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Apple OPEX: Never have so many owed so much to so few

Apple sales are growing faster than its operating expenses. Although all eyes are on gross margin, the company continues to run a tight ship in fixed costs (costs which do not vary with the output).

In terms of R&D, spending has dropped to 2.4% of sales, a level seen only once since 2005. Sales, General and Administrative costs also dropped to 7.7% of sales, a new record low.

The total operating expenses as a percent of sales stands at 10.2%. The following chart shows the trend.

Keep in mind that, in many ways, the leadership of Apple in both marketing and product development means are doing the job for all the knockoffs, copycats and ripoff artists in the industry. Including that fat chunk of the industry means that those few engineers and designers and marketers accomplish a feat of efficiency that boggles the mind. Thanks, I say.

  • Alexkhan2000

    You bring up a very good point with this article. Apple's net margin remained the same although the gross margins went down nearly 5%. Apple's net margin remained at 21%, which is still phenomenal for a hardware company. So if the bottom line didn't take a hit, why are the analysts and investors so focused on the gross margin? Isn't the bottom line along with revenue growth a more important factor than gross margins?

    Apple's spending on SGA and R&D seems surprisingly low for a company that has a reputation for innovation and marketing/advertising flair. But, I suppose, since the revenues are growing so fast, they can afford to keep the spending in check as a percent of the annual sales. It's really remarkable that Apple gets the mileage they do with so such low percentage spending compared to Microsoft and other tech companies.

    Remember when Sun had R&D spending in excess of 10% during their heydays of growth in the late-90's during the dot-com era? Along with the dot-com bust, the R&D spending and their SGA expenses are really what killed Sun when things slowed down. Also, all that R&D spending didn't produce the Sparc chips or software that generated any real revenue growth. I'm sure Jobs learned well from that Sun meltdown.

  • RobDK

    Spot on analysis (again!). Apple is effectively innovating for the whole IT/CE industries at a relatively low cost. All the other firms just need to wait 6-12 months and try to copy Apple!

  • CndnRschr

    I'd like to see them ramp up the R&D. The investment in infrastructure (such as the data center in the Carolinas) is also welcome. Apple is sucking the profits away from the competition and what better use for these than consolidation for the future? The big competitors are still Microsoft and Google. The former is investing in marketing and the latter is investing in research (e.g. Google car). Which company has a longer term vision?

    • Gandhi

      "The big competitors are still Microsoft and Google. The former is investing in marketing and the latter is investing in research (e.g. Google car). Which company has a longer term vision? "

      Except that both these competitors lack focus. They are throwing everything up on the wall and hoping something sticks

    • Marcos El Malo

      I would guess that it's actually hard to increase spending when your R&D is disciplined and focused and you intend to keep it that way. True, you might miss some opportunities by not casting a wide enough net, but if you look at MS's RD, the company as a whole is not taking advantage of the opportunities they are creating in their labs. And Google . . . from where I am standing, Google seems to be operating their R&D like a bunch of start ups, start ups lacking discipline because they already have the backing of Google to do whatever.

      However, I would point out that Apple is doing some very efficient strategic STEALTH R&D with their $50 billion cash on hand. If the most interesting R&D is being done in smaller companies and start ups, Apple is in a position to acquire both that R&D and the talent behind it. I think this is the main reason Apple is low profile in their acquisitions, whereas other companies tout acquisitions. Apple is using the pool of start ups and small companies as their labs (which costs them little or nothing), then swooping in to grab the developments that offer them the greatest opportunities.

      Google and MS are doing this as well, of course, but it remains to be seen how effective they are at it. Consider MS's acquisition of Danger, Inc and how that lead to the Kin debacle. (I can't think of any examples off hand of Google's acquisitions leading either to notable advances or failures, but that might tell you something right there.) In my view, neither MS or Google are disciplined or efficient in their acquisition strategies.

      If I'm wrong on this, people, please educate me! I realize that my opinions might be based on my own ignorance.

      • CndnRschr

        In the interview with Sculley (Cult of Mac), he mentioned that Jobs kept the Macintosh development team to 100 people because that was all the names he could remember. If a new member joined, somebody left. Still, that was ONE R&D project, albeit a gargantuan one.

        The problem with acquiring your R&D through acquisitions is one of culture. Microsoft bombed with Danger as they wanted the cloud technology, not the people. But without the people, you get stuck with the technology at that snapshot of time. Steve Jobs is certainly thinking 5 years or more out and acquisitions are likely to be strategic rather than tactical.

    • yet another steve

      They are ramping up R&D… R&D is real people and real dollars and is up about $100 M /qtr from a year ago. That's a lot to manage. It's just not growing as fast as sales. As SJ says, they don't let money burn a hole in their pocket.

      My guess is that they're increasing R&D at the limits of their ability to manage it. And another important point is that too much R&D can mean too much management burden and actually weaken a company. Similarly on a technical team more people means more need for formal planning coordination, more possibility for team members to be at odds, more meetings, more overhead. Too few bodies and a project may ship late. Too many can kill it altogether.

  • kevin

    Apple's R&D has been gradually growing per quarter since 3Q07, with a general pattern of increase ~10%, followed by maintain same. But over this last year, it's been up by 30-40m every quarter. Here are the numbers beginning with 183m (in 2Q07), to 208m, 207m, 246m, 273m, 292m, 298m, 315m, 319m, 341m, 358m, 398m, 426m, 464m, 494m.

    I think Apple's philosophy is that there are only so many really top-tier people to add per quarter. If you expand too quickly, you wind up adding too many mid-tier people. Same for R&D projects, only some percentage are the best things to work on; go too low down the list, and you wind up with less return on investment, and less rewarding work.

    • Marcos El Malo

      One way of getting top tier people is the acquire their companies.

  • Marcos El Malo

    Good point! Also see my comment above re: stealth R&D via acquisitions. Apple, imho, has a $50 billion wad of cash to buy R&D anytime it wants it.

  • yet another steve

    Well put.

    From a financial viewpoint Apple has virtually unlimited R&D resources… the constraint is ability to find great people, focus them and manage the whole thing. When you're willing to buy $200M companies just for the technical talent… it's not about the money!

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