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: 

Posts At Eventide AAPL FQ2 Estimates

Posts At Eventide AAPL FQ2 Estimates

As an independent AAPL analyst and moderator of the Apple Finance Board I've witnessed the continuing transformation of Apple from primarily a one product company at the beginning of this millennium to a newly claimed position as a global technology leader offering an array of popular and award-winning products. 

My estimates rely heavily on Apple's recent quarterly results and I actively track trends that emerge on a rolling basis over the most recent eight fiscal quarters. For more information on the data I compile and the results I track, please see the Posts At Eventide Resource Guide.

FQ2 Revenue and Earnings Estimates

For the March quarter my models forecast revenue of $25.256 billion and earnings per share of $6.30. This represents anticipated revenue growth of 87% over the prior-year period and eps growth of 89%.

This extraordinary pace of revenue growth is due in part to an accelerating rate of iPhone unit sales boosted by the iPhone on the Verizon network and a lessening of iPhone supply constraints. In the March quarter I anticipate revenue growth from iPhone unit sales to be greater than the total revenue generated from iPad unit sales activity.

In year-over-year comparisons I expect a slight reduction in gross margins. Apple has become more aggressive on product pricing in pursuit of increasing unit sales. iOS-based devices (the iPhone, iPad and iPod touch) are designed to deliver post-purchase revenue activity over the economic life of each unit sold. Offsetting the moderation in gross margins is the reduction of operating expenses relative to revenue. For the second consecutive quarter I anticipate operating expenses consuming less than 10% of reported revenue. For an analysis of the growth in operating expenses relative to growth in revenue, please see my February post titled Apple's SG&A Expenses Versus Revenue. 

Posts At Eventide FQ2 AAPL Estimates

	Revenue Segment	Units FQ2 '11	Units FQ2 ’10	Unit Growth	FQ2 Revenue
	Macintosh	3,625,000	2,943,000	23.2%	4,585,625,000
	iPhone	18,125,000	8,752,000	107.1%	11,563,750,000
	iPod	10,000,000	10,885,000	-8.1%	1,800,000,000
	iPad	6,750,000	N/A	100%	4,320,000,000
	Peripherals				565,000,000
	Software, Services				762,500,000
	Other Music				1,658,750,000
	Revenue Total				25,255,625,000
	Cost of Sales	60.2%			-15,203,886,250
	Gross Margin	39.8%			10,051,738,750
	Operating Expenses	9.5%			-2,400,000,000
	Operating Income	30.3%			7,651,738,750
	Other Income				125,000,000
	Income Before Taxes				7,776,738,750
	Provision For Taxes	24%			-1,866,417,300
	Net Income	23.4%			5,910,321,450
	Earnings Per Share	937,503,000	Shares		6.30

AAPL FQ 1 Revenue Results With And Without The iPad

AAPL FQ 1 Revenue Results With And Without The iPad

On Tuesday Apple reported record revenue of $26.741 billion for the company's 1st fiscal quarter ended on December 25, 2010, representing 70.5% growth in revenue over the prior-year period and a 31.5% rise in revenue sequentially over the fiscal quarter that ended in late September. This frenetic pace of revenue growth was fueled by strong growth in iPhone sales and the emergence of the Apple iPad in the company's product line-up. 

The graph below illustrates the percentage contribution to revenue from each of Apple's largest revenue segments. Combined, the Apple iPhone and the Apple iPad represented 56.38% of Apple's reported revenue. The Macintosh line of personal computers contributed just over 20% to the revenue total and the Apple iPod line represented just over 1/8th of the total at 12.81%. 

AAPL FQ1 ’11 Results As Reported
	FQ1 ’11		FQ 1 ’10	FQ 1  ’11	%  of Revenue
Revenue Segment	Revenue	% of Total	Revenue	Growth	Growth
Macintosh	5,430,000,000	20.31%	4,450,000,000	980,000,000	8.86%
iPhone	10,468,000,000	39.15%	5,578,000,000	4,890,000,000	44.22%
iPod	3,425,000,000	12.81%	3,391,000,000	34,000,000	0.31%
iPad	4,608,000,000	17.23%	0	4,608,000,000	41.67%
Peripherals	593,000,000	2.22%	469,000,000	124,000,000	1.12%
Software, Service	786,000,000	2.94%	631,000,000	155,000,000	1.40%
Other Music	1,431,000,000	5.35%	1,164,000,000	267,000,000	2.41%
Total	26,741,000,000	100%	15,683,000,000	11,058,000,000	100.00%

Apple's FY2010: A Retrospective

Apple's FY2010: A Retrospective

In preparing my December quarter and FY2011 estimates for Apple, I'm looking to the company's FY2010 results for benchmarks and clues concerning revenue growth trends. FY2010 was a year of extraordinary growth for Apple, delivering revenue growth of about 52% and eps growth of roughly 67%. 

Fiscal Year Unit Sales

The emergence of the Apple iPad in the revenue mix for the June and September quarters was crucial to Apple's ability to deliver the growth numbers mentioned above. For the fiscal year iPhone unit sales grew about 90%, Mac unit sales grew about 30% and the Apple iPad (device sales and related accessories) represented 7.6% of the company's reported revenue for the fiscal year and contributed about 11.6% of the 52% growth in revenue. This was an extraordinary outcome for a product that was in the market for only six months and for much of that time in constrained supply. Although the Apple iPod line experienced a decline of about 8.5% in unit sales in the fiscal year, revenue grew almost 2.3% due to the sales performance of the iPod touch during the 12-month period. 

FY2010 Revenue Mix

The chart below illustrates Apple's product line revenue mix for the fiscal year. Due to strong growth in iPhone unit sales and an average selling price hovering around $600 per unit, the iPhone and related accessories delivered almost 40% of Apple's revenue in the fiscal year.

Apple: Do You See What I See?

Apple: Do You See What I See?

On Monday afternoon Apple releases the company's September quarter results and results for the 2010 fiscal year that ended with the quarter. Yesterday Philip Elmer-DeWitt posted the comprehensive analyst estimates on Apple 2.0. I'm honored to be among the independent analysts selected for the quarterly analyst comparison.

Apple's quarterly results are essentially a static snapshot of a dynamic company that's growing at an astoundingly fast pace for an enterprise of its size. For the first nine months of fiscal year 2010 Apple's revenue has risen 46.2% and earnings per share have grown 66.8% over the prior-year period. Most likely Apple's September quarter revenue and eps growth performance will exceed the results of the first three quarters of the fiscal year.

Apple's Revenue Source Expansion

Even before the September quarter results are released we should already be looking beyond those numbers. I've mentioned before more than 50% of Apple's revenue in the September quarter and more than 50% of revenue in fiscal year 2011 will be derived from products that did not exist in the marketplace as recently as three and one-half years ago. Fully 25% of Apple's FY 2011 revenue will be derived from a product that's been in the market for less than eight months as of this writing. According to IDC September quarter estimates, Apple has regained the #3 spot among domestic PC vendors and has now secured a 10.6% share of the US market. In fiscal year 2010 Apple's iPod line of products will actually report out an increase in revenue despite a drop in unit sales due to the popularity of the iPod touch. It's easy to see why people would become enamored with the company's quarterly results. But there's more to the story than these 91-day snapshots of performance.

When I look at Apple, I don't see a company that develops popular products. I see a management team that is focused on revolutionizing the way we use technology to better our lives and better the world around us. Excellent quarterly results are one component of management's mission.

Top Line Management and Bottom Line Growth

Apple's results aren't produced by a bottom line-only approach to management. Obviously decisions must be made based on the economic viability of products. But Apple's bottom line growth comes primarily from top line growth. Without growth in revenue, Apple's bottom line growth can not be sustained nor improved. Cost management has amplified Apple's earnings from revenue growth, but cost management has not been the primary driver of Apple's superb earnings performance. There's a difference between cost management and efforts at outright cost containment. Management understands costs must rise to support growth in revenue.

Apple and R&D

Over the past several quarters Apple has invested about 3% of revenue in research and development. As revenue has risen so has the company's investment in R&D. These expenses lead to future products. Management has chosen smartly to increase its investment in future product development  as revenue from current products provides the resources. In other words, Apple is investing in new products at a rate proportional to the success of its current products. R&D as a percentage of revenue has not been scaled back for the sake of bottom line growth.