OpEx

  • Posted: 05 March 2011 06:54 PM

    Has anyone developed a methodology to estimate R&D and SG&A expenses for the next few quarters? Mathematically a variance relative to expectations on OpEx as a % of revenue has just as big an impact on EPS as a a variance relative to expectations on GM as a % of revenue.

    Moreover, the variability of OpEx as a % of revenue has been relatively comparable to that of GM over the last year (percentage point difference from high to low quarter of ~4.8 for GM and ~3.0 for OpEx). So maybe we should be giving OpEx a little more attention.

    Overall trend seems to be for OpEx to be declining as a % of revenue (for both R&D and SG&A), but it tends to be higher early in the calendar year due to revenue moderation and lower late in the year (see below).

    My current EPS model for CY2011 assumes an absolute sequential increase of 7% per quarter for R&D for CQ1-3 and 15% for CQ4, which produces an overall downward trend in R&D as a % of revenue. SG&A is harder for me to forecast because it doesn’t follow the relatively consistent upward trend of R&D for historical quarters (most likely because of large variability in spend for advertising and maybe retail staffing).

    Total OpEx as a % of income for the last five quarters:
    FQ1-10: 10.8
    FQ2-10: 12.2 (sequential revenue decline vs. FQ1)
    FQ3-10: 12.1
    FQ4-10: 10.2
    FQ1-11: 9.2

    My ballpark estimates for this CY:
    FQ2-11: 9.6
    FQ3-11: 10.7*
    FQ4-11: 8.9
    FQ1-12: 7.9

    * I’m currently modeling a sequential decrease in sales for the June Quarter, which may be overly conservative.

    If anyone has developed a way to ballpark OpEx components for the year ahead, please share!

         
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    Posted: 05 March 2011 07:04 PM #1

    PurpleApple - 05 March 2011 10:54 PM

    Has anyone developed a methodology to estimate R&D and SG&A expenses for the next few quarters? Mathematically a variance relative to expectations on OpEx as a % of revenue has just as big an impact on EPS as a a variance relative to expectations on GM as a % of revenue.

    Moreover, the variability of OpEx as a % of revenue has been relatively comparable to that of GM over the last year (percentage point difference from high to low quarter of ~4.8 for GM and ~3.0 for OpEx). So maybe we should be giving OpEx a little more attention.

    Overall trend seems to be for OpEx to be declining as a % of revenue (for both R&D and SG&A), but it tends to be higher early in the calendar year due to revenue moderation and lower late in the year (see below).

    My current EPS model for CY2011 assumes an absolute sequential increase of 7% per quarter for R&D for CQ1-3 and 15% for CQ4, which produces an overall downward trend in R&D as a % of revenue. SG&A is harder for me to forecast because it doesn’t follow the relatively consistent upward trend of R&D for historical quarters (most likely because of large variability in spend for advertising and maybe retail staffing).

    Total OpEx as a % of income for the last five quarters:
    FQ1-10: 10.8
    FQ2-10: 12.2 (sequential revenue decline vs. FQ1)
    FQ3-10: 12.1
    FQ4-10: 10.2
    FQ1-11: 9.2

    My ballpark estimates for this CY:
    FQ2-11: 9.6
    FQ3-11: 10.7*
    FQ4-11: 8.9
    FQ1-12: 7.9

    * I’m currently modeling a sequential decrease in sales for the June Quarter, which may be overly conservative.

    If anyone has developed a way to ballpark OpEx components for the year ahead, please share!

    When your estimating R&D it is primarily head count of engineers and stock options.  I look at the previous qtr and know acquisitions.  For SG&A revenue I use a percentage of revenue and this has been trending down.  DT did a nice analysis at Eventide SG&A. R&D

         
  • Posted: 05 March 2011 07:17 PM #2

    Thanks, pats. I have seen DT’s posts, which are very helpful. But we know the %s tend to be higher in FQ2 than FQ1 and then decline until the next FQ2. I’m just wondering how folks are estimating the actual values for the next few quarters, given that you have to incorporate both a downward long-term trend and a likely short-term upward trend (at least for FQ2 vs. FQ1).

         
  • Posted: 05 March 2011 10:04 PM #3

    PurpleApple - 05 March 2011 11:17 PM

    Thanks, pats. I have seen DT’s posts, which are very helpful. But we know the %s tend to be higher in FQ2 than FQ1 and then decline until the next FQ2. I’m just wondering how folks are estimating the actual values for the next few quarters, given that you have to incorporate both a downward long-term trend and a likely short-term upward trend (at least for FQ2 vs. FQ1).

    PA, opex is very much a function of revenue not season or fiscal quarter. In my posts I did track and document opex as a function revenue. This major cost segment obviously has variable cost components that will rise with revenue generating activity. I suggest looking at the opex expense growth trends in this post about SG&A expenses , this post on R&D expenses and this post on opex growth v. revenue growth for past two fiscal years.

         
  • Posted: 05 March 2011 10:33 PM #4

    PA, opex is very much a function of revenue not season or fiscal quarter. In my posts I did track and document opex as a function revenue. This major cost segment obviously has variable cost components that will rise with revenue generating activity. I suggest looking at the opex expense growth trends in this post about SG&A expenses , this post on R&D expenses and this post on opex growth v. revenue growth for past two fiscal years.

    DT, your posts are very helpful, as always. Thank you. That said, it is clear to me that opex as a % of revenue in fact does exhibit significant seasonal variation. Just look at the last couple years—opex peaks in FQ2 each year (as a % of revenue) and then declines for the remainder of the fiscal year.

    What I take away from this is that opex as a % of revenue should not be set as a flat value for the fiscal year but rather varied by quarter (for EPS forecasting purposes). Perhaps this is obvious to other folks but it was a new insight for me.

    Overall the trend is down as opex is growing slower than revenues, but history suggests there is going to be significant variation this year by quarter—and not just down.

    My initial 4-quarter CY2011 EPS model included a flat number (initially 9.0%) for OpEx but I have since started modeling a different value for each quarter, taking into account the different behaviors of R&D and SG&A. Right now I anticipate seeing a moderate increase in OpEx as a % of revenue for FQ2, although to a less pronounced degree than for the last couple years due to roughly flat revenue change from prior quarter thanks to VeriPhone, continued strength of MacBook Air, “early” launch of iPad 2, and solid MacBook Pro line refresh.

    What are other folks forecasting as OpEx % of revenue for FQ2? Any forecasts for remaining quarters in CY2011?

    Going back to my original point, a 1-point miss in the OpEx forecast (% of revenue) has the same impact as a 1-point miss in the GM%, but we seem to focus more attention on GM.

         
  • Posted: 06 March 2011 01:27 AM #5

    PurpleApple - 05 March 2011 10:54 PM

    Has anyone developed a methodology to estimate R&D and SG&A expenses for the next few quarters?

    Yes. I recently upgraded my forecast model to take the average percent change in OpEx and R&D of the prior three like quarters, and apply that percent change to the current like period.  This method treats OpEx and R&D as an absolute, independent of Revenue.  A regression analysis seems to confirm that this approach works, or at the very least comes pretty close

    Trying to make this change to my forecast model caused me to miss the deadline to get my numbers posted with the rest of AFBers.

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  • Posted: 06 March 2011 02:31 AM #6

    Gregg Thurman - 06 March 2011 05:27 AM
    PurpleApple - 05 March 2011 10:54 PM

    Has anyone developed a methodology to estimate R&D and SG&A expenses for the next few quarters?

    Yes. I recently upgraded my forecast model to take the average percent change in OpEx and R&D of the prior three like quarters, and apply that percent change to the current like period.  This method treats OpEx and R&D as an absolute, independent of Revenue.  A regression analysis seems to confirm that this approach works, or at the very least comes pretty close

    Trying to make this change to my forecast model caused me to miss the deadline to get my numbers posted with the rest of AFBers.

    There’s always next quarter to get your numbers into the AFB index. I’m convinced the AFB price target index is having an impact and your contribution to next quarter’s edition would be appreciated.

    I’m interested in your thinking on opex growth.

    Everyone: Please remember opex has significant stock-based compensation expense attached.

         
  • Posted: 06 March 2011 02:39 AM #7

    PurpleApple - 06 March 2011 02:33 AM

    DT, your posts are very helpful, as always. Thank you. That said, it is clear to me that opex as a % of revenue in fact does exhibit significant seasonal variation. Just look at the last couple years—opex peaks in FQ2 each year (as a % of revenue) and then declines for the remainder of the fiscal year.

    What I take away from this is that opex as a % of revenue should not be set as a flat value for the fiscal year but rather varied by quarter (for EPS forecasting purposes). Perhaps this is obvious to other folks but it was a new insight for me.

    Overall the trend is down as opex is growing slower than revenues, but history suggests there is going to be significant variation this year by quarter—and not just down.

    My initial 4-quarter CY2011 EPS model included a flat number (initially 9.0%) for OpEx but I have since started modeling a different value for each quarter, taking into account the different behaviors of R&D and SG&A. Right now I anticipate seeing a moderate increase in OpEx as a % of revenue for FQ2, although to a less pronounced degree than for the last couple years due to roughly flat revenue change from prior quarter thanks to VeriPhone, continued strength of MacBook Air, “early” launch of iPad 2, and solid MacBook Pro line refresh.

    What are other folks forecasting as OpEx % of revenue for FQ2? Any forecasts for remaining quarters in CY2011?

    Going back to my original point, a 1-point miss in the OpEx forecast (% of revenue) has the same impact as a 1-point miss in the GM%, but we seem to focus more attention on GM.

    PA, the relationship between opex and revenue growth isn’t absolute. My point is the expense will rise with increases in revenue acquisition activity (staff, retail stores, promotions, etc.).

    I track opex as a percent of revenue as one means to evaluate my forward estimates. Please remember R&D can be an amorphous segment and can include a variety of expenses.

         
  • Posted: 06 March 2011 02:54 AM #8

    PurpleApple - 06 March 2011 02:33 AM

    Going back to my original point, a 1-point miss in the OpEx forecast (% of revenue) has the same impact as a 1-point miss in the GM%, but we seem to focus more attention on GM.

    There is much more attention paid to GM because analysts and tech journalists are focused on it. In my analysis I convert all major expense components to a function of revenue to determine the variables in eps projections. Here’s how it looks:

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

    I may update the numbers after the March quarter results are released.

         
  • Posted: 06 March 2011 02:31 PM #9

    DawnTreader - 06 March 2011 06:31 AM
    Gregg Thurman - 06 March 2011 05:27 AM
    PurpleApple - 05 March 2011 10:54 PM

    Has anyone developed a methodology to estimate R&D and SG&A expenses for the next few quarters?

    Yes. I recently upgraded my forecast model to take the average percent change in OpEx and R&D of the prior three like quarters, and apply that percent change to the current like period.  This method treats OpEx and R&D as an absolute, independent of Revenue.  A regression analysis seems to confirm that this approach works, or at the very least comes pretty close

    Trying to make this change to my forecast model caused me to miss the deadline to get my numbers posted with the rest of AFBers.

    There’s always next quarter to get your numbers into the AFB index. I’m convinced the AFB price target index is having an impact and your contribution to next quarter’s edition would be appreciated.

    I’m interested in your thinking on opex growth.

    Everyone: Please remember opex has significant stock-based compensation expense attached.

    I calculate R&D and SG&S change separately.  I do this because percent change for R&D in the first and second quarter of each year is volatile, while it is fairly constant in quarters three and four.

    The average change in SG&A for the 2nd quarter in years 2008, 2009 and 2010 is negative 7.57%, although it seems to be trending down.

    The average change in R&D for the 2nd quarter in years 2008, 2009 and 2010 is positive 6.43%.  Percent change is definitely trending downward.

    Using the combined average change percent, I come up with OpEx of $2,364,500,000.

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    You can’t do more, make more, be more, than the next guy, if you think like the next guy. Think different.