Apple: A Quarterly Comparison of Costs and Cost Ratios To Revenue

  • Posted: 28 November 2010 04:59 AM

    My latest missive at Eventide.

    This is part two of a two-part series comparing Apple’s major cost components over an 8-quarter period. The graphs and corresponding table data illustrate that although cost of sales is the largest of Apple’s major cost components, the quarterly fluctuations in that cost component do not necessarily have the largest impact on changes in total costs in a quarter. There are other cost factors to consider.

    Snippet:Although Apple’s cost of sales is the largest of the company’s three major cost components, swings in the relative ratios of operating expenses and taxes to reported revenue can have greater influence on the company’s quarterly results in any given fiscal period. While cost of sales (and the inverse ratio called gross margins) should be carefully watched, operating expenses and taxes also have a big influence on Apple’s net earnings and earnings per share. A focus on gross margins only may lead to less accurate analysis of the company’s quarterly performances and less accurate forecasts of future earnings results.

         
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    Posted: 28 November 2010 11:54 AM #1

    DawnTreader - 28 November 2010 08:59 AM

    My latest missive at Eventide.

    This is part two of a two-part series comparing Apple’s major cost components over an 8-quarter period. The graphs and corresponding table data illustrate that although cost of sales is the largest of Apple’s major cost components, the quarterly fluctuations in that cost component do not necessarily have the largest impact on changes in total costs in a quarter. There are other cost factors to consider.

    Snippet:Although Apple’s cost of sales is the largest of the company’s three major cost components, swings in the relative ratios of operating expenses and taxes to reported revenue can have greater influence on the company’s quarterly results in any given fiscal period. While cost of sales (and the inverse ratio called gross margins) should be carefully watched, operating expenses and taxes also have a big influence on Apple’s net earnings and earnings per share. A focus on gross margins only may lead to less accurate analysis of the company’s quarterly performances and less accurate forecasts of future earnings results.

    Outstanding work DT.  I think it is an important fact that Apple is doing a wonderful job keeping SG&A as a percentage of revenue in check.  No easy task.  I don’t follow the tax rates closely, I tend to rely on Apple guidance.  Is the decrease in tax rate primarily a result of Overseas sales or is there something else at work here?

         
  • Posted: 28 November 2010 01:40 PM #2

    pats - 28 November 2010 03:54 PM
    DawnTreader - 28 November 2010 08:59 AM

    My latest missive at Eventide.

    This is part two of a two-part series comparing Apple’s major cost components over an 8-quarter period. The graphs and corresponding table data illustrate that although cost of sales is the largest of Apple’s major cost components, the quarterly fluctuations in that cost component do not necessarily have the largest impact on changes in total costs in a quarter. There are other cost factors to consider.

    Snippet:Although Apple’s cost of sales is the largest of the company’s three major cost components, swings in the relative ratios of operating expenses and taxes to reported revenue can have greater influence on the company’s quarterly results in any given fiscal period. While cost of sales (and the inverse ratio called gross margins) should be carefully watched, operating expenses and taxes also have a big influence on Apple’s net earnings and earnings per share. A focus on gross margins only may lead to less accurate analysis of the company’s quarterly performances and less accurate forecasts of future earnings results.

    Outstanding work DT.  I think it is an important fact that Apple is doing a wonderful job keeping SG&A as a percentage of revenue in check.  No easy task.  I don’t follow the tax rates closely, I tend to rely on Apple guidance.  Is the decrease in tax rate primarily a result of Overseas sales or is there something else at work here?

    pats:

    The decline in the effective tax rate (and consequential decline in tax expenses as a percentage of revenue) is wholly linked to the increase in foreign earnings. As the graph and table data indicate, the effective tax rate in FY 2009 was fairly consistent at about 32%.

    The tax rate dropped precipitously in FQ2 2010 due to (if I recall correctly management’s statement) a one-time adjustment and remained well below FY 2009 rates for the balance of the fiscal year.

    This change in effective tax rates in FY 2010 mitigated the decline in gross margins (or increases in cost of sales relative to revenue) and was a key factor in the sharp increases in eps relative to revenue growth last fiscal year.

    For the purposes of this 8-quarter comparison I chose to convert the tax expense to a percentage of revenue from a percentage of pre-tax income.

    On the issue of opex or operating expenses, we should see a continuing decline in this expense relative revenue as revenue scales dramatically higher this fiscal year due in large part to the influence of the Apple iPad that has no prior-year activity. In other words, for the first two fiscal quarters of FY 2011, every revenue dollar generated from iPad sales activity is a 100% revenue gain over the prior-year period.

    In terms of my own estimates, I believe I’m high on opex for FQ1 2011. I will most likely be adjusting my estimate. Practically speaking, at the pace revenue is rising, it’s virtually impossible for this cost component to scale close to revenue. It’s challenging to develop an accurate model for opex activity with revenue rising anywhere near 70%.

    I’m thinking of publishing my eight quarters of data of Apple’s results for the benefit of AFB members interested in developing estimates or interested in following the progression of revenue and expense activity.

    Are members interested in having the data available online for reference?

         
  • Posted: 28 November 2010 03:11 PM #3

    adamthompson3232 - 28 November 2010 05:59 PM

    Yes, I am definitely interested.

    How did I know you’d be among the first to respond in the affirmative?  LOL

         
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    Posted: 28 November 2010 05:02 PM #4

    I?m thinking of publishing my eight quarters of data of Apple?s results for the benefit of AFB members interested in developing estimates or interested in following the progression of revenue and expense activity.

    Are members interested in having the data available online for reference?

    My spreadsheets are not nearly as organized as I would like :wink: so I welcome the data review.  As far as the opex, The R&D expense is mostly personnel so, I think it is the easier of the two components to estimate.  I model using a percentage of revenue for SG&A and R&D as a fixed number based on the previous quarter, and add in any know acquisitions which raise the engineering head count.

         
  • Posted: 28 November 2010 05:19 PM #5

    I always say that a picture is worth 1,000 words.  OPEX is scaling up with sales more than I’d expect, but with Apple’s expanding sales abroad, I’m not too surprised. 

    I’m currently at $6.06 EPS for FQ1 2011.  I’ll be fine-tuning it over the next two weeks.

         
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    Posted: 28 November 2010 05:46 PM #6

    DawnTreader - 28 November 2010 05:40 PM

    Are members interested in having the data available online for reference?

    Yes, I’ll have two please. smile

         
  • Posted: 28 November 2010 05:49 PM #7

    Mercel - 28 November 2010 09:19 PM

    I always say that a picture is worth 1,000 words.  OPEX is scaling up with sales more than I’d expect, but with Apple’s expanding sales abroad, I’m not too surprised. 

    I’m currently at $6.06 EPS for FQ1 2011.  I’ll be fine-tuning it over the next two weeks.

    Included in OpEx is stock-based compensation which in part is an illusory expense. That cost component will be impacted by the rise in share value which is indirectly related to growth in revenue. The challenge I have in estimating OpEx is the huge leap in revenue antiquated in FQ1 and how the cost components comprising OpEx will scale in response.

    I’m at $6.00 eps but I do need to scale back OpEx just a bit and figure out what’s going on with iPad unit sales.

         
  • Posted: 28 November 2010 08:31 PM #8

    DawnTreader - 28 November 2010 07:11 PM
    adamthompson3232 - 28 November 2010 05:59 PM

    Yes, I am definitely interested.

    How did I know you’d be among the first to respond in the affirmative?  LOL

    That would be fantastic (and much appreciated)!

         
  • Posted: 28 November 2010 10:18 PM #9

    cranium - 29 November 2010 12:31 AM
    DawnTreader - 28 November 2010 07:11 PM
    adamthompson3232 - 28 November 2010 05:59 PM

    Yes, I am definitely interested.

    How did I know you’d be among the first to respond in the affirmative?  LOL

    That would be fantastic (and much appreciated)!

    Ok. I’ll get working on it. smile

         
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    Posted: 29 November 2010 12:02 AM #10

    DawnTreader - 28 November 2010 07:11 PM
    adamthompson3232 - 28 November 2010 05:59 PM

    Yes, I am definitely interested.

    How did I know you’d be among the first to respond in the affirmative?  LOL

     


    WEEEEELL, were waiting. tongue laugh (Caddyshack)

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    Adversity does not just build character, it reveals it.

         
  • Posted: 29 November 2010 12:34 AM #11

    mbeauch - 29 November 2010 04:02 AM
    DawnTreader - 28 November 2010 07:11 PM
    adamthompson3232 - 28 November 2010 05:59 PM

    Yes, I am definitely interested.

    How did I know you’d be among the first to respond in the affirmative?  LOL

     


    WEEEEELL, were waiting. tongue laugh (Caddyshack)

    Next weekend. The extended weekend time at home with undisturbed hours pouring over AAPL numbers is coming to an end…

         
  • Posted: 29 November 2010 02:58 AM #12

    adamthompson3232 - 29 November 2010 05:21 AM

    You mean your career, Sandy, and your three teens are more important than Apple, AAPL, and the AFB?!?! Come on, DT. Priorities!:)

    Actually, it’s four teens. Add in the romantic interest of one of the teens who is often here doing college homework and I, too, tend to lose count.  LOL

    The hold up isn’t time. It’s figuring out where to host the data.  grin

         
  • Posted: 29 November 2010 05:44 AM #13

    Thanks for the graphs and information.  This looks to me to be some tax smoothing by Apple.  Agree that international sales are scaling up an this is causing a change in tax rates, but I also expect there are some agressive steps by Apple to mitigate the increase in OPEX by using the Irish tax break, the same one used by Google, to gain that lower rate.  I have no proof obviously, but Apple has a large Ireland operation and I am sure their accountants are not fools.  I think this gets back to the thinner margins on iPad and other more recent devices.  Will be interesting to see how the trend continues this quarter.

         
  • Posted: 29 November 2010 05:47 AM #14

    Thanks for the graphs and information.  This looks to me to be some tax smoothing by Apple.  Agree that international sales are scaling up an this is causing a change in tax rates, but I also expect there are some agressive steps by Apple to mitigate the increase in OPEX by using the Irish tax break, the same one used by Google, to gain that lower rate.  I have no proof obviously, but Apple has a large Ireland operation and I am sure their accountants are not fools.  I think this gets back to the thinner margins on iPad and other more recent devices.  Will be interesting to see how the trend continues this quarter.

    Ladies and gentlemen we have another winner.

    Great 1st post.

    Welcome.

         
  • Posted: 29 November 2010 04:15 PM #15

    Apple’s corporate tax rate was consistent through FY2009. According to management, the company benefitted from a one-time adjustment to tax liability and through FY2010 benefitted from rising percentage of overseas sales.

    Whether or not there are some small tax benefits from creative application of tax law is not an issue nor would it be the cause of the sharp reductions in tax liability relative to pre-tax earnings.

    Because of the one-time tax adjustment realized in FY2010, the company will most likely see eps grow more in line with revenue growth in FY2011 rather than dramatic increases in eps because of the differences in tax rates relative to the prior-year period.