growing number of the world's consumers. 

	Revenue Thru	Revenue Thru	% YOY	Operating	Operating	% YOY
Region	6/25/2011	6/26/2010	Gain	Income 2011	Income 2010	Gain
Americas	28,667	17,312	65.59%	10,250	5,482	86.98%
Europe	20,381	13,234	54.00%	8,414	5,457	54.19%
Japan	4,326	2,580	67.67%	1,996	1,185	68.44%
Asia-Pacific	16,062	5,524	190.77%	6,869	2,553	169.06%
Retail	10,543	6,232	69.18%	2,665	1,447	84.17%
Total	79,979	44,882	78.20%	30,194	16,124	87.26%
Stock-Based Compensation Expense Other Corporate Expenses, net				-870	-655
				-4,244	-2,531
Total Operating Income				25,080	12,938	93.85%

Why The Apple iPad Stands Alone

HP's recent announcement the company is extinguishing its webOS-based product lines and jettisoning its PC division highlight the ongoing transformation of the personal technology markets. Market share alone accomplishes nothing. Integrated product lines and content to support product sales mean everything in our fast-changing world. 

Although HP is currently the world's largest PC maker, HP doesn't own the operating system on which the company's consumer PC products run. Developing a strong content distribution system to support product sales for the mobile OS the company does own would have taken years and billions of dollars to accomplish. HP's global PC market share delivered no advantages in efforts to develop a market for handheld digital devices. Content sells devices. Without content and the means to sell and distribute content quickly and inexpensively, device sales will languish.

The Apple iPad now stands alone in the global market for tablets. The iPad is first and foremost an expansion of Apple's multi-device iOS product paradigm. Outside of the Apple iPad, a robust consumer market for tablet devices does not currently exist. At this time there isn't consumer demand for a tablet other than the iOS-based product Apple has released in tablet form. 

The Foundation of the iPad's Success

Underpinning the Apple iPad's success are the same factors underpinning the success of the iPhone and the iPod touch. Through the end of the June quarter, cumulative iOS-based product sales have reached 222 million units.  However, the more impressive statistic is the more than 225 million iTunes accounts backed by credit cards. The Apple iPad is building on the customer and content sales relationships the company began establishing in 2003 with the opening of the iTunes store. There isn't a competing product manufacturer that has a direct sales relationship with almost one-quarter billion customers with active accounts for content purchases. The chart below illustrates the Apple iPad's unit sales performance since the product's initial release. 

Apple's First $100 Billion Year

During the twelve months that ended in late June, Apple reached an important milestone. It was the first 12-month period in which the company's reported revenue exceeded $100 billion. Apple's fiscal year ends in late September, but the trends revealed in the four fiscal quarters that ended in late June provide important insights into the company's current rates of revenue growth and the dynamic nature of Apple's revenue mix.

In the four fiscal quarters ended in late June, the company reported revenue of $100.322 billion, a year-over-year increase of 75.73%. In this four-quarter period the Apple iPhone and the Apple iPad represented 60.98% of revenue and 88% of the $43.233 in revenue growth over the corresponding prior year four-quarter period. 

The Impact of the Apple iPhone and Apple iPad

The iPad's sales presence in all four quarters of this twelve-month period significantly boosted revenue growth. However, iPhone revenue growth of $23.936 billion exceeded total iPad revenue of $16.282 billion during the four fiscal quarters. The iPhone's particularly strong June quarter performance was due in part to Apple's decision to handle this year's iPhone transition on a different timetable than in the past.

The iPhone remains Apple's flagship product and is the primary catalyst for Apple's frenetic rates of revenue growth. Apple's decision to push the transition to the iPhone 5 well beyond the start of the September quarter has merit provided sufficient product supplies are available at the time of the product's release.

The graph and table data below illustrate and delineate the sources of revenue in this four-quarter period that fueled the 75.73% rate of revenue growth and the revenue total that topped $100 billion.

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.

Apple Retail Stores: Revenue Growth Exceeds 90%, Catalyst For Mac Sales

There's no disputing Apple's success since the release of the iPhone four years ago. Last week I published a forecast that suggests Apple's revenue for the fiscal year ending in September will reach $112 billion, up from $65.225 billion in FY 2010. In the recent March quarter the Apple iPhone represented roughly 50% of the company's revenue. The release of the Apple iPad has accelerated the company's revenue growth and contributed significantly to the 83% revenue gain in the same March quarter. Sales of the Apple iPad may create as much as 25% of the more than $40 billion in revenue I expect the company to generate in the upcoming holiday quarter.

Apple Retail Stores As A Source of Success

But for all of the attention lavished on the iPhone and the iPad, there is a component of Apple's continuing success that is often overlooked. It's the success of Apple's retail stores and in particular the positive impact Apple's global chain of over 300 retail stores is having on Apple's oldest and most enduring product, the Macintosh line of personal computers. 

The graph and table data below illustrate the continuing rise in Apple retail store revenue and the corresponding percentage of total revenue generated by retail store activity. For the first six months of FY 2011 (the December and March quarters) retail store revenue rose 92.6% and represented 13.7% of the reported revenue for the company. In the same six-month period Apple's total revenue rose 76.2%. Over the most recent four fiscal quarters the pace of revenue growth at the retail stores has outstripped the pace of revenue growth for the company as a whole.

The rate of growth in retail store revenue is due in part to the opening of new stores and in part to the mutual halo effect among Apple's hardware device lines. The debut of the Apple iPad just over one year ago has had a positive impact on retail store foot traffic and the resulting sales activity.

	Apple Store	% of	Apple Store	% of	Retail Mac	Overall Mac
Quarter	Revenue	Total Revenue	Mac Units	Mac Units	YOY Gain	YOY Gain
FQ1 ’09	1,746,000,000	14.70%	515,000	20.40%	2.18%	8.84%
FQ2 ’09	1,377,000,000	15.16%	438,000	19.77%	-4.37%	-3.19%
FQ3 ’09	1,492,000,000	15.33%	492,000	18.90%	3.36%	4.29%
FQ4 ’09	2,041,000,000	16.72%	670,000	21.95%	12.42%	16.93%
FQ1 ’10	1,971,000,000	12.57%	689,000	20.49%	33.79%	33.20%
FQ2 ’10	1,683,000,000	12.47%	606,000	20.59%	38.36%	32.81%
FQ3 ’10	2,578,000,000	16.42%	677,000	19.50%	37.60%	33.38%
FQ4 ’10	3,566,000,000	17.53%	874,000	22.50%	30.45%	27.25%
FQ1 '11	3,847,000,000	14.39%	851,000	20.59%	23.51%	22.96%
FQ2 ’11	3,191,000,000	12.94%	797,000	21.20%	31.52%	27.76%