Apple’s Higher R&D Expense May Not Be Good News

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Apple announced lower gross margins and slower growth this week, leading to a selloff of their stock. But Chris O’Brien reports some good news:

[If] investors are looking for some reasons for optimism, they might do well to check Apple’s numbers related to its research and development spending. Tucked way down deep in its 10-Q filed on Thursday, the company noted that spending on R&D increased 33% in the quarter ending in December. That amounts to an increase of $252 million to a cool $1 billion.

….So, what’s cooking in Apple’s labs? Ha. You didn’t think they’d actually tell us that, did you? In the filing, the company said, “This increase was due primarily to an increase in headcount and related expenses to support expanded R&D activities.”

This might indeed be good news. But then again, it might not. Part of Apple’s success over the past decade has been its uncanny ability to invent a very small number of blockbuster products. Its R&D expense has been low—less than 2 percent of sales—largely because there was so little wasted motion: first the iPod, then the iPhone, then the iPad. That’s three products, along with a smattering of other stuff, generating $200 billion per year. That’s remarkable.

But as product lines age, they have to be maintained, and maintenance engineering is as costly as the original invention itself. Compatibility problems crop up, both between product lines and with prior versions of software. Old products have to be supported. Bureaucracies swell. Not every new product is a winner. All of that causes R&D expense to go up.

Maybe Apple still has the R&D magic. Maybe they’re spending more because their next product introduction will be even bigger and more amazing than anything they’ve done before. But then again, maybe it’s because they’re turning into an ordinary company. Maybe their improbable run of good luck is over. We’ll have to wait and see.

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It is astonishingly hard keeping a newsroom afloat these days, and we need to raise $253,000 in online donations quickly, by October 7.

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Readers also told us to just give it to you straight when we need to ask for your support, and seeing how matter-of-factly explaining our inner workings, our challenges and finances, can bring more of you in has been a real silver lining. So our online membership lead, Brian, lays it all out for you in his personal, insider account (that literally puts his skin in the game!) of how urgent things are right now.

The upshot: Being able to rally $253,000 in donations over these next few weeks is vitally important simply because it is the number that keeps us right on track, helping make sure we don't end up with a bigger gap than can be filled again, helping us avoid any significant (and knowable) cash-flow crunches for now. We used to be more nonchalant about coming up short this time of year, thinking we can make it by the time June rolls around. Not anymore.

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