Apple Inc. (NASDAQ:AAPL)’s 10-K filing which accompanied its latest earning report provided some key revelations. According to Morgan Stanley analysts Katy L. Huberty, Jerry Liu and Scott Schmitz, it shows better gross margins and revenue acceleration, both of which support their bullish view of the company.
Interpreting Apple’s guidance
They point to Apple’s capital expenditures guidance, which was for a 53% year over year increase, as supporting the acceleration in revenue growth which was implied by management’s December quarter guidance. The $10.5 billion Apple Inc. (NASDAQ:AAPL) plans to spend on non-retail store expenses is just a small increase from last year’s peak of $9.5 billion. However, the analysts say this is a “meaningful uptick” from the $6.5 billion the company spent during the fiscal 2013 year. They said this signals confidence as Apple heads into the next year.
They suggest that some possible drivers of this uptick include the purchase of equipment for new products like a large-screen iPhone or iWatch or the building of the new corporate headquarters. They say it could also include spending on new data centers, which could be to more fully utilize the 64-bit ARM chip, M7 processor and fingerprint sensor in the new iPhone and iPad.
Apple’s off-balance sheet commitments showed higher than seasonal growth
The Morgan Stanley analysts also point to Apple Inc. (NASDAQ:AAPL)’s off-balance sheet commitments and vendor trade receivables as key evidence for their bullish view. They note that off-balance sheet commitments increase 38% quarter over quarter, which is the strongest rate since 2010. Vendor non-trade receivables, which show “Apple’s transfer of purchased components to ODMs,” rose 63% quarter over quarter. The analysts say this is the largest September quarter increase in the company’s history.
Changes to Apple’s gross margin
They note that warranty and more iOS deferrals had a negative impact on Apple Inc. (NASDAQ:AAPL)’s gross margin, lowering it by about 200 basis points. The company announced that it was deferring more from its average selling prices of iOS devices and Macs than it was previously. It started doing this with the launch of the new iPhones in the second half of September. This lowered gross margins for the September quarter by about 20 basis points.
In addition, they said warranty expenses as part of Apple’s hardware revenue hit an all-time high. Gross margins would have increased by 162 basis points based on the rate from the June quarter and 218 basis points based on the rate from a year ago. Excluding these factors Apple Inc. (NASDAQ:AAPL)’s gross margins “improved materially” quarter over quarter.