Here’s Why Apple Says Its Margins Are Going To Collapse This Quarter


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Apple told analysts yesterday that its forecasting a 36% gross margin for the holiday quarter.Analysts were expecting a 43% margin for the quarter. The reason for the huge gap in margins is that Apple decided to refresh almost everything it makes in the last two months. (New iMacs, iPhones, iPads, and MacBooks.)

On the earnings call, CFO Peter Oppenheimer said, “New or re-priced versions of our products announced during this time frame represent over 80% of the total expected December quarter revenue.”

These new products are going to be expensive to manufacture initially. As Apple gets better at making them, it should be able to make more money on them.

He also noted that on the iPad mini, the “gross margin is significantly below the corporate average.” So, the iPad mini is dragging things down, too.

Here’s the full transcript of Oppenheimer’s margins explanation via Seeking Alpha:

This is the most prolific product period in Apple’s history. We have an unprecedented number of new product introductions over the last six weeks and this has led to record levels of demand. New or re-priced versions of our products announced during this time frame represent over 80% of the total expected December quarter revenue.

But there are costs associated with such dramatic change and demand. The iPhone 5, iPad Mini, iMac, MacBook Pro 13-inch, iPod Touch and iPod Nano have completely new form factors with great new features and we’ve never before introduced so many new form factors at once. All of these products have higher costs than their predecessors and therefore lower gross margins as they are at the height of the cost curve.

This has been the case with new products in the past, so nothing new. The difference this time is the sheer number of new products we are introducing in a very short period of time. Additionally, we lowered the price of the iPhone 4S and iPhone 4, delivering incredible value to our customers. We head into this holiday quarter with the strongest iPhone line-up that we have ever had with the iPhone 4 starting at three in the subsidized markets. We also added the iPad Mini to our iPad line-up. The iPad Mini has the iPad experience and we priced it aggressively at $329 delivering incredible value to our customers.

Its gross margin is significantly below the corporate average. So in summary, we expect our gross margin to decline by about 400 basis points sequentially. We expect the benefit from positive leverage on the sequentially higher revenue and a greater mix of iPhone, but we expect these benefits will be more than offset by a number of factors.

First, margins on new products are lower than their predecessors including the iPhone 5 and we have been aggressive with the iPad Mini. Second, we’ve lowered the price of the iPhone 4S and the iPhone 4. Third, we will experience transitionary costs associated with multiple new product ramps. Fourth, the high end anticipated volume of iPhone and other new products will generate significantly greater deferred revenue sequentially.

As you are aware, we differ a portion of our revenue with every device we sell and amortize it back into revenue over the life of the device. [In period] have exceptionally strong sales like the December quarter the deferred amounts are significantly higher than the revenue amortized in from past sales. And fifth the favourable items that benefited the gross margin in the September quarter are not expected to repeat in the December quarter.

We will work hard to try and get down the cost curves and improve our manufacturing and other efficiencies as we’ve successfully have done in the past. We ended this holiday season with our strongest product line-up ever and we have great choices for customers. To be in position to anticipate over $50 billion of demand for our products in a single quarter is a reflection of the incredible strength of our products and our business.

And Tim Cook added the following:

We are dedicated to making the very best products in the world and we think about the smallest of details and we are unwilling to cut quarters in delivering the best customer experience to the world. If this relentless commitment to innovation and excellence is the reason that our customer choose by our products and this will always be the driving force behind Apple. We are advantaging the company for the long run and will continue to make great long-term decision. We’ve remained very, very confident in our strategy and will use our world-class skill and hardware, software and services to delight our customer.