It can be worthwhile to crawl through
Japan is growing faster than Greater China
For the past two years Japan’s revenue has grown faster than Greater China (China, Hong Kong and Taiwan). In fiscal 2012 Japan generated $10.6 billion in revenue, an increase of 94% year over year, while Greater China generated $22.5 billion for a 78% increase. In fiscal 2013 Japan increased its revenue by 27% to $13.5 billion while Greater China grew 13% to $25.4 billion. Note that the rest of the company grew revenue 7% year over year.
Japan was the only segment to increase its operating income year over year. Its operating income increased by 16% to $6.8 billion while every other segment saw theirs decline between 3% (U.S.) to 13% (China and Retail).
Note that Greater China had the iPhone 5, 5c and 5s all launch in fiscal 2013 and its revenue only increased 13% year over year. Management called out in the 10-K that part of Greater China’s and Japan’s growth in fiscal 2013 was due to an increase in iPhone channel inventory at the end of the year.
Retail sales grew slower than the rest of the company and its operating margin fell faster
Apple’s retail segment grew revenue 7% to $20.2 billion vs. the total’s company growth rate of 9%. Its operating income of $4 billion (19.9% of sales) was down 13% from last years $4.6 billion (24.5% of sales).
Revenue per store decreased from $51.5 million to $50.2 million, down 3% year over year while the number of visitors per store per week dropped 4% to 18,800. The average revenue per visitor stayed constant at $51 (not bad at all for each person who walks in a store).
The number of store employees only increased 1% year over year to 42,800 and the retail revenue per store employee was $473 thousand.
Gross margins were hit by multiple factors
Gross margins declined from 43.9% in fiscal 2012 to 37.6% in 2013. The company attributed the decline to:
- Introduction of new versions of existing products with higher cost structures and flat or reduced pricing
- A shift in sales mix to products with lower margins
- Introduction of iPad mini with gross margin significantly below the Company’s average product margins
- Higher expenses associated with changes to certain of the Company’s service policies and other warranty costs
- Price reductions on certain products, including iPad 2 and iPhone 4
- Unfavorable impact from foreign exchange fluctuations.
R&D spending grew faster than revenue growth for the first time in five years
Between fiscal 2009 to 2012 Apple’s R&D spending grew slower than revenue and its percent of revenue went from 3.4% in fiscal 2008 to 2.2% in fiscal 2012. In fiscal 2013 the company spent $4.5 billion and its percent of revenue crept up to 2.6%.
SG&A spending as percent of revenue seems to be flattening
In fiscal 2003 SG&A spending was $1.2 billion and almost 20% of the year’s $6.2 billion in revenue. Five years later spending had increased to $3.8 billion but as a percent of revenue it had fallen to 11.6%. It continued to fall until fiscal 2012 when it was 6.4% of revenue and was essentially the same in fiscal 2013 at 6.3% of revenue. It appears that there won’t be much if any operating margin leverage from SG&A spending unless revenue starts to increase in the low to mid teens.
Advertising spending has also contributed to operating margin growth
One small leverage item that has played out is the cost of advertising as a percent of revenue. In fiscal 2007 advertising spend of $467 million was 1.9% of revenue and it decreased to 0.64% in fiscal 2012 and 2013.
Operating cash flow increased $2.8 billion from last year
Operating cash flow increased 6% from 50.9 billion to $53.7 billion even though net income was down $4.7 billion year over year. Capital expenditures were essentially flat year over year at $8.3 billion but dividends at $10.6 billion were significantly higher than last years $2.5 billion.
U.S. cash decreased for the first time
U.S. cash decreased by about $3.2 billion to $35.5 billion after taking on $17 billion in debt and paying out $10.6 billion in dividends and spending $22.9 billion on stock buybacks. To support the yearly $11.5 billion in dividends and about $16 billion in stock buybacks Apple will have to take on more debt or significantly dip into its U.S. cash holdings.
Miscellaneous findings in the 10-K
- The weighted average interest rate earned on its cash and equivalents was 1.03% in fiscal 2012 and 2013
- The company’s tax rate has increased by 100 basis point in both fiscal 2012 and 2013 from the prior year
- Warranty accruals increased 130% year over year from $2.2 billion to just over $5 billion
- Apple plans to spend $11 billion in capital expenditures in fiscal 2013 which compares to $8.2 billion in fiscal 2013 and $8.3 billion in fiscal 2012. While it isn’t stated in the 10-K I believe a large portion of the increase could be for the new headquarters in Cupertino.
- The off balance sheet purchase obligations decreased from $21.1 billion in fiscal 2012 to $18.6 billion in fiscal 2012
- There are now 80,300 employees at the company, a 10% increase year over year with an additional 4,100 temps or contractors, up 24% year over year
- Machinery, equipment and internal use software assets increased from $16 billion to $21.2 billion, up 33% year over year after increasing from $7.1 billion in 2011. Apple is spending a lot of capital getting its vendors equipment to build its products.
- Other corporate expenses increased by 32% year over year from $5.9 billion to $7.7 billion
Valuation seems reasonable at about a 13x PE multiple
Apple’s shares seem to have settled into a mid-$520’s area as investors digest the most recent results and project what 2014 (fiscal and calendar) could look like.
With the shares trading at 13x on a fairly stable $40 in EPS growing at 5% to 10% organically combined with the share count decreasing about 4% on the current share buyback plan the stock doesn’t seem to have much downside with upside to $630 based on a PE multiple of 14x on EPS of $45.
Source: StockChart.com
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