Consumer Electronics

Apple's Margins Fall on Higher Costs, Lower ASPs

29 October 2013

Despite shipping a record number of iPhones in its fourth fiscal quarter, Apple Inc.'s gross profit margins continued to slide as it grappled with higher costs and lower average selling prices.

Peter Oppenheimer, Apple's chief financial officer, said in a conference call with analysts following the fiscal fourth quarter report that average selling prices (ASPs) for the company's iPhone declined by 7 percent in the quarter, primarily due to a significant increase in sales of lower-priced models. "We had made them more affordable to attract more first-time smart buyers," Oppenheimer said.

Apple's fourth-quarter gross profit margin fell to 37 percent compared with 40 percent in the same quarter a year ago, and the company expects gross profit margins of between 36.5 percent and 37.5 percent in its first fiscal quarter ending in December.

Apple estimates that gross profits will be flat sequentially in the current quarter due to several factors, including a $900 million sequential increase in the net amount of revenue deferred for software upgrade rights and non-software services, Oppenheimer said.

In addition, Apple expects to sell a richer mix of new iPads with higher cost structures and lower pricing, and new lower-priced iMacs and Mac Book Pro with higher cost structures than their predecessors, he said. Oppenheimer also blamed currency exchange headwinds, primarily from the Japanese Yen.

However, Oppenheimer said that the company is "working hard to get down the cost curves" as it has successfully done in the past. And that given all the new products that the company has launched in the last few weeks, Apple is "pleased to be guiding gross margins about flat sequentially."

Earlier this month, Apple launched the all-new Mac Pro, featuring the latest Intel Xeon processors with up to 12 cores, dual workstation-class GPUs, six Thunderbolt 2 ports, PCIe-based flash storage and ultra-fast ECC memory. It also announced iPad Air and a new iPad Mini with Retina display, which analysts said the company might have launched too soon since it might not be able to keep pace with demand as it deals with supply constraint issues on its 7.9-inch Retina Display.

The iPad Mini with the Retina display will start shipping later in November, but the company is uncertain whether it will have enough supply for the quarter, Oppenheimer said.

Despite the skepticism, Apple CEO Tim Cook, said "Apple's business is stronger than ever." The company sold 33.8 million iPhones—a record for the September quarter—compared to 26.9 million in the year-ago quarter. It also sold 14.1 million iPads, compared to 14 million in the year-ago quarter, and 4.6 million Macs compared to 4.9 million last year.

Record iPhone sales helped Apple post healthy quarterly revenue of $37.5 billion, up from $36 billion in the year-ago quarter. Quarterly net profit fell to $7.5 billion, or $8.26 per diluted share, from $8.2 billion, or $8.67 per diluted share, in the year-ago quarter.

In its first fiscal quarter, Apple expects revenue of between $55 billion and $58 billion.

According to analysts, guidance for the current quarter reflects a number of new product cycles materializing, including the iPhone 5S and 5C, iPad Air and iPad Mini 2. Cook indicated that Apple ended the quarter with significant backlog of iPhone 5S, but that it continues to build supply.

He also expects Apple's tablet business in its first fiscal quarter to grow year over year, and that its iPad Air business is "off to a great start."

"We do feel that we wanted to reduce the price of the iPad Mini and so we did that and now we're coming in at $299 which is an incredible value to get access to the whole [Apple] ecosystem," he said.

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