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Apple’s Rising R&D Expenses
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DawnTreader
- [ Ignore ]
In my relentless effort to slice, dice and analyze all of Apple’s revenue and expense components, I’m crafting a series of Eventide posts to graph and compare quarterly data. These posts have AAPL independent analysts specifically in mind.
Over the past nine quarters, Apple’s R&D expenses have risen sequentially each quarter. While the percentage of revenue consumed by R&D expenses will obviously vary by quarter due to seasonal influences on product sales, I expect R&D expenses to continue to rise as Apple broadens its product portfolio and product refresh and upgrade activity increases.In the December quarter reported R&D expenses rose about 45% year-over-year.
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Thanks for this and all the other distilled info, DT.
I’d always wondered by Apple’s R&D didn’t seem to go up very much over the years. This addresses my concern. Smart innovation is one thing, but I have no problem with Apple increasing the research budget substantially right now. They have repeatedly shown they can put the money to good use.
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The Summer of AAPL is here. Enjoy it (responsibly) while it lasts.
AFB Night Owl Team™
Thanks, Steve. -
This is an amazing growth factor for R&D and assures Apple is determined to stay at the technological forefront and innovation. Makes the stock even more attractive at current prices. Thank you for pointing that to us.
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DawnTreader
- [ Ignore ]
In my view it’s unreasonable to expect R&D expenses to ramp with revenue at this point in time. I do expect increases in R&D expenses to eventually move much closer to the pace of revenue growth as the company’s product portfolio continues to expand and development and design commitments necessarily increase to support more products.
Apple has quickened the pace of product refreshes over the past few years on most product lines and I expect Apple to maintain an aggressive schedule of product refreshes as a competitive advantage.
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With Apple’s increasing profitability and high gross margins it makes sense to keep R&D expenses running as high as prudently possible and especially if generous tax credits continue.
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DawnTreader
- [ Ignore ]
With Apple’s increasing profitability and high gross margins it makes sense to keep R&D expenses running as high as prudently possible and especially if generous tax credits continue.
Tax credit may be a help, but I see the need to maintain a strong competitive advantage as the primary motivating factor. Tax credits, however, do benefit the bottom line.
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Competitive advantage is primary motivating factor, agreeing on that and adding below.
R & D investment growth and size is a solid line of reasoning on how Apple beats the fallacious bear case on the law of large numbers. DT could even add to his fore sighting article on the issue showing the efficiency and amazing ratio of growth and size of investments in R&D by Apple .
Interesting data on Worldwide Industrial R&D investment, ranking it by company, published by the European Union can be found
hereDT?s article here
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In my relentless effort to slice, dice and analyze all of Apple’s revenue and expense components, I’m crafting a series of Eventide posts to graph and compare quarterly data. These posts have AAPL independent analysts specifically in mind.
Over the past nine quarters, Apple’s R&D expenses have risen sequentially each quarter. While the percentage of revenue consumed by R&D expenses will obviously vary by quarter due to seasonal influences on product sales, I expect R&D expenses to continue to rise as Apple broadens its product portfolio and product refresh and upgrade activity increases.In the December quarter reported R&D expenses rose about 45% year-over-year.
1) Apple doesn’t design manufacturing. They push that stuff out to their contractors.
2) Apple designs.
3) When Apple designs cannot be completed using existing methods, Apple leans on contractors. When the contractors repeatedly say that it cannot be done, Apple increases R&D money allotted to the contractor while shopping for new contractors.
4) When Apple designs are found to be faulty through material analysis, design trumps engineering. For example, there is a laptop where every one of cases will crack because design trumped engineering. Worse, the fault was found and predicted well before production.
5) Contractors get burnt out working with Apple and more of them are turning down request to bid offers or intentionally bidding high.
Hence we come to my three-fold conspiracy theory:
1) Apple is making more products and that is reason enough for R&D to go up.
2) Enough experienced Apple contractors are telling Apple to go fly a kite requiring Apple to spend more and more time with new contractors. Consider an iPod for example: As we know, many iPods start out life as a block of aluminum that is machined and then finished. The trouble is that Apple has exacting design standards on the types of finishes and each blessed one of your 90 CNC machines has a distinct “personality” that impacts the finish result. This requires constant fiddling.
3) In China energy use is metered. Apple’s manufacturing processes (while often super recyclable to appease the tree huggers) are ofter super energy inefficient to build. As a result of rising energy costs, Apple’s manufacturing costs are going up.
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4) When Apple designs are found to be faulty through material analysis, design trumps engineering. For example, there is a laptop where every one of cases will crack because design trumped engineering. Worse, the fault was found and predicted well before production.
When did this happen recently and how has it affected Apple long-term?
5) Contractors get burnt out working with Apple and more of them are turning down request to bid offers or intentionally bidding high.
Plausible, but Apple has supreme leverage (cash enough to circle the globe many times, or create a nice thick orbital cash ring so Earth has a Saturn feel to it). If contractors hate Apple, they must really, really hate pumping out all of those high-precision iPhones and iPads, and will hate it even more with iPad 2 and iPhone 5. And yet somehow I think Apple will manage to get them to crank out a respectable number of each.
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The Summer of AAPL is here. Enjoy it (responsibly) while it lasts.
AFB Night Owl Team™
Thanks, Steve. -
DawnTreader
- [ Ignore ]
Competitive advantage is primary motivating factor, agreeing on that and adding below.
R & D investment growth and size is a solid line of reasoning on how Apple beats the fallacious bear case on the law of large numbers. DT could even add to his fore sighting article on the issue showing the efficiency and amazing ratio of growth and size of investments in R&D by Apple .
Interesting data on Worldwide Industrial R&D investment, ranking it by company, published by the European Union can be found
hereDT?s article here
That particular blog titled Apple and the Law of Large Numbers captured a lot of attention worldwide.
I’d like to get back to writing article-length posts and will do so after working through all of the December quarter numbers and March quarter estimates.
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Apple has not announced any events this year so far. Both the daily launch and VZ iPhone launch were hosted by others. Any precedent in previous years? I hope they are planning a mega event as rumors fly for iPad 2, another iPhone (nano / 5), new MBPs, mobileme overhaul, etc.
Thoughts? -
Apple has not announced any events this year so far. Both the daily launch and VZ iPhone launch were hosted by others. Any precedent in previous years? I hope they are planning a mega event as rumors fly for iPad 2, another iPhone (nano / 5), new MBPs, mobileme overhaul, etc.
Thoughts?If I was guessing, the next beta iOS will intro both the software and iPad 2 but the iPad will release with 4.3.
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5) Contractors get burnt out working with Apple and more of them are turning down request to bid offers or intentionally bidding high.
2) Enough experienced Apple contractors are telling Apple to go fly a kite requiring Apple to spend more and more time with new contractors.
Really? Please tell us how you come to know this. Haven’t read anything about this anywhere else before. What you call turning down bid solicitations might be contractors bumping up against their capacity limits (both managerial and physical) as Apple’s sales have been growing by leaps and bounds. I certainly don’t hear about Hon Hai and the other firms on Apple’s contract mfr bench quitting the lineup.
With sales growth like Apple has been seeing, it should be no surprise that they are having to bring in new contract mfrs. And if these contract mfrs, or the people running them, have done business with Japanese companies before (which in the far east is not unlikely), believe me, Apple’s performance and quality standards will not be a big shock to their systems.
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3) In China energy use is metered. Apple’s manufacturing processes (while often super recyclable to appease the tree huggers) are ofter super energy inefficient to build. As a result of rising energy costs, Apple’s manufacturing costs are going up.
Odd then that their Gross Margin just went up significantly last quarter. Do other manufacturers who have less economies of scale somehow not pay rising energy costs? Would iPhones and Ipads sell better if they were made of cheap injection molded plastic?
I can’t figure it out. -
Would iPhones and Ipads sell better if they were made of cheap injection molded plastic?
I don’t think so.
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5) Contractors get burnt out working with Apple and more of them are turning down request to bid offers or intentionally bidding high.
2) Enough experienced Apple contractors are telling Apple to go fly a kite requiring Apple to spend more and more time with new contractors.
Really? Please tell us how you come to know this. Haven’t read anything about this anywhere else before. What you call turning down bid solicitations might be contractors bumping up against their capacity limits (both managerial and physical) as Apple’s sales have been growing by leaps and bounds. I certainly don’t hear about Hon Hai and the other firms on Apple’s contract mfr bench quitting the lineup.
With sales growth like Apple has been seeing, it should be no surprise that they are having to bring in new contract mfrs. And if these contract mfrs, or the people running them, have done business with Japanese companies before (which in the far east is not unlikely), believe me, Apple’s performance and quality standards will not be a big shock to their systems.
Eric’s posted about this many times in the past because ‘he know’s a guy’. You’ll find some of it here and more here. My objections to this line of thinking are included in those threads so I’ll leave it at that.
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