20 April 2010

AAPL: Income Statement Analysis for the March 2010 Quarter

Apple (NASDAQ: AAPL) reported earnings of $3.33 per diluted share in the second quarter of fiscal 2010, which ended on 27 March.  Earnings rose an extraordinary 86 percent above the $1.79 Apple made in the same quarter of 2009.

This post examines Apple's Income Statement for the latest quarter and compares the entries on each line to our "look-ahead" estimates.  Reported earnings exceeded the $2.36 per share we had forecast by a humbling $0.97.

The principal sources for this review were the earnings announcement and the conference call with analysts (transcript made available by Seeking Alpha).

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. has been recognized by Fortune as the world's most admired company for the last three years.  The company is known for elegant product design, innovation, customer loyalty, secrecy, and the cult-like status afforded CEO (and savior) Steve Jobs.  Additional background information about Apple and the business environment in which it is currently operating can be found in the beginning of the look-ahead.

In fiscal 2010, Apple changed from subscription accounting of iPhone (and the less important Apple TV) sales that required revenues and costs to be spread over each delivered item's estimated two-year economic life.  The company now, in compliance with the latest standards issued by the Financial Accounting Standards Board, recognizes "substantially all" revenue and costs when a product is sold to a consumer.  Apple has restated earlier results to conform to current accounting principles. 

Please click here to see a full-sized, normalized depiction of the actual results for the just-concluded quarter, as well as the restated 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 $13.5 billion far surpassed the high end of $11.0 billion to $11.4 billion guidance offered by Apple when it announced the previous quarter's results.  The reported figure was 49 percent greater than Revenue of $9.1 billion in the March 2009 quarter.

Our Revenue target for the quarter was $11.7 billion, which Apple blew away by 15.4 percent.

Apple sold 2.94 million desktop and portable Macintosh computers, up 33 percent from 2.22 million in the March 2009 quarter.  Mac sales increased at a faster pace than the industry, indicating a market share expansion.  Revenue per computer fell a modest 4.4 percent, from $1336 to $1278.  The number of units sold was slightly above expectations, but the average unit price seems to have been significantly better.

Mac Revenue of $3.76 billion was 27.9 percent of total Revenue.

The number of iPhones sold increased 131 percent to 8.75 million, a record high and quite a bit better than some estimatesiPhones and related products were responsible for Revenue of $5.45 billion, 40.3 percent of total Revenue in the quarter. 

iPod sales decreased 1 percent, less than expected, from 11.0 million to 10.9 million units.  However, strong iPod Touch sales led to an increase in the average selling price of the iPod product line.  As a result, iPod Revenue overcame the decline in unit sales and grew 11.8 percent, from $1.67 billion to $1.86 billion.

In addition to Mac, iPhone, and iPod sales, Apple had another $2.4 billion of Revenue from "Other Music Related Products and Services" (e.g., the iTunes Store), "Peripherals and Other Hardware," and "Software, Service and Other Sales."

All Apple operating segments experienced substantial Revenue growth, relative to the year-earlier quarter.  Revenue growth was greatest in the Asia-Pacific region, up 184 percent.  Countries other than U.S. accounted for 58 percent of total Revenue.

The Cost of Goods Sold was 58.3 percent of Revenue in the latest quarter, which translates into a Gross Margin of 41.7 percent.  The margin expanded a hefty (and lucrative) 180 basis points from 39.9 percent in the March 2009 quarter. 

The Gross Margin also exceeded the company's 39 percent guidance.  Our target was 40 percent, which still turned out to be much too low.

Apple, during the conference call, attributed the better-than-expected Gross Margin to: "first, a stronger product mix including more iPhones and accessories. Second, lower cost. Third, fixed cost leverage from the higher than expected revenue in the March quarter as well as a few other small items."

Research and Development and Sales, General, and Administrative expenses summed to $1.646 billion, almost exactly matching the company's $1.64 billion guidance for Operating Expenses.  The R&D expense of $426 million was 33.5 percent more than last year, but it fell from 3.5 percent of Revenue to 3.2 percent  (Ed. note: isn't the bang Apple gets for each R&D buck spent spectacular?).  Apple spent 6.5 percent more on R&D than the $400 million we had estimated, perhaps due to the iPad.

The SG&A expense of $1.22 billion was 1.6 percent less than our $1.24 billion estimate.  Although 24 percent more than in March 2009, SG&A as a percentage of Revenue fell from 10.8 percent to 9.0 percent.

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

Subtracting the various operating expenses from Revenue yields Operating Income of $3.98 billion, which was 71 percent more than in the year-earlier quarter.   Far more robust Revenue growth and the much more lucrative Gross Margin pushed Operating Income 31 percent above our $3.04 billion target.

Net interest and other non-operating items produced income of $50 million, which was down from $63 million last year. The latest figure was $20 million more than we expected.

Pretax income of $4.03 billion zoomed past our $3.07 billion estimate by 31 percent.

The 23.7-percent effective income tax rate was significantly less burdensome than the previous March's 32.1-percent rate.  We had assumed the tax rate would match the company's 29-percent guidance.  Apple now believe the tax rate for the year will be about 27 percent because a greater proportion of sales will take place overseas, where the company pay less taxes.

If the tax rate in the March quarter had been the now-expected 27 percent, Apple's earnings would have come down about $0.14 per share.

Bottom-line Net Income rose by 90 percent to $3.07 billion ($3.33 per diluted share), compared to (restated) earnings in the year-earlier quarter of $1.62 billion ($1.79 per share).  Our estimate was $2.18 billion ($2.36 per share).

In summary, Apple had another exceptional quarter.  The top and bottom lines of the Income Statement grew at year-on-year rates rarely seen at a large company.   Apple sold more than twice as many iPhones in the quarter and 33 percent more Macs, while expanding margins. 

It's not usual for Apple's Revenue in a March quarter to be nearly 25 percent less than Revenue in the previous holiday-fueled December quarter.  However, Revenue only slipped 14 percent in the latest period.

Although our estimates were more optimistic than the company's guidance, the actual figures still laid waste to our projections.   Looking ahead, the June quarter will be the first one to include iPad sales.  Apple said it is "extremely pleased with sales results" during the first few week's of iPad availability.

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

1 comment:

  1. I'm interested to see what the numbers will be like once they report on the sales of the iPad. Anyone want to take a guess as to whether the iPad will take sales away from other products?