Apple's Challenging Metric Conversion

On Friday, August 16th, Apple's share price closed above $500 for the first time since January. The recent announcement by Carl Icahn of his investment in Apple, the completion of the first big phase of the planned $60 billion share repurchase program and better than expected iPhone sales in the June quarter have combined to catapult the share price off the 52-week low of $385.10 set back in April.

From the all-time high of $705.07 reached last September to the 52-week low set in April to the closing price of $502.33 on Friday, Apple's share price has gyrated wildly over the past twelve months.

Within weeks Apple will announce its fall product refreshes for the iPhone and iPad lines. Rumors and speculation about the company's forthcoming new products are again receiving broad press coverage. The product news will come at the tail end of Apple's most challenging fiscal year in recent history.

In late October, Apple is likely to report negative net income growth for the fiscal year ending in September and a fourth consecutive quarter of tepid revenue growth. The deterioration in Apple's year-over-year profitability is due in part to the outsized revenue and earnings growth rates achieved in the prior fiscal year. In FY2012, Apple's revenue rose 44.58% and earnings per share rose 59.60%. In the first three quarters of the current fiscal year, Apple's revenue growth rate was 10.7%. Net income, a better metric than earnings per share as Apple repurchases tens of millions of shares, is down 11.89% year-over-year.

Apple's Challenging Metric Conversion
In today's article I am publishing a series of graphs that detail the recent deterioration in a select set of financial performance metrics and mention the challenges Apple faces as management strives to return the company to strong rates of revenue and earnings growth.

Apple's Revenue Growth Rates

The graph below illustrates Apple's revenue growth and revenue growth rates over the most recent fifteen fiscal quarters. 

Although the company has eked out revenue growth of 10.7% in the first nine months of the current fiscal year, due in part to a roughly $1 billion sequential drop in channel supply value in the recent June quarter, the reported revenue growth rate in the period was 0.86%. Apple is now experiencing its slowest rate of revenue growth in years and the revenue growth rate so far this fiscal year is below the 14.4% revenue growth rate realized in recession-plagued FY2009.

Apple's Earnings Per Share Performance
The graph below illustrates Apple's earnings per share and eps growth rates by quarter since FQ1 2010. 

In the first three quarters of the current fiscal year, Apple has reported negative earnings per share growth. Over this nine-month period eps has fallen 11.61% year-over-year to $31.36. The recent negative eps growth is despite fewer shares outstanding in the recent March and June quarters.  In the June quarter, Apple's $7.47 eps performance fell below the $7.79 per share earned two years prior in FQ3 2011.

Apple: Where From Here?

On Tuesday, July 23rd, Apple announced results for the company's third fiscal quarter of  2013. The company surprised Wall Street with year-over-year iPhone unit sales growth of 20% to 31.241 million units despite a 600,000 unit reduction in global channel supply to 11.0 million units. iPhone unit sell-through in the quarter was about 31.84 million units. 

iPad unit sales were a disappointment in the period, falling year-over-year by 14.23% to 14.617 million units. Management emphasized during the quarterly conference call that reported iPad unit sales were negatively impacted by a 1.9 million unit swing in channel supply year-over-year. Meanwhile, Mac unit sales fell 6.62% to 3.754 million units. In the June quarter Apple did not refresh its MacBook Pro line, but refreshed the MacBook Air line only. One year ago both the MacBook Air and the MacBook Pro received a June quarter update. 

For the quarter, revenue rose a scant 0.86% to $35.323 billion and net income fell from $8.824 billion in the June quarter last year to $6.90 billion in the quarter ended June 29th. 

Despite the stronger than expected iPhone unit sales numbers and the fact Verizon and AT&T activated more iPhones in the June quarter than all other makes of smartphones combined, the quarter's results highlight Apple's many challenges moving forward. While revenue in the Americas region rose 12% in the June quarter, Greater China delivered a 14% decline in revenue and Apple's Retail revenue segment had a $10 million year-over-year revenue setback despite more stores open for business. 

Apple: Where From Here?

In today's article I will detail changes that are occurring in Apple's revenue flow and why the company's road to earnings recovery may take some long and winding turns.   

Apple As An Eco-System 

Apple has moved beyond the scope of being primarily a device maker. In the June quarter revenue from the company's iTunes/Software/Services revenue segment rose nearly 25% to $3.99 billion and represented 11.3% of reported revenue. The graph below illustrates the growth in what was the company's fastest growing revenue segment in the period. The fairly consistent revenue growth in the iTunes/Software/Services segment is contrasted in the graph with the seasonal revenue performance of Apple's Accessories segment that experienced a 4% revenue decline in the recent quarterly period.

Of the $3.99 billion in segment revenue, $2.4 billion was sourced from iTunes alone. Since the opening of the Apple app store, $11 billion has been paid through to developers. According to management, half of the $11 billion was earned by developers within the past 12 months. iTunes billings, separate from recognized iTunes revenue, reached $4.3 billion in the June quarter.