Apple Expenses Tiger’s $19.3M R&D Costs, SEC Filing Reveals (UPDATE)

January 31st, 2005 at 2:00 PM - Apple Stock Watch by Brad Gibson

Apple Computer expensed US$19.3 million in the last two fiscal quarters on research and development costs for its soon-to-be-released update of Mac OS X, code named "Tiger", the company revealed Tuesday in its quarterly report to the U.S. Securities and Exchange Commission. Apple also said that its fiscal first-quarter earnings would have been reduced by $20 million, to $275 million, had the company accounted for stock-compensation expenses.

The company acknowledged that it capitalized "Tiger" development costs of approximately $4.5 million in the fiscal fourth quarter of 2004 and $14.8 million in the fiscal first quarter of 2005.

"In the fourth quarter of 2004, the company began incurring substantial development costs associated with the upcoming upgrade of Mac OS X version 10.4," the report stated. "Tiger achieved technological feasibility following its public demonstration in August 2004 and the subsequent release of a developer beta version of the product...In most instances, the company’s products are released soon after technological feasibility has been established; therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant, and generally all software development costs have been expensed."

Apple said it will amortize the R&D costs when Tiger begins shipping and will spread out the costs over the next three years. Apple plans to release "Tiger" in the first half of calendar year 2005, the company said.

Expenditures for R&D increased 3% or $4 million to $123 million in the first quarter of 2005 compared to $119 million in the same quarter of 2004 due primarily to an increase in R&D headcount in the current year to support expanded R&D activities, the company said.

Stock Payments a Hefty Earnings Cost

Apple also said that its fiscal first-quarter earnings would have been reduced by $20 million, to $275 million, had the company accounted for stock-compensation expenses. Apple said it added $9 million to account for stock-based employee compensation expenses included in its net income, net of tax, but also subtracted $29 million for stock-based compensation expenses determined under the fair value method for all awards, net of tax. The expenses also would have reduced Appleis earnings-per-share to 66 cents from 70 cents.

Apple Lays Off 485 Employees

Apple said it had terminated 415 employees by the end of 2004, and will let go of another 60 people by the end of March. The company said the terminations would cost the company $14 million in severance expenses.

Warranty Costs Soar

Apple revealed in the quarterly report that warranty costs for the fiscal first quarter soared from $21 million to $35 million, an increase of 67%. The company gave no detailed explanation for the rise.

Jobsi Jet Use on the Rise

The report said costs related to the use of an executive Gulfstream V jet by Apple Chief Executive Officer Steve Jobs jumped to $419,000 in the fiscal first quarter of 2005. "The company recognized a total of $419,000 and $282,000 in expenses pursuant to the Reimbursement Agreement during the first quarters of 2005 and 2004, respectively," the report stated.

The MHz Myth

Apple acknowledged in its quarterly report that the slower clock speeds in both its G4 and G5 processors when compared to Intelis offerings remain a detriment to sales in both the professional and consumer space.

"It is likely that many of the Companyis current and potential professional, creative, and small business customers, who are most likely to utilize professional systems, believe that the relatively slower MHz rating or clock speed of the microprocessors the Company utilizes in its Macintosh systems compares unfavorably to those utilized by other computer manufacturers and translates to slower overall system performance," the company said in its filing. "These factors may result in an adverse impact to sales of the Companyis professional products as well as to gross margin and operating margin percentages."

Apple has been battling this issue for years, but made some headway with the introduction of the 2.0GHz G5 processor in June of 2003. At that time, Steve Jobs said that IBM would release 3.0 GHz G5 processors within the year, but Apple has so far only boosted the Power Mac product line to 2.5 GHz.

While benchmarks show that Appleis offering perform as fast or faster at most tasks as the fastest Intel computer, Appleis trouble has been in dealing with people who do not understand the issues. Fortunately for Apple, however, Intel itself has hit a speed wall, and its line of Pentium processors has largely stalled during the last 12 months.

Apple also said its seven flagship retail stores have leases ranging in length from 10 to 16 years and "have financial commitments of from $25 million to $50 million over the lifetime of the respective lease." As for all of its retail stores, Apple noted that the majority of the leases are 10 year leases, representing a major financial and resource commitment from Apple toward its retail store operations.

Appleis stock (AAPL) closed at $77.53, a gain of 0.63, or 0.82%, on moderate volume of 12.1 million shares.

Misha Sakellaropoulo and Bryan Chaffin contributed to this article.

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