Apple has always been a courageous yet conservative company since the days of Steve Jobs. Key analysts predict the company’s cash reserve to exceed $250 billion dollars when it reports its earnings today.
It was Steve Jobs who famously quipped:
People think focus means saying yes to the thing you’ve got to focus on. But that’s not what it means at all. It means saying no to the hundred other good ideas that there are. You have to pick carefully.
I’m actually as proud of the things we haven’t done as the things I have done. Innovation is saying no to 1000 things.
Mantra of Saying No: How Apple Manages its Assets
This deep philosophy around saying no is clearly reflected in how the company has managed its assets and capital allocation over the years. Most of Apple’s growth over the past decade was organic. Acquisitions have been very strategic with the intent to bolster its innovative capabilities as opposed to buying companies just to increase revenues.
Ten years ago, in 2007, Apple was experiencing growth with the sales of iPod. In fact Sales of iPod in 2007 were close to 51 million units and iPhone sales were merely 1.3 million units. The company had only 197 apple stores and a total of 21,600 employees. A lot has changed for the company in these ten years, but their discipline around managing growth has stayed intact.
Conservative with Cash
Unlike a lot of the new innovative companies such as TESLA who have seen dramatic cash burn rate in their attempts to grow, Apple was pretty conservative with its cash even in 2007. Although Cash reserves for the company only amounted to $15 billion dollars in 2007, (as opposed to the $250 bn today), it still accounted for 61% of the company’s total assets.
This large cash position will be a strategic asset as the company thinks through different growth opportunities.
Many analysts have complained tirelessly over the past few years that innovation is getting stifled at Apple, pointing out why Apple should explore growth via M&A opportunities.
Apple’s R&D Commitment
I think Apple is working very hard at innovation. In the last ten years, the global economy has gone through many cycles, and companies such as Apple have had to face challenging headwinds. The company has still persevered in growing its cash from operations as well as increased its spending on R&D.
In 2007, Apple’s R&D was 782 million, accounting for 3% of its net sales. Today that number is more than 10 billion dollars. In fact, R&D as a percentage of net sales increased from 3.3% in 2015-Q2 to 5% in 2016-Q2. The growth in the number of patents filed by the company over the last ten years is also staggering. With that said, the company still lags behind Alphabet, Amazon or Google’s R&D spend outlays as a percentage of their respective net sales.
Bottom line, for every dollar of your Apple product purchase, the company spends 5 cents in Research and development and banks a significant portion of the income into cash.
Too Big, Too Fast?
Some pundits claim that Apple is bloated. The numbers suggest otherwise. Although the company has grown its headcount by more than five times in the last ten years, this growth has translated itself into healthy profits. In 2007 net sales per full-time employee was $1.1 million. Today it has grown to more than $1.85 million.
In 2007 net sales per full-time employee was $1.1 million. Today it has grown to more than $1.85 million. Again showcases the operational excellence discipline that the company has been able to sustain.
In contrast, Microsoft’s 2016 revenue was $85B. With 120 thousand employees, Microsoft gets about $750k per employee. When you compare this metric to Google, the company had close to 57k employees with net sales of $90 billon in 2016, yielding close to $1.6 million per employee.
Apple is clearly prudent and efficient in how it manages its operations and scales with growth.
Apple missed out on opportunities to capitalize social media and its digital ad businesses. Apple has not directly monetized its signature iMessage platform for one. The argument that Apple is losing out in the new frontiers such as Mixed reality or autonomous driving is a myth in my opinion.
Facebook’s acquisition of Oculus for $2Bn has not added that much momentum to the company’s earnings.
Autonomous Vehicles are just getting started. The majority of the innovation in this space will perhaps center on the last mile, and Apple has already thrown its hat into the mix by recently signing up with California DMV and has begun testing.
This Cash Surplus is a Strategic Asset Moving Forward
Even if you assume the worst case scenario that Apple’s internal innovation and its ability to develop new product categories such as the iPhone is dead, the company still has enough firepower given its $250 billion of cash reserves to acquire growth if it chooses to.
Netflix’s market cap is about $67 billion whereas SNAP value is at $27 billion. If Apple wanted to get into the content or social media platforms, it could easily acquire any of these companies including Disney, valued at $182 billion.
Similarly, the company could position itself in the ride sharing or autonomous market through the acquisition of Didi Chuxing, valued at $50 Billion after its latest round of fundraising.
The ten-year anniversary iPhone, when launched will result in the massive upgrade cycle. Combine that with refreshed MacBook Pro and Mac platforms slated for next year, and you will think twice about doubting the company’s strategic advantage. On the software side, the revenue from its services is increasing dramatically.
Apple reports its Q2 earnings today. The company is projecting revenues between $51.5 and $53.5 billion for this quarter. It will be interesting to see how the iPhone 7 sales have played out and if the company has been able to grow at a higher rate when it comes to revenue from its services. Apple was able to increase the Services revenue by $1 billion dollars between 2015-Q2 and 2016-Q2 ($6 Bn vs. $5 Bn).
In 2016 Q2, Apple was able to sell 51 million iPhones, way lower than the 61 million units sold in 2015 second quarter. The question is whether this downward trend continues or will Apple turns things around with the release of the next-gen iPhone?
As an Apple fan, I still think that there is a lot more innovation to be showcased when it comes to iPhone. Prudent and disciplined approach combined with the ability to say NO to a thousand ideas has worked for the company for the last ten years.