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Thursday, January 24, 2013, 01:52 pm PT (04:52 pm ET)

Apple to spend $10 billion on innovation, expansion in 2013

This year, Apple will spend $10 billion investing in its future. That's a huge increase over last year, and it obliterates the popular notion that the company is drifting off into a highly competitive market with no real plans for innovating in the future.

In yesterday's earnings conference call, Steven Milunovich of UBS Securities noted that in capital expenditures, Apple "spent almost as much as Intel does," and asked, "I think you guys have said, you're not going to become vertically integrated per se, but in a sense you are since most of that I assume is buying equipment for your partners.

"Could you talk about the strategy here and how much of a differentiator this gives Apple in terms of your ability to ramp new products over time and maybe a little bit more about how deep you will you go in terms of semiconductor componentry, etc."

What Apple is buying in its capital investments

Apple's chief financial officer Peter Oppenheimer answered that Apple expects to spend "about $10 billion in CapEx this fiscal year, that will be up little under $2 billion year-over-year."

Oppenheimer added, "we expect to spend a little bit under $1 billion in retail stores and the other $9 billion is spent in a variety of areas. We're buying equipment that we will own that we will put in our partners facilities. Our primary motivation there is for a supply, but we get other benefits as well.

"We're also adding to our data center capabilities to support all the services that Tim spoke about in answering Ben's question and in facilities and in infrastructure. So, that's where the capital is going."

Apple has the cash to take its business elsewhere

In comparison, Intel (as mentioned by Milunovich) outlined plans to spend $12.1 to $12.9 billion in CapEx during 2012, while Samsung planned to invest $12.2 billion in its own semiconductor CapEx. About half of Samsung's CapEx was dedicated to integrated circuits last year.

Solid State Technology observed one year ago that "Samsung is significantly boosting spending for logic ICs. Approximately $6.5 billion of Samsung’s 2012 CapEx budget is dedicated to logic ICs. Samsung is Apple’s foundry partner for the A4 and A5 application processors used in iPad tablet computers, iPhones, and iPod touch devices, and doesn't want to lose this lucrative business."

A new report by Reuters notes that Samsung is now expected to "cut capital spending by as much as a fifth this year - a first reduction since the global financial crisis - as demand for computer chips weakens and rival Apple Inc looks set to buy fewer of its microprocessors used in the iPhone and iPad."

At the same time, the report noted, "by comparison, Taiwan's TSMC raised its capital spending to $9 billion this year, aimed in part at winning Apple orders away from Samsung."

Apple's capital investments growing rapidly

Last July, Apple outlined plans to spend $7.2 billion across fiscal 2012, exclusive of its investments in retail stores.

Morgan Stanley


Katy Huberty of Morgan Stanley observed at the time that "Apple's revenue and capex ex-retail stores have been 97% correlated over the past seven years and the acceleration in capex growth signals a similar acceleration in revenue growth, in our view."

This caused Huberty to forecast Apple reaching revenues of $56.4 billion in the holiday quarter. That forecast was a substantial $10 billion increase over Apple's record performance one year ago, when it reported quarterly revenues of $46.33 billion. Apple's actual revenues this winter quarter amounted to $54.5 billion, a year over year increase of "only" $8.17 billion.

If Huberty's calculations are useful at all, that would mean Apple's rapidly increasing CapEx investments (which ballooned from less than $1.5 billion in 2009 to reach $7.2 billion last year and $9 billion this year) portends a continued rise in the company's record revenues.

Regardless of their actual correlation with revenues, Apple's CapEx investments also mean that the company will continue to be able to deliver competitive, innovative products, thanks to new equipment Apple is buying for its partners to ensure a steady supply of components and finished products. New equipment will also help bring down the cost of components, a content area of focus Apple's chief executive Tim Cook alluded to in his other comments.