Apple's gross margin could improve with 'iPhone 5S', says analyst

Apple's gross margin could improve with 'iPhone 5S', says analyst

Summary: Whatever the next iPhone will be called—the iPhone 5S, or even the iPhone 6—one analyst believes Apple's dip in iPhone gross margin will recover with the next iteration of the popular smartphone. Here's why.

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TOPICS: Apple
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Apple's gross margins are down year over year, and the company's share price has dropped more than 35 percent in the past six months alone. 

A dip in gross margin shows a drop in overall profitability, and this is something Apple desperately needs to claw back. 

iphone-5-lightning-2012-09
(Credit: Apple)

Morgan Stanley analyst Katy Huberty said yesterday in a note to investors that while the financial firm keeps its $630 price target—Apple is trading at almost $200 a share lower than that at $442 per share on the Nasdaq this morning—she believes Apple can rebound again with the iPhone 5.

Why exactly? By digging through the company's 10-Q filing with the U.S. Securities and Exchange Commission, Huberty attempted to determine whether Apple's recent gross margin decline is a temporary hiccup, or part of a wider structural problem.

It's not the latter, she said, but hinted that the forthcoming "iPhone 5S"—which shouldn't be a valid indicator of what Apple will actually call the next-generation smartphone—or rather its manufacturing process could help the company bounce back.

Apple's the company's gross margin was 38.6 percent compared to 44.7 percent on the same quarter a year ago. If Apple keeps on the most part the same design as the recent iPhone 5, particularly the larger display and thinner design, then Apple can recoup some of its lost profit and regain traction on the trading floor.

From the 10-Q:

The lower gross margin expected in 2013 is largely due to anticipation of a higher mix of new and innovative products with flat or reduced pricing that have higher cost structures and deliver greater value to customers and anticipated component cost and other cost increases.

In a nutshell, Apple spent a lot on new manufacturing equipment to develop the iPhone 5 and this dinged the company's margins. It does also hint that new products might be on the way this year, but at this stage it would be beyond premature to even begin to speculate what these could be.

According to Huberty:

The 10-Q discloses $904 million of commitments for equipment purchases compare to $4.5 billion just two quarters ago when Apple invested in new in-cell touch displays for the iPhone 5. The decrease is likely due to iPhone 5S not requiring significant hardware changes, therefore iPhone GM could be much higher in [second half of calendar year 2013].

According to the Semiconductor Industry Association (SIA), the industry body behind the chip-making manufacturing and design effort, said today that while chip sales were down by 2.7 percent in 2012 on the previous year, NAND memory grew dramatically by 4.1 percent to $25.4 billion in 2012, showing an uptick in flash memory buying by tablet-focused companies.

More from Huberty:

NAND prices hurt in December but could ease. Deferred margin on component sales represents Apple's component cost advantage relative to spot prices  and correlates with Apple's [gross margin]. This metric deteriorated in [second half of calendar year 2012] but could improve going forward given the recent increase in spread between NAND contract and spot prices. A more favorable NAND contract price trend is consistent with Apple increasing NAND in the 9.7-inch iPad last week.

Apple anticipates gross margin to be between 37.5 percent and 38.5 percent during the second quarter of 2013. Huberty, however, experts gross margin of more than 38 percent by September.

(via Barrons)

Topic: Apple

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28 comments
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  • Sure it could!

    And the geek in the GoDaddy commercial could date Bar Rafaeli. AAPL has 2 huge problems in the US, their biggest market - 2 year contracts (people aren't going to upgrade before the end of the contract unless it's the new phone is a huge improvement over the 5) and the fact that their phones are trailing in features to quite a few high end Android offerings. And in the world's largest market, China, their products are just too expensive. For all the blather about China's growth, there still aren't that many people who can afford a > $600 item. And the ones who can have already gone to HK or bought one off the grey market.
    beau parisi
  • I miss the good old days

    when writing was about more than just finding a single source looking to improve their own standing.
    It's lazy writing, copy and paste being the majority of the errrr 'story'. If this is what 'blogging' is all about, can we have some proper journalists please? Perhaps zdnet could poach some from the sun to improve the quality of the (is it fair to call them) articles. Money for old rope if someone can get paid for this.
    Little Old Man
  • rip-off profits

    Apple products are utterly overpriced, not really upgradable and is sold at rip-off prices. Unfortunately there are lot of fools who falls for their shiny stuff. Lot of them thinks that owning Apple products are 'cool'... but the fact is that smart people really ridicule them...
    Owlll1net
    • Wow

      You upgrade your phone?

      Because this article is about the iPhone.
      Michael Alan Goff
      • What I posted...

        What I posted was my observation about Apple and the people who owns their product.
        Owlll1net
        • And it was a stupid one

          I bought a Macbook Air for a lot of reasons, none of them were "because I want to be cool".
          Michael Alan Goff
        • Margins are huge

          You can say it's the price of "desire", from an objective point of view it's silly, but people are complex "beasts" and Apple is just business like many others.

          About upgrades - just look at windows 7 phones, they can upgrade to windows phone 7.8 - so amazing, when I see someone with a Nokia 900 I automatically think "another smart person in this world" :-)
          AleMartin
    • From a kids point of view

      Apple does charge a lot for their products, just as Lexus or BMW does and like these other high end brands you are buying status but also getting a pretty good product that offers a lot over the competition. From a kid’s point of view these products are overpriced and they can get 80% of the experience from cheaper products, they have the time to mess around with work arounds and will except short coming far more readily. Now you have the leaders of these kids who are very smart and don't have the time or patients for the short comings and work arounds. Their time is better spent on moving things forward and they just want an excellent phone that does everything they want of it without issue or compromise. These are the folks that like the iPhone.

      Having been both of these people in my carrier I see the appeal of the Android to the young and technical fiddlers but I also see the joy of the iphone. I can also say that you rarely see an executive with an Android for the simple reasons above and these folks are generally the smartest of people.
      KBabcock75
    • Dude I know you hate Apple

      with a passion that is rivaled only by the fiercest of religious zealots but come on owlnet there is more FUD in your post than usual. Let me show you:

      "Apple products are utterly overpriced,"

      Now imma let you finish but here's some examples of how wrong you are with that statements - Microsoft Surface Pro. It's lowest priced unit costs MORE than the highest priced iPad. And check out the smartphone prices - why one can get an iPhone 4 free with a new contract, an iPhone 4S for $100 bucks, and the iPhone 5 at it's usual price points of $200, $30, and $400. Those price points fall in line with the majority of smartphone prices. So how is is iOS gear "overpriced" again?

      "not really upgradable"

      Okay and what smartphone or tablet really IS? Sure one can add SDCards to most of the Android devices to upgrade the storage - but wait, you CAN'T for WP devices! As for the rest of the device tell me where one can upgrade to a better screen, more ram, or a faster processor... And if one needs MORE storage on an non-upgradable device such an an iOS or WP device there is always the many cloud services available. So you were saying?

      "and is sold at rip-off prices."

      I pretty much addressed this with your idea that the iOS devices are overpriced. A bit redundant old boy? Man I hope Ballmer is paying you by the word...

      "Unfortunately there are lot of fools who falls for their shiny stuff."

      Shiny is the new thing - didn't you get the memo? Let me guess - you'd be the one to buy a matte finished car... the whole "shiny" argument is pretty lame at best.

      "Lot of them thinks that owning Apple products are 'cool'..."

      Actually it is - but not for the Apple logo. Personally I think owning Apple is cool because I know it's going to work every time I need it to. I did not have that same reliability with Android or WP devices. I don't have to worry about random shutdowns, crashes, or big brother watching me - well no more than usual. And I know that the apps I download will work right and will not give me any issues. Oh and my iOS device makes a pretty killer enterprise device. How's that WP device working for you in the enterprise?

      "but the fact is that smart people really ridicule them..."

      For having gear that works? Surely it con't be for paying the prices - otherwise everyone who owned a Microsoft Surface pro would get laughed at and ridiculed as well. Come on Owlnet - come up with some better FUD than this.
      NonFanboy
      • My point stands

        Explain the 40 to 45 percent margin they take on their products?
        Owlll1net
        • a product is not overpriced ...

          if it sells well. End of story.
          mobile_manny
        • Explanation:

          Enough people appreciate a well-thought-out, easily usable, stable, well-supported design and are willing to pay for it.
          Userama
        • A product is not overpriced

          if the buyer finds the value in it.
          Michael Alan Goff
  • A product driven company shouldn't focus on profitability!!!

    Anyone remember Apple from the 80s and 90s. They were driven by profitability until the company had to bring back Steve Jobs and beg Microsoft for a handout.

    The only idiots who care about the gross profit are the investors who are looking at getting extra bang for their buck. These people do nothing but throw resources out there hoping to get a little something for essentially nothing but locking up their money for a bit. They don't add to the design, they don't bring greatness to the company. They just had out a few dollars and say, "Gimme back!" a few months down the road.

    Apple has only done well when they were a product driven company and only floundered when they were a profit driven company. Greed does not create greatness and Steve Jobs knew this the second he walked back into the doors of the Cupertino office.
    nucrash
    • Grow up...

      Apple has always been driven by profitability. What you saw during the Jobs years was a well-crafted marketing plan which put a "quality over profit" face on the company; however, make no mistake...not day ever went by when Apple didn't favor profit.

      Apple pays its store employees about $11 an hour...which are poverty wages in most areas. Now, they could easily afford to double that, right? But they don't, so don't hand me that nonsense about Apple not being "profit oriented".
      shoutout
      • 11 bucks an hour?

        And tell me how much other retailers pay their employees? There are people at Best Buy and other retailers who make $10/hr or less. Some make around minimum wage.

        Yes Apple is - like every single other company out there - profit driven but is also product focused. The 2 are not mutually exclusive.
        NonFanboy
    • Ask the workers at Foxnet...

      Ask the poor Chinese workers who build your iPhone whether Apple was ever "not about profit".

      One look at the "suicide prevention nets" around the "Foxnet Hotel" should give you a clue.
      shoutout
      • You mean "foxconn"?

        And those suicides are Apple's fault HOW? And let me guess you must think that Apple is Foxconn's ONLY client. I got news for you bub - Dell, HP, Nintendo, Sony, and several other electronics and computer OEMs use Foxconn labor. And what about Samsung using child labor anf forced overtime to make THEIR devices? WHERE is your outrage over THAT?

        Come on dude, do some basic research before you post FUD and lies.
        NonFanboy
    • All companies focus on profitability

      to think otherwise is to kid yourself.
      Michael Alan Goff
    • handout?

      You do realize that Microsoft provided the funds to Apple to stave off the government anti-monopoly investigations into Microsoft at the time. This was a purely a mercenary act on behalf of Microsoft.

      Also, your understanding of the corporation is greatly lacking. A corporations primary existences is to generate profit. In doing so they can embrace other ideologies but always the core goal is to drive profits. No one knew this better than Steve Jobs, to believe otherwise is just plain foolish.
      KBabcock75