Inside The Apple Money Machine

I've been poring over Apple's fourth quarter earnings call transcript at Seeking Alpha, and I found this question and answer sequence interesting:

Katy Huberty - Morgan Stanley
Thank you. Europe out grew the U.S. now for four quarters in a row. Is that sustainable or are there some currency factors that are showing up in the numbers?

Timothy D. Cook: Europe did have excellent growth. In fact, year over year, we were up 37% in revenue and 47% in units, as you combine the retail stores with the channel results.In terms of Mac units, this is over four times the IDC projected gain for Western Europe, and so we are thrilled with the result. Europe did not have the typical lull in August that we have seen. The iMac announcement and then followed by the iPod announcement early September was enough to overcompensate for that.We factored our view of the future into the guidance that Peter provided earlier.

Katy Huberty - Morgan Stanley: And then just quickly, Peter, are there any nuances that will show up in the model as non-U.S. revenues become a larger percentage of the business, as it relates to either the margin profile or tax rate over time?

Peter Oppenheimer: Well, I’m not sure how to really answer the first part of your question, but in terms of the second part, generally for most U.S. companies, growth in foreign earnings is a benefit to your taxes, your U.S. tax rate.

The US dollar has been weakening against the Euro for over a year now, and that combined with 14% to 17% European VAT taxes have resulted in iPhone prices in Europe that are 40% to 60% higher than they are in the US, when converted into dollars. Combine that with the higher-then-US European sales growth and the reduction in US tax rates due to foreign income, and suddenly, I those forces driving Apple's 17% net income rate become a lot more clear.

I also found a couple more interesting numbers in the report down in the little-noticed categories of Peripherals and other Hardware and Software sales.

Peripheral sales were about $20 million higher than I had forecast, while Software sales were more than $100 million greater. Those two little-noticed categories contributed more than $2.75 billion in revenue in Apple's fiscal year 2007. Given that total iPhone sales are so far less than a quarter of that total, it's a category that perhaps deserves a bit more notice.

One final note: In these new days of subscription accounting, Apple investors should be tracking Apple's balance sheet quarter to quarter. At the end of June, Apple's assets were valued at $21.6 billion, with $13.8 billion in cash and short-term investments. As of the end of September, those numbers had swelled to $25.3 billion in assets with $15.4 billion in cash.

Said another way, Apple is growing its assets at a rate of just under 6% a month. That's an annual growth rate of 92% a year. And with a cash machine like that, it's no wonder the stock price continues to go up.

Full disclosure: the author owns Apple stock.

Comments

[drianross:]

I am from Germany and started value investing with rule number one. Now I read a much about value investing - Graham, Buffet, Lynch, Greenblatt and others. I calculated Apple and studied the annual reports. Over the last 9 years equity-, EPS-, sales growth have been far above 10 %. ROIC has been the last 5 years 12,3% on average and last year 25,3%. Only cash flow was last year negative. The 2 years before far above 10%. It is true Apple is starting and that is why you have not all numbers great. The equity growth low-rated would be 25%-30% the next years. The margin of safety would be therefore between 250-300 USD. So my conclusion is that Apple is not overpriced and you have to start with Apple before it is too expensive (value investing!!!).

2007 Oct 25 02:56 AM

[King Kang:]

Products are only part of what determines a company's value, the other part is the people you have running that company. www.newsvisual.com/new...

2007 Oct 25 04:46 PM