Apple: Frugal to a Fault?
Last year, Apple spent 3.8% of sales on development, and it spent just 3.2% in its most recent fiscal quarter.
Apple hasn't cut R&D spending. The company spent $534 million on development in fiscal 2005, which was 24% more than it spent in fiscal 2001. But the company has clearly been constraining the growth of development spending.
While sales have grown at a compounded annual rate of 27% over the last four years, R&D spending has grown at an average rate of just 5.6% per year over that period.
"At some point, that reaches stasis," says Crawford Del Prete, an analyst with industry research firm IDC. "They can't take it down to 1.5% or 2% of revenue."Part of the reason that Apple can't let its research spending decline much further is that the company has to bear costs that many of its PC industry competitors don't. If it wants a new operating system for its Macintosh computers, for instance, Apple itself has to develop it; it can't rely on Microsoft (MSFT). Likewise, with so much of its brand reputation centered on developing distinct products, the company can't just rely on the latest reference designs from Intel (INTC). But even more than that, Apple is already being vastly outspent by its rivals. Both in dollar terms and as a portion of its revenue, Apple's R&D budget is a fraction of that of competitors Hewlett-Packard (HPQ), Sony (SNE) and Microsoft. The vast amount of money that those companies spend allows them to introduce multiple product lines and spread their risks around, analysts say. Though the companies may have a lower portion of hit products, they're less likely to be hurt if a product fails, analysts say.
|Apple's Squeezing R&D
|FY '05||FY '01|
|Sales||$13.93 billion||$5.36 billion|
|R&D||$534 million||$430 million|
|as % of sales||3.8%||8.0%|
|Net income||$1.34 billion||($25 million)|
|Compounded annual growth rate|
|(Fiscal 2001 to Fiscal 2005)|
|Note: Apple's fiscal year ends in September
Source: Apple's annual reports, TheStreet.com's research
|Sales (in billions)||R&D in billions||R&D as % of sales|
|Research In Motion||1.35||0.10||7.5|
|Note: Sony's figures were converted to dollars at the March 14 exchange rate.
Source: Companies' most recent annual reports.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Jim Cramer + 20 Wall Street pros
- Intraday commentary & news
- Real-time trading forum
- Actionable trade ideas
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV