FY2015: Apple's Big Adventure

On Friday, November 28th, Apple’s share price closed the month’s trading at $118.93, up 9.9% from the opening price on November 3rd and up nearly 10.5% from the opening price on September 29th, the first trading day of the fiscal year. 

Recent analyst revenue upgrades and price target revisions have provided support for the share price. The current Wall Street consensus revenue estimate for the December quarter is $66.23 billion compared to management’s revenue guidance for the quarter of between $63.5 billion and $66.5 billion. However, the current revenue consensus estimate for FY2015 remains a decidedly conservative $210.68 billion and for FY2016 the revenue consensus estimate is a surprisingly low $223.02 billion.

In contrast, my revenue models suggest Apple may reach one-quarter trillion dollars in revenue in FY2016 following a revenue performance this fiscal year of $225 billion.

On November 19th Morgan Stanley’s Katy Huberty raised her firm’s price target from $115 to $126. She stated investors underestimate demand for the Apple Watch and is forecasting 30 million Apple Watches will be sold in CY2015. She also believes institutions remain underweighted in Apple shares. In my view, increasing institutional demand for shares will buoy the share price during the first six months of the current fiscal year.

On November 25th Aaron Rakers at Stifel Nicolaus raised his Apple price target to $130 from $115. On the same day Brian Blair reiterated his firm’s view iPhone unit sales will range between 72 million and 75 million in the December quarter. Although the share price may not go higher in a straight line, I expect a continuing series of analyst estimate revisions over the next several weeks to support the share price into Apple’s December quarter earnings release in late January. 

Looking Back

Although unit sales expectations for Apple’s iPhone 6 handsets are moving higher with strong evidence of a big market share shift in the high-end smartphone market from competitors to Apple, most analysts remain cautious on their FY2015 revenue and earnings per share estimates. 

The graph below illustrates Apple’s revenue mix for the fiscal year ended in September. In the 12-month period, the iPhone represented just over 55% of reported revenue. Combined, the iPhone and iPad lines represented over 72% of revenue in the period.

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 Success Is In The Sensational And The Subtle

On Friday, August 29th, Apple’s share price ended the month’s trading at an all-time closing high of $102.50 after setting an all-time trading high of $102.90 earlier in the day’s session. For the month of August, the share price rose about 8% from the opening price of $94.90 on August 1, 2014. Since Apple announced the return to profit growth following the close of trading on April 23, 2014, the share price has risen about 37%. 

At Friday’s closing price, the company’s market capitalization stands at about $614 billion dollars. Because of the ongoing $90 billion share repurchase program and despite the recent all-time highs, the company’s market cap remains below the record levels set in late September 2012 and institutional ownership remains at a curiously low 62% of outstanding shares. 

No matter the dramatic rise in the share price over the past four months, opportunities remain for long-term shareholders to be richly rewarded over the next several quarters. 

Apple’s September 9th Event

There’s no shortage of rumors and speculation concerning what products and services Apple will choose to announce at the upcoming September 9th event. There’s very little doubt Apple will announce the next iteration of the company’s popular line of smartphones and expectations are high Apple will also announce its foray into mobile payments as well as new services to complement the much-anticipated iWatch line of accessories. 

Various reports from component suppliers suggest Apple will produce record numbers of iPhones, with larger screen sizes, to accommodate what is predicted to be unprecedented demand for the new handsets and demand on a scale that may prove to be high even by lofty iPhone standards. But the fact of the matter is it would actually be worrisome if demand for the new iPhone handsets didn’t break all previous records by a proverbial country mile. 

Apple’s Dependence On iOS Devices

The graph below illustrates Apple’s reliance on the iPhone and iPad product lines for revenue and revenue growth. Since the June quarter (FQ3) of FY2011, the iPhone and iPad lines have contributed at least 60% of Apple’s reported revenue. In seven of the most recent fifteen quarters, the iPhone and iPad lines have contributed at least 70% of Apple’s reported revenue total.

The graph below delineates the revenue performance of the iPhone and iPad lines over the most recent fifteen quarters. Against a backdrop of 5.42% aggregate revenue growth in the first three quarters of the current fiscal year, iPhone revenue rose 9.12% to $78.313 billion while iPad revenue fell 3.21% to $24.967 billion. Combined, the two product lines delivered $103.280 billion or 73.42% of the $140.672 billion in reported revenue in the nine-month period. As Apple determines the best path forward for growth in iPad unit sales, the iPhone line is and will remain Apple’s primary revenue growth driver.

Apple's Game Of Inches

On Friday, July 25, 2014, Apple’s share price reached a 52-week closing high of $97.67. This was also the highest split-adjusted closing price since September 24, 2012 and within range of the all-time high closing price of $100.30 set on September 19, 2012.

From the closing high of 100.30 on September 19, 2012 to the closing share price nadir of $55.79 on April 19, 2013 to Friday’s closing price of $97.67, it’s been a startling roller coaster ride for Apple’s long-term shareholders. It’s simply a matter of time before Apple’s share price vaults above its previous all-time closing high and begins an ongoing series of new records.

Despite the share price volatility of the past two years, Apple’s growth moving forward will be best seen in sublime advances of technologies and less in sharp spikes and slides in revenue and earnings growth rates that have characterized the past four years of the company’s financial performance.

Apple is engaged in a game of inches and has entered an era that will again reward long-term shareholders for their conviction, patience and grit. 

Apple’s Return To Glory

While much attention has been placed on Apple’s recent 7-for-1 stock split, the share price rise from the closing price on the first day of post-split trading on June 9, 2014 of $93.70 to Friday's closing price represents a share price gain of 4.24%.

However, the share price rise from the closing price immediately prior to the release of March quarter results on April 23, 2014 has been 30.29%. Apple’s return to organic net growth income growth has delivered extraordinary share price gains in just over three months. Apple has now concluded two consecutive quarters of net income growth following a four-quarter slide in underlying profitability. 

The graph below illustrates the company’s net income performance over the most recent nineteen fiscal quarters. Rising net income is and will remain the primary catalyst for Apple’s share price appreciation.

Apple: Net Income Growth Is The Name Of The Game

Apple is a global empire with revenue results that place it among the top publicly-traded enterprises on the planet. Apple is also among the largest dividend payers in the world and management is dedicated to returning more than $100 billion in capital to shareholders over a four-year period through a combination of dividend payments and share repurchases. Apple’s brand value is arguably the highest in the world and the company’s balance sheet reflects over $140 billion in cash and equivalents net of debt despite the ongoing capital return program. 

No matter these superlatives, Apple is challenged to reverse a decline in profitability. The company is in the midst of a multi-quarter decline in net income and a cycle of lower net income per revenue dollar even as revenue rises modestly year-over-year.

Apple: Net Income Growth Is The Name Of The Game

For Apple’s first quarter of FY2014 ended December 28, 2013, management reported revenue growth of 5.7% to $57.594 billion. In the same 91-day period net income fell year-over-year by $6 million to $13.072 billion and represented 22.70% of reported revenue, below the 23.99% of net income per revenue dollar earned the year before.

This FQ1 2014 performance came on the heels of the company’s FY2013 results in which Apple’s reported revenue rose 9.2% to $170.91 billion and net income fell 11.25% to $37.037 billion. Based on Apple’s March quarter revenue guidance, which suggests the possibility of a decline in revenue year-over-year, net income in the current quarter may fall below not only last year’s results, net income is likely to come in well below the results of two years ago. 

Apple’s Net Income By Quarter

The graph below illustrates Apple’s net income has been in decline on a year-over-year basis since the March quarter (FQ2) of FY2013. Although in FQ1 2013 the company managed a meager rise in net income of $14 million, in the recent December quarter (FQ1 2014), Apple’s net income was $6 million below the results in the prior-year period and only $8 million above the results of two years ago. 

While Apple’s reported revenue has continued to rise, the company’s net income per revenue dollar has continued to fall. In the December quarter, net income represented 22.70% of revenue versus 23.99% in the prior-year quarter and 28.20% of revenue in the December quarter two years ago.

Apple: There And Back Again

On April 23rd, Apple released the company's results for its second fiscal quarter of 2013. Reported revenue of $43.60 billion represented a March quarter record and the third highest quarterly revenue performance in the company's stored history. However, March quarter earnings per share fell to $10.09, down 18% year-over-year. In today's article I will review Apple's March quarter performance, the recently announced cash distribution plan and the ways in which Apple is setting a firm foundation for future growth. 

Apple: There and Back Again

The graphs below illustrate Apple's recent rates of revenue and earnings per share growth compared with the quarterly rates of growth since the first quarter of FY2010.

In the March-ending period, Apple reported its slowest rate of quarterly revenue growth in years. Since the third quarter of FY2012, quarterly revenue growth has slowed to a pace last seen in FY2009 and the peak of the Great Recession. In the March quarter, Greater China, previously Apple's fastest-growing revenue region, reported only 7.54% revenue growth. That was below the 11.27% revenue growth for the company as a whole. For the current June quarter, Apple has guided to revenue of between $33.5 billion and $35.5 billion and hinted at the possibility of a negative revenue growth quarter. In the June quarter one-year ago, Apple reported revenue of $35.023 billion.

Despite the fact Apple will almost certainly report yet another successive year of record revenue, the company's performance is overshadowed by expectations of flat earnings growth this fiscal year and present-day market preoccupation with the company's massive amounts of cash.

In the March quarter, Apple reported its second consecutive negative eps growth quarter and its first negative net income growth quarter in years. In the recent December quarter, earnings per share fell 0.4% with a modest $14 million rise in net income. In the March quarter, earnings per share fell 17.9% to $10.09 from $12.30 in the prior-year period with a corresponding drop in net income of $2.075 billion. 

Apple has returned from a three-year cycle of extraordinary rates of revenue and earnings growth following the Great Recession that was fueled by strong geographic expansion, the introduction of the iPad and fast rates of growth in the global smartphone market. This is an end to a chapter, not the end of Apple's long-term growth story. 

Apple's Revenue By Region: There's More To The Company's Story

On February 27th Apple will host its annual meeting of shareholders. While much attention is being paid to the company's holdings of cash and marketable securities and the recent sell-off in the share price, very little attention is focused on the company's organic growth. 

In the December quarter, Apple's  revenue rose nearly 27% on an equal week basis and the company reported record revenue and net income in the 13-week period. The impact of "share creep" from stock-based compensation reduced earnings per share $.06 year-over-year despite a $14 million gain in net income and the 14-week prior-year quarter reduced the rate of reported revenue growth to about 17.7%.

Due to extraordinarily high gross margin in the December and March quarters of FY2012, Apple will report negative earnings per share growth in the first six months of the current fiscal year.  Although I expect sequential margin recovery from the December quarter's 38.63% through the March quarter of next fiscal year, Apple's rate of earnings per share growth in FY2013 will be the lowest rate of growth in the company's recent history. But there's much more to Apple's growth story.

Apple's Growth By Revenue Region

Apple manages its businesses on a geographic basis. With the release of the company's December quarter results, management created an additional revenue region called "Greater China" and now reports revenue from other countries in the former Asia-Pacific revenue region as "Rest of Asia Pacific." 

Illustrated below is the percentage of recognized revenue delivered by each of Apple's revenue regions in the last fiscal year. 

Last fiscal year, both the United States and China represented more than 10% of Apple's reported revenue. The graph below illustrates revenue by region in the fiscal year and the corresponding rates of regional revenue growth.

View Apple By Seasons, Not By Quarters

On October 25th, Apple announced earnings for the 13-week period ended September 29, 2012. For the quarter, Apple reported revenue growth of 27.22% to $35.966 billion and earnings per share growth of 22.98% to $8.67 per share. The earnings per share outcome in the quarter was negatively impacted by accelerated recognition of foreign exchange-related losses. 

In contrast to the September quarterly results, for the fiscal year ended the same date, Apple reported revenue growth of 44.58% to $156.508 billion and earnings per share growth of 59.54% to $44.16. 

View Apple By Seasons, Not By Quarters

The charts below illustrate the quarterly changes in year-over-year and sequential rates of revenue and earnings growth for the most recent twelve fiscal quarters. Apple's high annual growth rates are now concentrated in a six-month season comprised of the company's December and March quarters. The June and September quarters have comparatively slower rates of revenue and earnings growth and represent their own six-month revenue and earnings season. 

Apple's quarterly results are essentially static snapshots of a fast-moving enterprise. Results are best viewed based on annual growth rates and the year-over-year growth rates of the company's two and distinctly different revenue growth seasons.  

Apple's quarterly revenue growth rates FQ1 2010 - FQ4 2012:

Apple's quarterly earnings per share growth rates FQ1 2010 - FQ4 2012:

Apple's Annual Revenue and Earnings Growth Rates

The charts below illustrate Apple's dramatic rates of revenue and earnings growth over the most recent seven fiscal years. The annual rates of revenue and earnings growth will continue to be far more uniform than the rates of quarterly growth depicted in the graphs at the top of the article. The highly seasonal nature of Apple's revenue activity will continue not only because of the refresh cycle for the Apple iPhone, which comprised over 50% of the company's FY2012 revenue, but the influence of changes in the company's regional revenue mix as well.

Apple's annual revenue FY2005 - FY2012:

Apple's annual EPS FY2005 - FY2012:

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: