Putting capital to work

Apple’s Cash and Marketable Securities has been the focus of attention for many year now. It has now reached $81.6 billion equivalent to a value of $86.8 per diluted share. Currently each share is worth about $393 making the enterprise value $306/share or 11 times last twelve month’s earnings.

The division of liquid cash and cash equivalent asset types is shown in the following chart.

The company added $5.4 billion to its cash reserves during the quarter and now keeps two thirds of that outside the US. Long-term securities (bonds mainly) are now also about two thirds of total. Both of these ratios have increased this year. Some of this shift may be explained by changes in the strategy employed by the CFO/treasurer, but there is another set of assets that has changed dramatically and may explain the change in cash allocation.

I’ve written about the PP&E assets and their dramatic increase, but the “Acquired intangible assets” have also had a huge increase in the last quarter ($2.3 billion). Much of that is attributed to the acquisition of Nortel’s patents.

Unlike cash, these assets can be considered an “investment” by the company. They are expected to (but may not) return value to shareholders in excess of the average cost of capital. Therefore, they demonstrate that some of Apple’s capital is being “put to work” rather than resting idle as many suggest. Apple is buying patents and companies and intellectual property. $12 billion worth so far.

Whether they will be a good investment, we cannot tell, but the allocation of capital to non-cash assets is already significant and has grown more quickly than cash. They have, in fact, more than doubled in a year and quadrupled in two.

  • Secular Investor

    “Acquired intangible assets” also probably includes the undisclosed amount paid to Nokia to settle the patent dispute.

    • Anonymous

      No, that was already being accounted for as a charge, they realized a small cash profit when the eventual royalty turned out to be less.

      An asset is by definition something that has transferable value, and their license with Nokia is almost certainly non-transferable.

    • Anonymous

      The Nokia settlement was not material, as Apple had already set aside enough funds; otherwise, Apple would have had to file a notice with the SEC, which it didn’t. These “acquired intangible assets” are clearly different.

  • Anonymous

    Some of this shift may be explained by changes in the strategy employed by the CFO/treasurer, but there is another set of assets that has changed dramatically and may explain the change in cash allocation.

    Horace, I’m not sure what your point is here, are you suggesting that the switch to longer maturities is motivated somehow by the intention to make further large capital expenditures on plant and IP? Because if anything I would argue it suggests the opposite – if they’re intending imminent large investments it would make more sense to hold shorter term instruments. They could have maintained their cash and short term paper position last quarter by simply refraining from buying long term instruments.

    It seems more likely that this is purely down to a search for better returns.

    • It’s all hypothesis, but I am wondering if they drew cash from short term US accounts to pay for Nortel while cash flows outside the US were untouched and grew faster to begin with. That would explain the increase in offshore cash.

      As far as a split between long-term and short-term I don’t have an explanation other than the inaccessibility of offshore cash makes it more likely to be placed in long term securities.

      • Anonymous

        Did the proportion of overseas vs on-shore cash&equiv change? I have some vague recollection that it was around 2/3rds offshore last quarter too, but I can’t for the moment find the source for that so perhaps I’m misremembering.

        Anyway we also see a decrease in cash the previous quarter and that presumably wasn’t related to the Nortel purchase, and I can’t remember any other large US investment that quarter.

        I guess we’ll see the answer next quarter – if cash rebounds again then it was Nortel, if not then it’s strategic.

      • Anonymous

        I also have the vague recollection that offshore cash was about 2/3rds of the total.

        What puzzles me is if you had a choice, would you prefer to use US-funds or foreign-funds to purchase the Nortel assets? Intuitively, I would have guessed foreign-funds.

      • I found one reference from August suggesting that Apple held $47.6b offshore. At the time Apple had $76.2b. That would make it 62.5%

      • GJG

        I’d take a bet Horace that the purchase of patents from Nortel (a Canadian company) was made with off-shore assets.

      • Good point. I had forgotten Nortel is in Canada.

      • GJG

        Strikes me that everyone in the consortium (Microsoft, Sony, Ericsson, EMC, etc.) including RIM had lots of foreign earnings that they could use for that purchase.

      • Anonymous

        It makes sense to keep cash offshore. Most of Apple’s growth will be coming from abroad. Most of their asset heavy expenses are abroad. But most importantly, they have a smattering of stores abroad, compared to the US. Apple has a huge opportunity to build a ton of huge stores outside the US, because their visibility outside the US is extremely low.

      • Anonymous

        Whenever possible I’m sure that Apple uses off-shore cash rather than on-shore. It’s easy for them to spend on-shore money abroad, but the tax implications the other way around are horrible.

      • Rj

        Your graph seems to suggest that the split between long- and short-term could just be about arbitrary numbers; it looks like there is a preference to having about $5-10B in cash and around $25B in short-term investments, with the remainder going into long-term securities.

        There’s a bit of a pattern in cash and short-term holdings that almost looks seasonal (preferring to have more liquid assets available during major product launches or something)… are you analysing that variation?

        I’m a bit confused why you are suggesting that it’s interesting the balance between long- and short-term is changing when the level of short-term investment doesn’t look like it changes all that much. Their cash holding is more volatile but even that seems to be somewhat seasonal and you don’t seem to be discussing the balance between cash and short-term investments.

        It’s definitely interesting that the investment in patents and companies has been increasing at such a rate but I don’t see that relating to the first graph tremendously.

  • Billykunz

    Short and long term assets can be sold as fast as they are bought to raise cash. APPL is just trying to increase their rate of return in using them.

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  • What are the “goodwill” expenditures?

    • Typically Goodwill is the value of acquired companies beyond their book (tangible) value.

      • That’s fascinating that there’s a book value for the non-tangible value of acquisitions. Do these carry over or are the goodwill portions new acquisitions each quarter? With a brand as strong as Apple’s I would feel like their goodwill assests would depreciate quickly as the products, such as Siri, quickly become associated with Apple directly rather viewed as a great product that Apple purchased.

      • You might wish to read this to understand what Horace means:

      • The way I think it works is this: if Apple buys, say, Siri for $400 million, that company may only have assets worth a fraction of that, say $50 million. Apple would then account for the extra $350 million as Goodwill. It may reduce that value over time. The asset cannot be amortized but can be written off.

        This is how I see it, but I’m sure there is much more subtlety and complexity to Goodwill.

        (Large acquisitions like AOL/Time Warner were booked with huge Goodwill and it was all written off when the merger was determined by management to have failed)

  • Anonymous

    I wonder if some of the cash being accumulated is to bid on the upcoming broadcast spectrum auctions.

    • In which country?

      • US… sorry to be the ugly American…

      • The US is now about a quarter of the iPhone business and shrinking. I don’t think owning a piece of that spectrum would help with the core problem of serving 4 billion customers.

      • I wasn’t thinking about the world iPhone business. I was thinking more about the US smart phone market and the US TV market — both the telcos and the cablecos are ripe for disintermediation to improve the User Experience.

  • Anonymous

    What I would suspect you would find if there were forced to disclose it, is that Apple now owns pieces of certain facilities, including Sharp’s Kameyama LCD fab most likely. It appears Apple is making direct investments in LCD manufacturers (some of whom might eventually be OLED manufacturers as well) and these now pass some standard of materiality that Apple needs to account for “ownership” of their portion of the facilities on the balance sheet.

    I’m not feeling well enough to start digging through the FASB rules on this, but I’d imagine someone is sitting around very carefully making sure Apple will not get to the point it will need to include any of these facilities on the income statement, but has reached the stage where they qualify as asset and must be reported as such.

    This is speculation, but highly consistent with a lot of rumor. (Most especially, it is well known at this point that part of the Gen 8 Kameyama Sharp fab which was originally created for large-size LCD televisions is being repurposed for tablet displays, expected to be in iPad3. This in part might be due to Apple’s continued dissatisfaction with LG’s performance in iPad2, continued concerned about too close a relationship with litigation-foe Samsung, as well as the belief that Sharp is well positioned to build a “retina class” display in the 9.7″ size.)

  • Davel

    Sorry to be so dense, but is there a relation to cash and property and intangible assets?

    I am trying to understand why you included both in the same post.

    • No relation except that they are both part of the balance sheet on the asset side. If there is a decline in the growth of cash and an increase in the intangible assets, you can make a plausible case that Apple is putting “capital to work”.

      • Davel

        Thanks Horace

  • Sean Meyers

    They just bought 32 very interesting patents: I wonder what would the current value and potential market value of each.