Apple’s Net Income Relative To Revenue Continues To Rise

  • Posted: 24 July 2011 07:11 PM

    Apple’s Net Income Relative To Revenue Continues To Rise

    This is an 11-quarter review of Apple’s net income growth relative to revenue and includes the recently announced June quarter results.

    Snippet: During the conference call with Wall Street analysts that followed the release of June quarter results, management suggested gross margins would fall in the September quarter as unspecified product refreshes (presumably including the Apple iPhone 5 but it was not specifically cited) would impact cost of sales per revenue dollar. However, the release of Mac OS X, 10.7 last week and its accompanying high margins, the attractive retail margins produced by product sales through Apple’s global chain of retail stores and the anticipated economies of scale on the iPhone 5 with expected simultaneous releases on both the AT&T and Verizon networks suggest gross margins will remain high in the September quarter.

         
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    Posted: 24 July 2011 07:37 PM #1

    I will soon scale into Jan 13 500s (again) and will try not to let ‘em go.  It’s risky, but a safer kind of risky.

    As for fiscal Q4, the answer to the net income ratio question depends upon just how radical a change the iPhone 5 is.  “4GS”, net income ratio goes through the ceiling.  Radical redesign, count on a small drop in the ratio while Apple drives down the cost curve to record levels over the next couple quarters.

    [ Edited: 24 July 2011 07:45 PM by Mav ]

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  • Posted: 24 July 2011 09:04 PM #2

    Adam:

    What are you using for the fully diluted share count? I like this table.

         
  • Posted: 24 July 2011 10:03 PM #3

    With the impact of partial deferred revenue on device sales in play it may have a slight dampening effect on revenue and eps growth over the next few/several quarters. I don’t expect net income as a percentage of revenue to reach or exceed 27%. But 26% is definitely within reach.

         
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    Posted: 24 July 2011 10:07 PM #4

    You mean for the year?  Agreed there.  But Apple may stun us all in FY ‘12 with a 29-30% net income ratio quarter.  It already advanced its profitability to a .255 net income ratio this year.

    I’m not 100% sure how deferred revenue will affect Apple’s profitability.  I know about the 2% or so of ASP “rule of thumb” of deferred revenue, but will Apple still recognize 100% of the COGS?

    [ Edited: 24 July 2011 10:10 PM by Mav ]

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    Posted: 24 July 2011 10:37 PM #5

    Adam,

    These are excellent tables. I find myself deeply into the ‘what if’ aspects of my growth outlook and this makes it easy to extrapolate other variables in a friendly, useful way.

    Neat. grin.  I’m rumbling around 50 bucks (unbelievable) and yet glancing at your tables it is not unbelievable…..not at all.

    [ Edited: 24 July 2011 10:41 PM by Red Shirted Ensign ]

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  • Posted: 24 July 2011 11:31 PM #6

    I’m developing a series of metrics and measures for validating eps estimates and gauging potential eps outcomes.

    Wall Street has yet to figure out how to value Apple. In some ways the Street treats Apple like the company is primarily a PC maker.

         
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    Posted: 25 July 2011 12:02 AM #7

    Let’s not get ahead of ourselves, Ensign.  We don’t want WS catching on just yet.

    Only one metric is really needed as a quick check of EPS plausibility relative to revenue.  It’s the revenue part that’s toughest.

    WS will never figure it out completely and I don’t care.  Lower valuation also equates to higher relative safety, and Apple will keep churning out revenues and profits like we’ve never seen for the next five quarters.  There’s also the whole “oh, we sold 100+ million iPhones this year” and other stuff, which will probably put Apple in a whole new light because Apple is now beginning to sell in volumes that have never been seen not just from Apple, but from any company ever.  Sheer ubiquity, with the fastest adoption rates yet seen, will demand investor attention.  Kinda like Windows in the past.  wink

    There are some “peers” in the P/E department that Apple cannot be compared to without fits of laughter.  And even IF Apple inherits a stodgy, Wal-Mart-like P/E, investors will STILL be fine on the sheer strength of massive profits/EPS.  An 18-month time horizon should be well rewarded.

    [ Edited: 25 July 2011 12:10 AM by Mav ]

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    Posted: 25 July 2011 12:04 AM #8

    Got it. Mav

    I’ll burn that envelope I was doodling on.  :wink:

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    Posted: 25 July 2011 12:54 AM #9

    adamthompson3232 - 25 July 2011 03:35 AM

    If you look at analyst consensus for fiscal 2012 you see $132B in revenue and $31.65 in EPS. If you assume 950 million shares you get to net income of $30.1B which is a 22.8% net income margin. Um, hello, Wall Street, this is Adam from California calling you all morons. Last Q this percentage was 25.0% and it will grow from here.

    Net income margin % has been ramping substantially the past several quarters after slower growth in previous quarters…but this metric has shown very consistent growth. It has shown sequential growth in eight of the last ten quarters and it has shown YoY growth in seven of the last seven quarters. The growth numbers included below are expressed in basis points.

    Also, there is a cool formula in Excel called Growth. This formula looks at two series of numbers (X and Y) and predicts future values of Y based on estimated future values of X. If we assume this quarter sees $32B in revenue and the holiday quarter gets to $50B this formula predicts 25.7% net income margin in the current quarter and a percentage of roughly 32% in the holiday quarter. Is 32% possible? Probably not. This analysis was doing using Apple’s results going back to F1Q09 and since Apple has never had revenue as high as $50B it may not be reliable when predicting net income margins for revenue amounts that high. B


    t was an interesting exercise nonetheless.

    Bottom line is that net income margin is absolutely expanding, and it’s expanding consistently every quarter. Wall Street is calling for a drop of 220 basis points from last quarter for fiscal 2012. They’ll end up being off by roughly 400 basis points in my opinion. And then you need to consider just how low their revenue estimates are too. If this doesn’t convince everyone to buy January 2013’s I don’t know what will.

    Qtr   Net Inc %    Sequential   YoY
    F1Q09   17.6%     
    F2Q09   17.2%        (40) 
    F3Q09   18.1%        90  
    F4Q09   20.4%        230  
    F1Q10   21.3%        90       370

    F2Q10   22.4%      110       520
    F3Q10   20.4%      (200)      230
    F4Q10   21.1%        70         70
    F1Q11   21.9%        80         60
    F2Q11   24.2%      230       180
    F3Q11   25.0%        80       460

    Don’t say 50 bucks a share.  It causes distress. It is the new Valdemort. It’s name cannot be said.

    From now on just refer to it as ” the number that shall not be named” :wink:

    [ Edited: 25 July 2011 12:58 AM by Red Shirted Ensign ]

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    Posted: 25 July 2011 01:12 AM #10

    adamthompson3232 - 25 July 2011 04:02 AM

    The number that shall not be named is absolutely in play. I won’t say we’ll get there for sure but it is definitely possible. I’d say there’s a 50/50 (or number that shall not be named/number that shall not be named) shot we get there for fiscal 2012.


    LOL

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    Posted: 25 July 2011 01:19 AM #11

    AT - Certain semi-brave assumptions are required (given the uncertainty of prognosticating this far out) but I might actually take your, let’s call em odds and raise ‘em to a less verboten 70/30. 

    Things will become a lot clearer after fiscal Q4.  If fiscal Q4 contributes the numbers I’m forecasting (which are moderate-to-conservative), add a certain YOY rev growth multiplier to FY ‘11 (fairly reasonable), multiply by a certain net income ratio (very reasonable), divide by a certain number of shares (also very reasonable), and BOOM…the number that shall not be named.  And a little spare change!

    [ Edited: 25 July 2011 01:24 AM by Mav ]

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  • Posted: 25 July 2011 01:22 AM #12

    mbeauch - 25 July 2011 04:12 AM
    adamthompson3232 - 25 July 2011 04:02 AM

    The number that shall not be named is absolutely in play. I won’t say we’ll get there for sure but it is definitely possible. I’d say there’s a 50/50 (or number that shall not be named/number that shall not be named) shot we get there for fiscal 2012.


    LOL

    Yep. I’m looking at that number now. I didn’t expect it.  Mark sends his numbers in early. We’ll know soon if he sees it too.

         
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    Posted: 25 July 2011 01:24 AM #13

    3 of us are seeing it, then.  Shared hallucination?

    Or shared insight?

    Tune in next October!

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    The Summer of AAPL is here.  Enjoy it (responsibly) while it lasts.
    AFB Night Owl Team™
    Thanks, Steve.

         
  • Posted: 25 July 2011 01:24 AM #14

    Mav - 25 July 2011 04:19 AM

    AT - Certain semi-brave assumptions are required (given the uncertainty of prognosticating this far out) but I might actually take your, let’s call em odds and raise ‘em to a less verboten 70/30. 

    Things will become a lot clearer after fiscal Q4.  If fiscal Q4 contributes the numbers I’m forecasting (which are moderate-to-conservative), add a certain YOY rev growth multiplier (fairly reasonable), multiply by a certain net income ratio (very reasonable), divide by a certain number of shares (also very reasonable), and BOOM…the number that shall not be named.  And a little spare change!

    Take that number and add something really low on a p/e multiple such as 15 and look at the outcome.

         
  • Posted: 25 July 2011 01:24 AM #15

    DawnTreader - 24 July 2011 10:11 PM

    Apple’s Net Income Relative To Revenue Continues To Rise

    This is an 11-quarter review of Apple’s net income growth relative to revenue and includes the recently announced June quarter results.

    Snippet: During the conference call with Wall Street analysts that followed the release of June quarter results, management suggested gross margins would fall in the September quarter as unspecified product refreshes (presumably including the Apple iPhone 5 but it was not specifically cited) would impact cost of sales per revenue dollar. However, the release of Mac OS X, 10.7 last week and its accompanying high margins, the attractive retail margins produced by product sales through Apple’s global chain of retail stores and the anticipated economies of scale on the iPhone 5 with expected simultaneous releases on both the AT&T and Verizon networks suggest gross margins will remain high in the September quarter.

    The original post back for page 2.