Apple Quarterly Earnings Analysis: By the Numbers

Apple Inc Head Office Campus, Infinite Loop, Cupertino, Californias, USA
Ian G. Dagnall/Alamy
Apple (AAPL) just reported its preliminary financial for the quarter that ended Sept. 30, results based on which we provide a unique corporate earnings release based analysis of its performance. Our analysis focuses on the company's performance for the same quarterly period on a year-on-year basis (unless stated otherwise).This earnings release follows the earnings announcements from the following peers of Apple: Intel (INTC), Google (GOOG) and SanDisk (SNDK).

  • Summary numbers: Revenues of $42.123 billion, Net Earnings of $8.467 billion and EPS of $1.42. Performance focus more on top-line than bottom-line: same period year-on-year change of revenue of 12.75% vs. change in earnings of 12.71%.
  • Gross margins now 38.01% from 40.90% compared to the same period last year, EBITDA margins now 26.51% from 30.62%
  • Ability to declare a higher earnings number? Year-on-year change in Operating Cash Flow of 42.20% better than change in earnings.
  • Earnings growth from operating margin improvements as well as from unusual items

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

Revenue Growth (Qtr YOY)4.265.304.046.5012.75
Earnings Growth (Qtr YOY)-8.65-0.057.0812.2912.71
Net Margin20.1122.7722.4520.6520.10
Return on Equity24.3441.3032.7325.7129.14
Return on Assets14.7724.2018.9714.4714.91

Revenue Growth Versus Earnings Growth

Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line i.e. Earnings or Net Income. Investors should look at revenue growth to understand a company's ability to grow its market share, and earnings growth to look at the company's ability to generate returns. Comparing revenue growth to earnings growth helps understand a couple of items: (1) A company's focus on gaining market share vs. generating profits and (2) How additive or dilutive the revenue performance has been to earnings.

Apple's year-on-year change in top line compared to the same period last year of 12.75% is better than its change in earnings which was 12.71% -- suggesting perhaps that the company's focus is on the top-line at the expense of bottom-line earnings. However, this change in top line is better than average among the declared results thus far in its peer group -- pointing to some likely market share gains and helps to look past the weaker earnings performance this period. Also, for comparison purposes, revenues changed by 12.27% and earnings by 9.28% compared to the immediate last quarter.

Earnings Growth Analysis

The company's earnings have gone up year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations - gross and ebitda margins are currently at 38.01% and 26.51% respectively and 40.90% and 30.62% for the same period last year. For comparison, gross margins were 44.54% and EBITDA margins 32.67% in the immediate last quarter.
Gross Margin Trend

Companies sometimes tradeoff for improvements in revenues and margins by extending friendlier terms to customers and vendors. One quick way to check against such activity is to compare the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is quite possible that the company's performance is a result of truly delivering in the marketplace and not simply a prop up using the balance sheet.

The company's decline in gross margins is offset by some improvements on the balance sheet side - working capital management shows progress. The company's working capital days have gone down to 28.98 from 74.93 for the same period last year and suggests that the gross margin decline is not altogether bad.

Operating Cash Flow Growth Versus Earnings Growth

Companies often post earnings numbers that are influenced by non-cash activities. One way to gauge the quality of the declared earnings number is to judge the deviation in the growth in earnings from the growth in operating cash flows. In general, an earnings growth rate that is higher compared to the operating cash flow growth implies a higher proportion of non-operating and even one-time activities - such activities are typically not sustainable over long periods.

Apple's year-on-year change in Operating Cash Flow of 42.20% is better than its change in earnings, suggesting that the company might have been able to declare a higher earnings number. In addition, this change in Operating Cash Flow is better than average among the declared results thus far in its peer group.
Unusual Items

The company's earnings growth has also been influenced by the following factors: (1) Improvements in EBIT margins from 25.85% to 26.51% and (2) unusual items. The company's pretax margins are now 27.23% compared to 27.15% for the same period last year.

EPSGrowth Versus Earnings Growth

Apple's year-on-year change in Earnings per Share (EPS) of 20.34% is better than its change in earnings of 12.71%. However, this change in earnings is better than the peer average among the declared results thus far in its peer group suggesting that the company is gaining more ground in generating profits in this group.

Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
Revenue Growth (Qtr YOY)4.265.304.046.5012.75
Peer Average Revenue Growth (Qtr YOY)5.098.697.329.329.53
Earnings Growth (Qtr YOY)-8.65-0.057.0812.2912.71
Peer Average Earnings Growth (Qtr YOY)17.5311.338.4424.476.95
Operating Cash Flow9908.0022305.0013473.009846.0014089.00
Peer Average Operating Cash Flow5407.005638.003946.005540.005994.00
Operating Cash Flow Growth (Qtr YOY)-15.252.417.5814.0232.63
Peer Average Operating Cash Flow Growth (Qtr YOY)12.956.612.6619.4210.71
Gross Margin40.9041.6643.6144.5438.01
Peer Average Gross Margin60.0159.6263.4161.7661.88
EBITDA Margin30.6234.0234.0532.6726.51
Peer Average EBITDA Margin34.3135.5835.2133.8132.11
Net Margin20.1122.7722.4520.6520.10
Peer Average Net Margin19.9919.8020.1220.4319.12
Working Capital Days74.9344.5553.8859.5228.98
Peer Average Working Capital Days142.46140.50154.24128.97110.71
Peer Average EPS1.181.761.401.211.26
EPS Growth (Qtr YOY)-4.734.9915.1719.9520.34
Peer Average EPS Growth (Qtr YOY)16.9410.648.2427.903.80
Return on Equity24.3441.3032.7325.7129.14
Peer Average Return on Equity18.7419.1915.8217.2418.88
Return on Assets14.7724.2018.9714.4714.91
Peer Average Return on Assets12.6613.2111.5211.9512.16

Company Profile

Apple, Inc. designs, manufactures, and markets mobile communication and media devices, personal computers, portable digital music players, and sells a variety of related software, services, peripherals, networking solutions, and third-party digital content and applications. Its products and services include iPhone, iPad, iPod, Mac, iPod, Apple TV, a portfolio of consumer and professional software applications, the iOS and OS X operating systems, iCloud, and accessories, service and support offerings. The company also sells and delivers digital content and applications through the iTunes Store, App Store, iBooks Store, and Mac App Store. It sells its products worldwide through its retail stores, online stores, and direct sales force and third-party cellular network carriers, wholesalers, retailers, and value-added resellers to the consumer and also sells third-party iPhone, iPad, Mac and iPod compatible products, including application software, and accessories, through its online and retail stores. The company was founded by Steven Paul Jobs, Steve Wozniak and Ronald Gerald Wayne on April 1, 1976 and is headquartered in Cupertino, California.

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