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Apple Inc.'s R&D Spending Continues to Shoot Higher

By Ashraf Eassa - Apr 30, 2016 at 3:30PM

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Dollars spent today fuel Apple's tomorrow.

Image credit: Apple.

Apple (AAPL -0.87%) has dramatically bolstered its spending on research and development over the past several years, no doubt enabled by the company's tremendous revenue growth. Interestingly, even as the company sees a slowdown in its business, as sales are expected to plunge by around 14% year over year in the current quarter,  Apple continues to increase its research and development spending.

Indeed, in the most recent quarter, Apple reported that its research and development spending increased from $1.918 billion in the year-ago quarter to a whopping $2.511 billion. Spending on a sequential basis was up around $100 million.

Let's see what Apple executives had to say about these increased investments even in the face of a challenging revenue and demand environment.

R&D up, but discipline in SG&A
On the call, CFO Luca Maestri pointed out that total operating expenses in Apple's most recent quarter were only up 10%, a figure that he says is the "lowest rate that [investors have] seen in years."

Diving a little bit deeper into the dynamics around operating expenses, Maestri pointed to "continued significant investments in research and development."

These investments, the executive said, are due to a number of factors. Here's Maestri:

We continue to invest in initiatives ahead of revenue. We have a much broader [product] portfolio than we used to have. We do much more in-house technology development than we used to a few years ago, which we think is a great investment for us to make.

As far as sales, general and administrative spending, or SG&A, Maestri noted that this figure actually came down year over year. That said, the difference between $3.46 billion and $3.423 billion is a virtual rounding error at the scale that Apple operates.

Apple wants a competitive expense-to-revenue ratio but won't starve the biz
Maestri's message was quite simple: Apple isn't going to put the brakes on research and development spending because the investments made in that area today will be what deliver revenue tomorrow. Apple is, however, going to continue to try to manage its SG&A "extremely rightly and in a very disciplined way."

"As you know, our expense-to-revenue ratio is around 10%," the executive said. "It's something that we're very proud of. It's a number that is incredibly competitive in our industry, and we want to keep it that way."

Investors should look forward to what this product pipeline will produce
Given the dramatic step up in research and development spending on Apple's part, I am inclined to believe CEO Tim Cook when he says that he's "very excited about what's in [Apple's product] pipeline."

The world's greatest technical and creative minds are going to be in high demand and collecting them all under one roof isn't going to be cheap. However, given Apple's tremendous wherewithal to invest in future products, it's good to see the company take the long view rather than focus solely on short term profits.

This fall, Apple is going to need to put out a dazzling set of products to persuade customers to upgrade their current iPhones to next-generation models and, at the same time, continue to bring non-iPhone users looking to upgrade to new devices into the iPhone fold.

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