What does Apple spend on research and development?

201602-unsplash-appleFor the three months ending December 26, 2015, Apple spent $2.4 billion in research and development.

So what? That number doesn’t mean a whole lot in isolation. Let’s dig in a little bit and see if we can build some context.

For the same three month period, Apple had revenue of $75.9 billion. That means Apple’s R&D budget was about 3% of sales.

Apple's income statement, from their most recent 10-Q filing.
Apple’s income statement, from their most recent 10-Q filing.

Again, so what? Let’s look at Google. For the three months ended December 31, 2015, Google spent $12.3 billion in R&D, against $75.0 billion of revenue. Google’s R&D budget was about 16% of sales.

Google's income statement, from their most recent 10-K filing.
Google’s income statement, from their most recent 10-K filing.

Now we’re getting somewhere. Google’s and Apple’s quarterly revenues are nearly identical, but Google spent over 5 times more on R&D than Apple.

Profitability and costs

While we’re digging into numbers, what about profitability? Apple had quarterly earnings of $18.4 billion, while Google’s quarterly earnings were $15.8 billion. Apple was more profitable than Google, 24% to 21%.

With R&D on our minds, let’s dive into the cost structure. Apple’s largest cost was cost of sales, or the cost for them to manufacture their hardware. Cost of sales was $45.4 billion, against revenue of $75.9 billion, or 60% of revenue. That leaves Apple with a gross margin of 40%, with gross margin being defined as (revenue – cost of sales)/revenue.

What about Google? What does their cost structure look like? Cost of revenues consumed $28.2 billion of their $75.0 billion of revenue, or 38% of revenue. Google’s cost of revenues are considerably less than Apple’s (38% of revenue versus 60% of revenue).

How is Apple more profitable, if they face much larger cost of revenues than Google? We already pointed out that Google spends more on R&D ($12.3 billion versus $2.4 billion). Google also spends more on selling, general, and administrative costs than Apple ($15.2 billion versus $3.8 billion).

Let’s look at one final cost item: taxes. You’ll see that Apple expects a quarterly tax burden of $6.2 billion, while Google shows $3.3 billion. Again, these amounts are against almost identical revenues. For whatever reason, Apple has a considerably larger tax burden that Google, at least for these respective quarters.

Who cares?

First, for anyone who may have an interest, this simple exercise is a demonstration of financial analysis 101 for publicly-traded companies. I like how easy it is to skim over financial results and get a picture of the financial performance of different companies.

Second, this exercise is an example of the importance of context when answering a question. You might be curious about Apple’s R&D budget. But without context, the raw number ($2.4 billion for the quarter ended December 26, 2015) doesn’t mean a whole lot.

You need to know their revenue. It’s helpful to know how R&D fits into their broader cost structure. It’s also helpful to know how Apple’s cost structure compares to the cost structure of its competitors.

Even if you’re not working on a pure financial analysis, know what context will be most useful, both to you as an investigator, and to your audience, as you communicate your results. Raw numbers are nice to have, but we don’t know what story to tell until we discover the reality surrounding those numbers.

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