Inside Apple’s Financials
Here is the video from this transcript: YouTube
Most of you might be familiar with Apple. But I am pretty sure that most of you don’t have the time to go through their financials. So, I went through their annual reports and graphed some charts for you. Before taking a look, I laid out a visual representation of their business. Apple divides its business into the products and services divisions. I am sure you know about their iPhones, Macbooks, iPads and Apple Watches. These form part of their products division. Their Appstore, Apple Music and Apple Care form part of their services division.
Pretty simple business, right? They simply sell consumer electronics, and most of you might add the word overpriced to it. But I am going to go with the word premium instead. And no. I am not really a fan of Apple. I use an android phone and a windows OS. Premium is just the politically correct term to use in business.
Let’s take a look at their sales split across their products. The iPhone is the real driver of the business. Even if we add all the other categories together, we will still be short by more than 20 billion dollars to match iPhone Sales. But Wearables and Services are starting to form an important part of Apple.
In terms of proportion of sales, the Services business nearly doubled since 2014. And I think that Apple will start paying more attention to that category in the future.
Now, let’s look at sales split by geography. The Americas constitute the biggest portion of sales at over 100 billion dollars. And if you were wondering how Apple defines their geography, here it is. North and South Americas are bundled up. Europe includes India, the Middle East and Africa for some odd reason.
The percentages have been pretty stable over the last six years. I would have expected Greater China to constitute a bigger proportion over the years because Apple seemed to have devoted some resources there. But that just means the increase in revenues in the territories were relatively the same.
Now, on to Gross Margin. For those of you new to finance, gross margin is the gross profit divided by the net sales. And to get to gross profit, you simply subtract the cost of sales from the net sales. As expected, the Services division command a higher gross margin, sitting above 60%, while the products division sit around 32%. The increase in competition can be seen in the decline in the gross margin in the products category. Apple states that the decline is due to higher cost structures and unfavorable exchange rate. As for the Services division, the increase is attributed to the fixed cost structure of the division.
Operating expenses nearly doubled from 2014 levels. Research and development stand at 16 billion dollars for fiscal year 2019. Now, most fans of Apple believe that the company undertakes tremendous research to come up with new products.
But when we take a look at the research and development margin, it’s merely 6.2% in 2019. Can you believe that it was around only 3% back in 2014. Imagine if Apple ploughed more dollars on research and development. They might have introduced Android’s features in iPhones sooner.
Now, let’s look at their taxes. It is widely known that Apple stashes their cash overseas to avoid paying taxes on it. And Apple is pretty open about it. They say that their effective tax rate is lower than the federal rate because most of the earnings are generated in subsidiaries based in Ireland, where no US taxes are paid when these earnings are indefinitely reinvested outside the US.
Just to point out that its not really illegal to do that. It’s just a financial loophole that is being exploited. If anything, hats off to the lawyers who came up with that.
Alright, so after subtracting cost of sales, operating expenses and non operating expenses such as taxes and interest from net sales, net income sits around 55 billion dollars.
Net income margin is pretty stable, at around 21%.
Let’s look at their cash flow situation now. Cash from operating activities is simply net income adjusted for changes in working capital and non cash items such as depreciation. Investing activities refers buying or selling things like property, plant and equipment, other businesses and financial securities.
Apple loves to purchase marketable securities as a form of earnings reinvestment. More specifically, they invest in highly rated corporate debt marketable securities. These are simply the debt of publicly traded companies. Most financing activities revolve around issuing debt or shares or paying down debt or buying back shares.
Apple has stashed more than 200 billion dollars, most of which is overseas, to avoid paying taxes on it.
As we can see from the previous cash flow graph, financing activities has been amplified right after 2017. This is when the US Jobs Act was passed, which lowered the corporate tax rate to 21%, amongst other things. The law was an incentive for companies like Apple to repatriate profits from overseas.
Apple thought about it differently though. They tapped into the debt market to accelerate their share repurchase program.
As you can see, the share buyback was north of 70 billion dollars in 2018, more than double the number of 2017.
Although Apple’s stock price took a beating at the end of 2018 due to concerns about growth, the stock has more than doubled from its lowest point in 2018.
