Cracking the Oppenheimer Code, Part 3 of 5: Progress, er, OpEx Marches On

Warning: This article may seem especially boring, even by fundamentals standards.

As we move on to Part 3 of the now-renamed “Cracking the Oppenheimer Code” (Mr. Oppenheimer being Apple’s CFO, and a CFO who plays the guidance game very close to the vest), one might wonder why I decided to go “out of order” and address OpEx (operating expenses) even though it’s farther down the consolidated statements of operations, and (of course) a lesser number than COGS to boot.

Honestly, GM seems a little “easier” to puzzle through, so we can save it for later. Also, blogger’s initiative!

Besides, OpEx does seem to be a bit of a mystery at first glance.

Back when Apple’s quarterly results seemed in fairly consistent, fabulous long-term uptrend (at least as measured against reality and the growth rates of similarly-sized, similar-type tech companies), Apple’s OpEx efficiency increased at a steady pace. Even though one might expect nothing less from a Think Different, Outperform Different company such as Apple (at the time), it was still quite something to behold. Horace Dediu of Asymco documented several quarters of Apple’s OpEx efficiency through mid-2010 here.

But that’s not what we’re seeing now. For this quarter, Apple’s projecting an OpEx range of $3.85-3.95B – which means that Apple is highly likely to set an all-time high in OpEx despite projecting top-end revenues of $35.5B, or about 35% less than the $54.5B fiscal Q1 2013. Or, if you prefer a non-holiday quarter compare, 19% less than fiscal Q2 2013. So either way, it seems like Apple’s vaunted OpEx efficiency is reversing itself, because even with the most optimistic revenue and OpEx projections, Oppenheimer’s guiding to OpEx being almost 11% of revenues – despite Apple not having been above the 10% level in 10 quarters.

opex1

Oppenheimer, by the way, generally gives pretty accurate OpEx guidance. And while he used to be very conservative on revenue guidance in the past…well, recent history suggests that may have changed. For Apple to “stay below” the 10% OpEx/revenues level, it’d have to beat guidance by a full $3B – which it hasn’t done since fiscal Q2 2012. So that might be asking a bit much, especially in light of Oppenheimer’s recently revised guidance methodology, which shows early signs of greatly reducing upside surprise past the top of the guided revenue range.

Is this some sign Apple’s losing its efficient ways? Is there some subcategory of OpEx that might be responsible for the “spike” just this quarter? It’d be nice to get some kind of handle on this “trend reversal”, because OpEx is the second-biggest determinant of net income, and almost 75% of every OpEx dollar Apple can save flows to the bottom line.

I’ve given this a little thought, and after running the numbers a few different ways and contemplating the general subcategories of OpEx (SG&A and stock-based compensation, specifically), my theory is that the “truth” is really quite simple.

Basically, Apple doesn’t “tune” its expenditures depending on its fundamentals at any given point in time.

Put another way: Apple just keeps building for the future. (Yes, I get that OpEx isn’t CapEx, but it’s conceptually similar, sorta.)

opex3

Yes, this is probably quite the oversimplification, but support for my theory is best reflected in Apple’s R&D expenses, which I project will just about double this quarter from the $575M spent in fiscal Q1 2011. Yes, SG&A accounts for most of the OpEx, but since October 2010, its rate of growth has been greatly outpaced by R&D.

“Hey, did you forget about stock-based compensation expense?” Fair question, but I was ready for you. Thanks to the awesome, free, and I presume accurate transcription services of Morningstar.com, stock-based compensation expense (SBCE) included within OpEx, which Oppenheimer talks about in the CC but which doesn’t appear in the quarterly report, is easy to find. In brief: It just looks too small to meaningfully affect the overall OpEx trend, which appears to be roughly a $700M/yr. increase (at present) while SBCE stair-steps up maybe $100-$125M a year. In other words, SBCE at present estimated trend will likely account for less than 20% of OpEx growth.

opex2

Are there any takeaways from this? Nothing as far as new products that I can tell – it’s just the continuation of a trend that I’ve tracked back 10 quarters. Apple certainly seems to be doing things the right way to ensure its own well-being as a sustainable company – by not being concerned with short-term financial results. Apple is a pragmatic company, with a tradition of forging into product categories when the technology is ready, so it stands to reason that Apple won’t increase things like R&D spending, employee incentives aka SBCE, and overhead without expectation of payback in the form of growth somewhere down the road.

Time will tell.

Advertisements

3 thoughts on “Cracking the Oppenheimer Code, Part 3 of 5: Progress, er, OpEx Marches On

  1. Increase probably to marketing and promotion expenses for new products to be launched in the quarter. Such expenses are generally period based.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s