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The role of capital [1]

At the end of 2011 Apple’s net property, plant and equipment (PP&E) was $7.8 billion. This reflects $12.34 billion gross PP&E net accumulated depreciation and amortization of $4.5 billion. The depreciation and amortization increased by a total of $533 million and the gross PP&E increased by only $572 million. I say “only” because in the previous quarter PP&E increased by $1.42 billion. If we assume that this growth is equivalent to capital expenditures for the quarter, it’s also a very small amount given the company’s stated intentions to spend $7.1 billion during the fiscal year.

The gap is illustrated in the following chart:

The blue bar in the 2012 year represents the company’s stated intentions (from the 10K). The Yellow bar in 2012 is what has been spent so far as measured by the change in reported asset values. Given that the company has been exceeding their targets lately, one should expect the yellow bar to reach as high as $8 billion after another three quarters.

Another view into this data is provided by the following chart.

The beige bars represent the quarterly change in asset value and the green bars are the depreciation expenses for the same quarter. This view also shows a significant slowing in spending.

In the past I showed that CapEx, especially spending on machinery, equipment and internal-use software correlates with iOS device production during the next quarter. It’s not a relationship that helps much in quarterly predictions due to the elastic nature of product transitions. There were quarters when spending and output were de-coupled, for example spending in March and June 09 quarters was far lower than one would expect for the 3GS launch quarters that followed.

We will have to keep an eye on the change in asset value to be reported for CQ1 to see how the spending ramps up during the year. At this time the company needs to spend at least $6.5 billion in three quarters or over $2 billion per quarter to meet its target for the fiscal year (ending October this year). We have to see whether and why Q1 (fiscal) was too low.

This discussion is also affected by the discussion on Apple’s other balance sheet item: cash and cash equivalents. The magnitude of its assets is staggering: $100 billion in cash, $7.8 billion in PP&E, $3.47 billion in acquired intangible assets (mainly patents), and $896 in Goodwill (acquisitions). With this much “capital” the company does not make use of any debt facilities.

In this regard Apple is also an apparent anomaly. As it gets subtracted out of indexes because it weighs too much or skews “reality” so Apple and its balance sheet is causing a warp in “time-space” of capital markets. The traditional relationship between financiers and operating companies assumed some form of symbiosis but as the credit crisis has shown some have not kept their part of the implied bargain.

So we have to ask yet another unsettling question: what is the value of capital markets when their products are commoditized by relatively unsophisticated CFOs?

Notes:

  1. This is the material accompanying the third case discussion at Asymconf. Participants are encouraged to read it at the material linked before the show.
  • deemery

    Horace, could you expand/explain/point me to more on this comment at the end of the article:
    The traditional relationship between financiers and operating companies assumed some form of symbiosis but as the credit crisis has shown some have not kept their part of the implied bargain.So we have to ask yet another unsettling question: what is the value of capital markets when their products are commoditized by relatively unsophisticated CFOs?

  • http://twitter.com/brookr brook riggio

    Yeah, but…what does it all mean?

  • claimchowder

    Horace, have you tried registering yourself for the Apple earnings calls? You may get to ask questions that clear up exactly the kind of information you are trying to derive here. You are certainly more sophisticated than the likes of Shaw Wu and Gene Munster, and with Apple being an asymmetric firm in many aspects, I would be surprised if they weren’t delighted to have you on the call.

    • http://www.asymco.com Horace Dediu

      I just made the request for info on how to participate. Let’s see what the response is.

  • gbonzo

    Apple sees the Dec-11 quarter as somewhat “extraordinary” in the sense that it was both an iPhone launch quarter and a holiday quarter. This was hinted in the earnings call. They do not expect strong growth (or any growth?) sequentially going into Mar-12 quarter, therefore the lower spending in the Dec-11 quarter.

    Seeing the numbers that you provide, it is easy to conclude that these give more substance to Cook´s statements about strong product pipeline this year. The iPhone 4 styled handset will probably be replaced by a different design that requires different machinery and equipment to manufacture.

  • Z Kariv

    Does buying other companies (Anobit) or patents registers different (qrtr wise) on this balance sheet?
    The  ongoing expantion of NC digital center and the up front investments in manufectoring–is it as you pay or a one lump sum?
    What were Apple’s traditional % in the 1st Qrtr?

    • http://www.asymco.com Horace Dediu

      Acquisitions appear as Goodwill on the balance sheet.

  • genkihito

    does the new Apple spaceship campus and Austin expansion account for the projection?

    • http://www.asymco.com Horace Dediu

      I don’t think it will consume significant capital until next fiscal year. The land cost has been paid already but I believe groundbreaking is not scheduled yet. It will take 3 to 4 years to complete.

  • genkihito

    does the new spaceship campus and Austin expansion account for the projections?

  • Alex Park

    ” … and $896 in Goodwill (acquisitions). ” ? Is it 
    “$896 mil” ?

  • Alex Park

    Apple’s CAPEX spending maybe slowing down in part because they can outsource data centers (public clouds) for seasonal and peak network transactions. I wonder how their OPEX spending changed? 

  • davel

    “The traditional relationship between financiers and operating companies
    assumed some form of symbiosis but as the credit crisis has shown some
    have not kept their part of the implied bargain.”

    If I were a CEO 2008 should have taught me to build and keep a cash hoard independent of my wall street financiers. They do not work for me, nor do they have my interests in mind. They are sharks that look at me as food. There is no symbiosis. That was the past were a bank was a partner. Where my banker knew my business and understood when business conditions went against me and they cut me some slack because they knew my business and believed in my company.

    In watching various analysts it is clear that they learn their cookie cutter metrics in school and run the formula with numbers that represent me. There is no relationship.

  • Jeff G

    Horace,

    Are the commoditized products company goods?

    I tried to feel unsettled, but could not muster it:)  I think maybe I am not clear on the question.

    Independent of the sophistication level of CFO’s the value of the capital markets is the same as their intended purpose…to efficiently allocate capital (Although individual investors understand this little and even pro’s have lost sight of it in the 1990′s, if not before.  Causing companies valuations to often correlate poorly with their return on capital (i suspect, but haven’t measured)

    This is compounded by the difficulty in predicting normal business competition, trends, business cycle and of course any applicable disruption!

    Still, over long periods such as 7 or 10 years there is typically a return to the mean, where stock prices and capital valuation metrics mean something from time to time.

    Companies WITH sophisted/SMART CFO’s and board’s of directors, and visionary leadership seem even more likely to be the culprits who shed light on the market inefficiencies.  A lot of it boils down to whose crystal ball can foresee insanely popular product acceptance by the masses?  and how do you deploy the capital efficiently and effectively to “capitalize” on it.

    Cook and Oppenheimer et al, have been in a difficult, but enviable position to try to navigate the perfect storm of radical acceptance, profits, limited materials, and difficult manufacturing logistics, due to volume. 

    Apple’s vision that a small, flat, cube-like computer would dominate the MP3 market was right on.  Clearly its a matter of commoditizing the design, materials and labor to sell digital cubes (pods, phones, pads) of various sizes/shapes/designs at attractive margins to as many millions of consumers that will optimize profits, sales and market share.

    The value of the capital markets for those who can allocate their capital more efficiently is still in play.  Certainly the capital markets have been rewarding Apple Inc’s efficiencies and return on capital lately. 

    I read somewhere a couple months ago, that out of managed funds indexed vs the S&P 500, 40% of them didn’t own AAPL as a top 10 holding.   To me, that says Wall St. STILL doesn’t beleive its a real story, or at least a sustainable one.  It also supplies potential buying power as those funds come into alignment. 

    It almost seemed like today’s market activity was a microcosm.  Sell other stuff, drive the market down -1/2%-ish, put some of those proceeds into APPLE (drive up the price 1.7%)  If this trend were to continue for a few months or years, it might symbolize the recognition of Apple’s supremely efficient use of capital, and bring alignment to the Force:)

  • M Rogers

    Have you seen this Forbes story:

    http://www.forbes.com/sites/techonomy/2012/04/04/apples-hon-hai-investment-talk-why-not/

    The gist is that Apple has made a $9B investment in Foxconn. Could explain your outstanding questions.

    • http://www.asymco.com Horace Dediu

      Thanks for this. It would not surprise me. Let’s see if it’s true.

    • http://www.asymco.com Horace Dediu

      It would not surprise me because I had contemplated this in late 2010: http://www.asymco.com/2010/12/15/apple-factories/

      • M Rogers

        The reply in that story from “Pando” was prescient wrt Intrinsity.