The Oppenheimer Code, Fiscal Q1 2014, Part 3: Taking OpEx to Another Level (and Just Staying There for the Entire Fiscal Year?)

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NOTE:  In case you’d like to refer back, click the following links for Part 1 and Part 2 of the current, fiscal Q1 2014 edition of my Oppenheimer Code home gamer earnings preview series.

My Oppenheimer Code posts for the prior two fiscal quarters are now collected in the Earnings Previews + Archive section.

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I’m more interested in Oppenheimer’s fiscal Q2 2014 OpEx guidance than I am in the December quarter number, for reasons I’ll get into a little later.  But first, a slight detour, which isn’t as much of a digression as you may think. 😛

As I started writing this post, I had a few assumptions that a check of actual data quickly challenged.  I was originally going to point to OpEx usually being a very predictable quantity; write that Oppenheimer is generally pretty accurate when it comes to OpEx guidance; and posit that it’s a fairly “safe bet” (note the quotes) to just pick a number within the OpEx guidance range and move on.

But then I realized that’s not 100% accurate.

Here’s Oppenheimer’s OpEx guidance range vs. actual for fiscal 2013:

Q1: Point guidance – $4.05B; actual $3.85B – guidance $200M / 5.2% higher than actual

Q2: $3.8-3.9B; actual $3.791B – guidance $9M / 0.2% higher than actual (based on lowest point in the range)

Q3: $3.85-3.95B; actual $3.823B – guidance $27M / 0.7% higher than actual (based on lowest point in the range)

Q4: $3.9-3.95B; actual $3.841B – guidance $59M / 1.5% higher than actual (based on lowest point in the range)

Two quick thoughts on this.  First, based on this admittedly small set of numbers, Oppenheimer is quite accurate with OpEx guidance, particularly since the switch to range guidance.  I don’t think it’s too far afield to expect Apple to guide within 2% of actual OpEx (whether by design or not) until we see otherwise.  That’s all kinds of valuable for home gamer Apple-watcher purposes, and I daresay quite adequate for more dedicated/professional analysts.  Second, Oppenheimer is consistently conservative with OpEx guidance, which is to say he’s guided higher than actual for all of fiscal 2013.  I’m starting to wonder if estimating OpEx at the low end of management guidance will yield better home game results.

Oh, and another thing – noticing a pattern?  Check out what happens when all of the actual OpEx data for fiscal 2013 is visualized:

aapl-opex-q114-edition

Ladies and gentlemen, the escalator’s out of order – you’ll need to use the stairs.  (I’ll be here all week.)

Yep, for fiscal 2013, quarterly revenue varied by as much as $19 billion – while quarterly OpEx range never varied more than $59 million¹

That is just ridiculous for a company as dynamic as Apple.  And – don’t mind the potential annoying effects of the boost to my ego – my tinfoil theory of planned OpEx expenditures (see above link) is looking a little less “out there” with each passing quarter.

After looking at the chart, all I can say is, bravo to Oppenheimer, Maestri and company.  I haven’t the slightest clue what you’re doing, but that is some amazingly disciplined expense management going on there, probably brimming with strategic purpose (whatever it may be).  I don’t really track the financials of other, say, S&P 500 companies, but I wouldn’t be surprised if this is yet another unique Apple innovation – albeit from a highly unexpected place.

And you all thought OpEx was boring. 😉  Not for Apple Inc., and not lately, anyway!

Returning to the point about March quarter guidance – where to next?  As you know – I have a guess. ² 😀  I could always be wrong, but it sure seems to me that a clear pattern is forming.

I’ll wrap up with a quick read of a new chart that won’t be updated very often – OpEx as % of revenue per year³

aapl-opex-fiscal-year-basis-thrufiscal2013

That’s right, Apple’s annual OpEx efficiency (measured by % of revenue) decreased for the first time since at least fiscal 2007.  Why?  Generally speaking, higher R&D spending was to “blame” for the “reversal”.

R&D expense (which includes stock-based compensation –  “share-based compensation” in Apple-speak) increased 32% YOY in fiscal 2013 (from $3.381B to $4.475B).  It’s actually a slower rate of growth compared to 2012 (which was about 39%), but Apple didn’t have the outpacing revenue growth rate that it formerly had, which previously served to “mask” the substantial spending increases.  Interestingly, SG&A expense (which also includes SBCE) was essentially flat from fiscal 2012 to 2013.  SBCE attributed to R&D expense increased $249 million in fiscal 2013; while it’s obviously a significant driver of the R&D spending increase, it wasn’t the primary cause (which is as it should be, if you ask me).

As we already know, 2013 was a major transition year for Apple.  No bad thing, pain to AAPL longs notwithstanding – the best companies always make the adjustments they want on their own terms, and from positions of strength, whenever possible.  And it sure looks like the principal reason for Apple’s “lagging” OpEx efficiency was none other than good old-fashioned R&D investment.

You have heard about those new product category/other great stuff-type promises made by Tim Cook for 2014, haven’t you?

Next up:  An updated look on Apple’s gross margin.

1 That’s a maximum OpEx differential of less than a quarter of that for fiscal 2012 ($277 million), which was already a narrow range.

2 And based on that guess – OpEx just slightly below the December quarter’s, very likely <$100M less than fiscal Q1 2014 actual (though guidance may indicate otherwise).

3 It may not be particularly illuminating – but there may not be much else to go on if Apple continues along its operating expense scheduling the way it has.  I tend to check back on OpEx each quarter anyway, and there’s always all the other AAPL watchers out there (from WS analysts to home gamers) to cover the many topics, metrics, and angles I don’t. (And yes, I’m using 2007-2009 numbers from Apple’s revenue recognition change in 2010.)

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