Apple's Cash Strategy Shift
Tim Cook is going out with a bang. Apple reported a stellar March quarter on Thursday, delivering 17% higher revenue, thanks to 22% growth in iPhone revenues, a big change from several years of anemic growth in sales of the ubiquitous device. In other words, far more consumers are upgrading their old iPhones than has been the case for a while.
Cook, who recently announced he would step down as CEO—to be succeeded by hardware executive John Ternus—on Sept. 1, was as ebullient as ever on Thursday’s call. As is the Apple way, he and Ternus traded over-the-top compliments. Ternus described Cook as “one of the greatest business leaders of all time,” while Cook gushed, “There is no one on this planet I trust more to lead Apple into the future than John Ternus.” Even before Cook steps down, though, Apple is making some big changes.
For one thing, as Cook pointed out on an earnings call, the company increased its research and development spending 34% in the quarter, reflecting investments to take advantage of “opportunities we see in both” products and services, Cook said. Apple has never been known for its lavish R&D expenditures—as a percentage of revenues, its R&D expense has hovered around 8% in the past few years, about half that of Google parent Alphabet. With AI transforming tech and expected to usher in a new generation of devices, Apple clearly doesn’t want to be left behind.
In the same vein, Apple Chief Financial Officer Kevan Parekh revealed on an analyst call that the company was abandoning its long-standing cash management strategy of aiming to be “net cash neutral"—which means having equal amounts of cash and debt on the balance sheet. Introduced in 2018 under former CFO Luca Maestri and Cook, that philosophy underpinned consistently massive stock buybacks. Apple’s net cash—cash on the balance sheet after deducting debt—shrank to $62 billion as of March 31, from $163 billion when the target was announced in 2018.
Parekh didn’t explain the change of heart in meaningful language—preferring corporate blather—but the shift raises the prospect that Apple wants to stockpile cash more than it has been doing. While it raised its dividend and announced a new buyback program, the company cut its stock buybacks in half in the March quarter from the year-earlier period, even though free cash flow jumped 28% compared with that period. (Parekh hinted that the quarter's buyback reduction was related to the announcement of the CEO transition: Much speculated about beforehand, it possibly contributed to volatility in Apple stock.)
Why would Apple want to keep more cash on hand? It‘s possible Cook and Ternus want to be prepared for skyrocketing memory chip prices, which Cook hinted he was expecting. But stockpiling cash could position Apple well at a time its counterparts in big tech are running down their cash reserves dramatically with massive capital expenditures. Imagine what assets might come up for sale, for instance, that other companies won’t have the money to buy? Of course, Apple historically hasn’t done major acquisitions. But it’s possible the next few years will bring more radical changes to the company than might now be apparent.