Last year, Apple (AAPL +2.59%) reported spending approximately $1.42 billion on research and development activities in its fiscal second quarter. In Apple's fiscal second quarter this year, the company reported spending $1.92 billion on research and development -- a 35% year-over-year increase.
The sharp increase in R&D spending may have some investors wondering one question: What is Apple spending all of that money on?
Source: Brandon Daniel via Wikimedia Commons.
Apple CFO Luca Maestri explains
Analyst Katy Huberty pointed out on the earnings call that Apple's research and development spending "continues to track well ahead of revenue growth." She even went on to say that this has been the case for "many quarters now" and asked Apple's management about what's driving that.
CFO Luca Maestri attributed this large bump in research and development costs to a number of factors worth exploring in more detail below.
Factor #1: A broader product portfolio
Right off the bat, Maestri said that Apple's product portfolio is "much broader than it used to be." He pointed to Apple's development of two iPhones and iPads each year rather than just one as had been the case in the past. He also noted that the company is also investing in the Apple Watch.
Factor #2: Bringing more technologies in-house
Maestri also made it clear that Apple is now developing more "core foundational technologies in-house" than it had previously. The most obvious example is that Apple now invests heavily in the development of complex applications processors that power its iPhone/iPad products.
There is also evidence that Apple is now developing chips such as flash memory controllers for its Macs. It also appears to be taking a more active role in the development of display technologies for its products.
Factor #3: Spending on new products
Another important point that Maestri made was that the company is "spending ahead of the products that will generate revenue in the future."
Product development cycles in technology are relatively long, particularly for the kinds of products that Apple develops which require a tight integration of complex hardware and software. This means that the money Apple is spending today is being used to develop products that might not show up for years to come.
And, although the investors fixated solely on the bottom line might not want to hear this, some of this research and development money may be spent on projects that Apple might ultimately choose not to release.
R&D is the "core" of Apple
Maestri explicitly said that research and development is the "core" of Apple. This is absolutely the right attitude for a technology company. Of course, technology companies should try to deliver as much profit to their shareholders as possible. However, companies need to be careful to not sacrifice their futures in order to save an extra buck today. Apple makes a lot of money and the growth in its revenue and gross profit is more than enough to offset the increases that the company is seeing in research and development.
Investing heavily today in future products is, without a doubt, the right decision.
Given that Apple has significantly stepped up its research and development expenses over the last few years, I believe that customers and investors will be pleasantly surprised with the quality of Apple's future products. As an Apple customer myself, I can't wait to see what all of that research and development spending brings.
