19 October 2009

AAPL: Income Statement Analysis for the September 2009 Quarter

Apple (NASDAQ: AAPL) earned $1.82 per diluted share in the quarter that ended 26 September, which was the fourth quarter of Apple's fiscal 2009.  This result far surpassed the $1.26 earned last year and recent estimates of $1.42 to $1.44

This post examines the Income Statement for the quarter and compares the entries on each line with guidance provided by Apple after the June quarter.  We did not write a look-ahead post prior to the release of the earnings announcement.

In a second article, we will report Apple's scores as measured by the GCFR financial gauges.  The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

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.

It is important to understand that, in accordance with the subscription accounting method, almost all iPhone Revenue and Costs of Goods Sold are deferred from the quarter in which the devices are purchased by a customer.  For any given iPhone, the associated Revenue and Costs are recognized uniformly over the device's two-year estimated economic life. 

Apple is expected to switch to a different accounting method in either fiscal 2010 or 2011.  The end of subscription accounting will, for a time, boost reported Revenue and Earnings by substantial amounts.

Gartner, Inc., estimated that Apple shipped 1.57 million personal computers in the U.S. in the September 2009 quarter.  This figure is about 8.8 percent of total U.S. shipments, which would give Apple the fourth-most share of the U.S. market.  Apple's share of the worldwide market for personal computers is less.

Please click here to see a full-sized, normalized depiction of the 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.

Revenue of $9.87 billion in the September quarter was 25 percent more than last year, and it transcended the $8.7 billion to $8.9 billion guidance issued by Apple three months ago in its previous earnings report.

Fiscal year Revenue increased from $32.5 billion to $36.5 billion, a gain of 12.5 percent.

Seemingly unaffected by a Great Recession, Apple sold more Macintosh computers and more iPhones than ever before.  The number of desktop and portable Macs sold increased by 17 percent, relative to the September 2008 quarter.  Revenue from "CPU" sales rose 9.2 percent.  Revenue per CPU fell from 6.6 percent, from $1386 to $1294, because of price cuts and fewer high-end workstations in the product mix.

iPhones were responsible for 23 percent of total Revenue in the quarter.   Revenue from these popular devices was 185 percent more than in the comparable period last year. iPhones sales might have been even higher if supplies had not been constrained.

Apple will soon be selling iPhones in China.

Revenue growth was especially strong in Europe, where sales increased 45 percent relative to the September 2008 quarter.

The Cost of Goods Sold was 63.4 percent of Revenue in the quarter, which translates into a Gross Margin of 36.6 percent, up from 34.7 percent in September 2008.  The Gross Margin significantly exceeded the 34-percent issued by Apple during July's conference call.

Apple indicated that the better-than-expected Gross Margin was due to more sales of high-margin products, component costs that didn't rise as much as feared, and lower freight costs.

We recommend this article on predicting Apple's Gross Margin, which cites the deservedly well-regarded Financial Alchemist.

Research and Development expenses were 3.6 percent of Revenue, which was a bit less than the 3.8 percent in last year's third quarter.

Sales, General, and Administrative expenses decreased from 12.7 percent of Revenue last year to 10.8 percent.

Together, R&D and SG&A expenses totaled $1.42 billion, which is 1.7 percent less than the $1.445 billion identified in Apple's guidance for operating expenses (exclusive of CGS).

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

Operating Income was up a stunning 52 percent from last year's 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 $45 million, which was down substantially from $140 million last year.  Some of the decline is due to lower interest rates on the company's cash balances.

The 25.6-percent effective income tax rate was far less burdensome than the 30-percent expectation.

Given all of the above, Net Income rose by 46.6 percent to $1.665 billion ($1.82 per diluted share), compared to earnings in the year-earlier quarter of $1.136 billion ($1.26 per share).  This performance made a mockery of the company's earnings guidance of $1.18 to $1.23 per share.

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

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