21 July 2009

AAPL: Income Statement Analysis for the June 2009 Quarter

Apple (NASDAQ: AAPL) earned $1.35 per diluted share in the quarter that ended 27 June 2009, surpassing most predictions and up from $1.19 last year.  This period was the third quarter of Apple's fiscal year, which ends in September.

Earlier today, the Apple 2.0 blog summarized the pre-announcement expectations of professional and amateur analysts:

The consensus, as reported by Thomson Financial, has been inching up and stands this morning at $1.17 earnings per share on revenue of $8.2 billion. As usual, the unaffiliated analysts — a ragtag group of bloggers, day traders and amateur analysts who track the stock as closely, if not more so, than the professionals — are considerably more bullish, predicting earnings in the $1.27 – $1.35 range.

[emphasis added]

This post, which is our first on Apple, takes a peek at the company's latest Income Statement.  In a second article, we will report Apple's scores as measured by the GCFR Financial Gauges.  The follow-up post will provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

For the benefit of any Luddites that might stumble onto a hardcopy of this post, we will note that Apple Inc., according to the company's last 10-K,  is in business to:

... design, manufacture, and market personal computers, portable digital music players, and mobile communication devices and sell a variety of related software, services, peripherals, and networking solutions. ...

In addition, the Company sells a variety of third-party Macintosh® (“Mac”), iPod® and iPhone™ compatible products, including application software, printers, storage devices, speakers, headphones, and various other accessories and peripherals through its online and retail stores, and digital content through the iTunes Store®.

The company is known for elegant product design, innovation, the loyalty of its customers, and the cult-like status afforded cofounder, CEO, and savior) Steve Jobs.

Apple is one of the top-five seller of personal computers in the U.S.  Figures from different industry analysts are inconsistent, but Chris Foresman at ars technica has done a good job sorting out the most-recent market share numbers.

Please click here to see a full-sized, normalized depiction of the actual results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Apple's Revenue in the June quarter was 11.7 percent more than last year, and it was up 2.1 percent from the March 2009 period.  Revenue from Macintosh desktops and portables fell 7.8 percent from June 2008, even though 13 percent more portables were sold (at lower average prices).   The Mac product mix tilted toward lower-price models due to the effect of the weak economy on businesses.

iPhones were the real star of the quarter, contributing 300 percent more to Revenue than in the comparable period last year.  iPhones were responsible for 20 percent of total Revenue in the most recent quarter.  Sales might have been even higher if supplies had not been constrained.

Revenue growth was especially strong in Europe, where sales increased 22 percent from last year's June quarter.

The Cost of Goods Sold was 63.7 percent of Revenue in the quarter, which translates into a Gross Margin of 36.3 percent, up from 34.8 percent in June 2008.  The Gross Margin exceeded prior guidance from Apple, and it was consistent with the 35 to 37 percent range cited by the more optimistic followers of the the company. 

Evidently, the lucrative iPhone more than makes up for both declining margins (after recent price cuts) on Apple's other products and rising component costs.

A nice article on predicting Apple's Gross Margin, which cites the deservedly well-respected Financial Alchemist, can be found here.

Research and Development (R&D) expenses were 4.1 percent of Revenue, which was a bit more than the 3.9 percent in last year's second quarter.

On the other hand, Sales, General, and Administrative (SG&A) expenses decreased slightly from 12.3 percent of Revenue last year to 12.1 percent.

The quarter did not include any separately identified "Other" operating expenses, such as restructuring charges, workforce reduction expenses, asset impairments).

Operating Income was up 20.1 percent from last year's second quarter.  This impressive result can be attributed to the healthy increases in Revenue and Gross Margin.

Net interest and other non-operating items summed to income of $60 million, which was down substantially from $118 million last year.  Some of the decline is due to lower interest rates on the company's cash balances.

The 29.0-percent effective income tax rate was identical to the rate in last year's June quarter.

Given all of the above, Net Income rose by 14.6 percent. Diluted earnings per share increased 13.4 percent.

Full disclosure: No position in AAPL at time of writing.

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