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What Will Apple Do With Its $51 Billion In Cash?

Posted on Tuesday, Oct 19th 2010

Apple reported record revenue and profit in its latest fourth quarter results. However, decline in its gross margin and its weaker-than-expected earnings forecast sent its shares sliding. But the highlight in its earnings is the company’s $51 billion cash balance. Let’s take a closer look.

Apple’s Financials

Apple reported record fourth quarter revenue of $20.34 billion, up 67% from $12.21 billion last year. Net profit was $4.31 billion or $4.64 per share versus $2.53 billion, or $2.77 per share last year. Gross margin was 36.9%, down from 41.8% last year and 39.1% last quarter. Last quarter, Apple had forecast a gross margin of 35% and attributed the decline to a higher mix of iPhone 4 and iPad sales, which have higher cost structures. Full year fiscal 2010 revenue was $65 billion.

Apple sold 3.89 million Macs during the quarter, up 27%, and 4.19 million iPads. Gene Munster, an analyst at Piper Jaffray, estimated sales of 4.5 million iPads. iSuppli this week raised its forecast of iPad sales from 12.9 million units in 2010 to 13.8 million units. iSuppli now expects iPad shipments to rise to 43.7 million in 2011 and 63.3 million in 2012.

Apple sold 14.1 million iPhones in the quarter, up 91%, and 9.05 million iPods during the quarter, down 11%. Recognized revenue from iPhone handset sales, accessory sales, and carrier payments was $8.82 billion, up 92%. The sales value of iPhones alone was about $8.6 billion, which yields an ASP of about $610. At the end of the quarter, the iPhone was being distributed with 166 carriers in 89 countries. Full-year sales for the iPhones were 40 million units.

Apart from its unique operating system and user interface, a crucial factor for Apple’s momentum in the convergence devices has been its applications. The App Store now has more than 300,000 apps.  An important application that Apple has recently included is AutoDesk’s AutoCAD. This is a great business application that plays to Apple’s strength in graphics software and can boost its presence in the enterprise market.

For the first fiscal quarter of 2011, Apple expects revenue of about $23 billion and EPS of about $4.80. Analysts expect earnings of $5.03 on revenue of $22.3 billion. The stock is trading around $318 with market cap of about $290 billion. It hit a 52-week high of $319 on October 18.

Chart forApple Inc. (AAPL)

Apple’s Strong Balance Sheet
Despite having a strong cash balance, Apple does not indulge its shareholders by paying dividends or buying back stock. On being asked about the plans for its cash, Steve Jobs in the earnings call said

“We strongly believe that one or more strategic opportunities may come along that we’re in a unique position to take advantage of because of our strong cash position. And I think we’ve demonstrated a really strong track record of being very disciplined with the use of our cash. We don’t let it burn a hole in our pocket, we don’t allow it to motivate us to do stupid acquisitions.”

Apple, unlike companies such as HP and Intel, hasn’t been making big, billion-dollar acquisitions. Apple has already made four acquisitions this year, but its biggest acquisition over the past decade was that of PA Semi for $278 million; the acquisition marked a shift in Apple’s component strategy. Early this year, it acquired wireless advertising concern Quattro Wireless for $275 million after it lost out to Google for AdMob. In July, Apple launched iAd, which can be used to place interactive ads in popular apps for iPhone, iPod Touch, and iPad.

In April, for $121 million, Apple acquired Intrinsity, which developed chip technology used in the iPad’s new A4 processor, followed by Siri, a mobile search applications developer. In July, it bought mapping firm Poly 9. Last year, it bought mapping firm PlaceBase.

Will Apple step up to make billion-dollar acquisitions? It can most definitely afford to! An interesting new possibility that I recently mentioned was Apple acquiring Netflix. Apple recently launched its iIV [formerly Apple TV] for $99, and iIV includes services from Netflix. Netflix’s current market cap is $7.8 billion. Apple can certainly afford it.

Peter Kafka of All Things Digital wonders if Apple is going to buy Facebook. I don’t think that is going to happen. Zuckerberg has his own designs with Facebook, and a company with that kind of momentum doesn’t sell itself.

There is a great analysis on the Asymco site today on how 60% of Apple’s sales are from products that did not exist three years ago. It is truly amazing what Apple continues to do.

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Given the recent acquisitions of Apple, their success in the 'mobile-usage' segment with iPads, mapping, face recognition, gesture recognition, mobile advertising and others – Apple could be looking at more partnerships similar to Verizon (in addition to AT&T) and niche technologies to capture the 'mobile collaboration' space.

Shaloo Shalini Wednesday, October 20, 2010 at 10:08 PM PT