20 July 2010

AAPL: Income Statement Analysis for the June 2010 Quarter

Apple (NASDAQ: AAPL) earned $3.51 per diluted share in fiscal 2010's third quarter, which ended on 26 June.  This EPS amount beat by 74 percent the $2.01 Apple made in the same quarter of 2009.

This post examines Apple's Income Statement for the latest quarter.  We did not issue "look-ahead" estimates because readers can spend their time more productively by following the well-researched projections of Apple experts such as Turley Muller and Andy Zaky.

The principal sources for this review were the earnings announcement, the accompanying data sheet, 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.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Apple Inc. has been recognized by Fortune as the world's most admired company for the last three years.  It is known for elegant product design, innovation, customer loyalty, secrecy, and the cult-like status afforded CEO (and savior) Steve Jobs.

It sells Macintosh® desktop and laptop computers, iPhone™ portable devices, iPad tablet computers, iPod® music and video players, operating system software (including OS X and iOS), software applications and Apps, digital entertainment, and various accessories.

The iPad launched on 3 April 2010, so the June quarter was the first to include sales of this widely anticipated item.

Apple's products are sold online and through the company's chic retail stores.  Digital content is made available through the iTunes Store®, as well as iPhone and iPad Apps stores.

For fiscal 2009, which ended last September, Apple earned $8.2 billion on sales of $42.9 billion.  The comparable figures for fiscal 2008 were earnings of $6.1 billion and sales of $37.5 billion.

A soaring stock price has elevated Apple's market capitalization over $230 billion, making Apple the second-most valuable U.S. company.

In the first quarter of fiscal 2010, Apple revised how it accounts for sales of the iPhone (and the less important Apple TV).  This change, which complies with the latest standards issued by the Financial Accounting Standards Board, enables Apple to recognize "substantially all" iPhone and Apple TV Revenue in the period that sales to consumers took place.  Apple had been required to recognize Revenue from these products over each product's two-year estimated economic life.  The "subscription accounting" method resulted in substantial amounts of deferred Revenue and costs. Apple, when it made the change, 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.

As has often been the case recently, Apple's Revenue of $15.7 billion far surpassed the high end of Apple's previous $13.0 billion to $13.4 billion guidance.  The newly reported figure, a record high amount for Apple, was 61 percent greater than Revenue of $9.7 billion in the June 2009 quarter.

The following table lists Apple's Revenue by product category.  More Macs were sold than in any previous quarter, and the rate of growth was faster than the global market for desktop and portable personal computers.  The iPod average selling price expanded even though unit sales were down because the product mix tilted toward the more-expensive iPod Touch.

3Q-20103Q-2009% Change

Units (m)3.4722.60333.4%

ASP ($)$1267$1289-1.7%

Revenue ($B)$4.399$3.35431.2%

Units (m)3.270--

ASP ($)$662--

Revenue ($B)$2.166--

Units (m)8.3985.20861.3%

ASP ($)$635$5888.0%

Revenue ($B)$5.334$3.06074.3%

Units (m)9.40610.215-7.9%

ASP ($)$164$14612.3%

Revenue ($B)$1.545$1.4923.6%
Other *

Revenue ($B)$2.256$1.82823.4%

TotalRevenue ($B)$15.700$9.73461.3%
* Other = "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 torrid Revenue growth. 

Revenue ($B)3Q-20103Q-2009% Change
Asia Pacific$1.825$0.703160%

The Cost of Goods Sold was 60.9 percent of Revenue in the latest quarter, which translates into a Gross Margin of 39.1 percent.  The margin contracted a hefty 180 basis points from 40.9 percent in the June 2009 quarter. 

Although down, the Gross Margin still far exceeded the company's 36 percent guidance (made during April's conference call).  Apple now says that the Gross Margin wasn't negatively affected as much as they expected by new iPad sales, a stronger US dollar, a portable Mac transition, the beginning of the education buying season, and the iPhone 4 transition.  The Gross Margin also benefited in June from "unanticipated favorable adjustments" and "leverage on the higher than expected revenue."

Research and Development and Sales, General, and Administrative expenses in the latest quarter summed to $1.902 billion, a modest 3.9 percent higher than the company's $1.83 billion guidance for these Operating Expenses.  R&D fell from 3.5 to 3.0 percent of Revenue, and SG&A dropped from 10.4 percent of Revenue to 9.2 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 $4.234 billion, which was 61 percent more than in the year-earlier quarter.  

Net interest and other non-operating items produced income of $58 million, which was almost the same at last year's $60 million last year.

The 24.2-percent effective income tax rate was significantly less burdensome than the previous June's 32.1-percent rate.  The company's guidance was for the rate to equal 27 percent.  Apple says that the lower rate was due to a greater proportion of earnings realized overseas.

Had the tax rate matched the company's guidance, earnings would have been about $0.13 per share lower.

Bottom-line Net Income rose by 78 percent to $3.253 billion ($3.51 per diluted share), compared to (restated) earnings in the year-earlier quarter of $1.828 billion ($2.01 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.  The company sold 33 percent more Macs and 61 percent more iPhones.  A higher number of Macs were sold than in any previous quarter, and the rate of growth was faster than the global market for desktop and portable personal computers.  The introduction of the iPad brought in Revenue of nearly $2.2 billion in its first quarter, and iPad sales are likely to grow because the tablet will become available in a greater number of countries.  The iPod average selling price expanded even though unit sales were lower because the product mix tilted toward the more-expensive iPod Touch.  While the Gross Margin contracted somewhat, it remained higher than had been expected three months prior.  Apple's earnings also benefited from a falling tax rate, as international sales outpaced those in the U.S.

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

No comments:

Post a Comment