Amid all the chatter about Apple's fiscal third quarter results, which were strong, most concerns about the future revolve around two words: Gross margins. The big takeaway for technology buyers: Those lower margins hint at cheaper iPods and notebooks in the not-to-distant future.
Following Apple's typical strong quarter with a side of conservative guidance (Techmeme), CFO Peter Oppenheimer and COO Tim Cook noted that gross margins would be 31.5 percent for the September quarter and about 30 percent in fiscal 2009. It could be that Apple is lowballing again with its outlook, but there are good reasons to think that your Mac notebooks and iPods will come cheaper in the future.
Overall, I think you're going to see Apple play the volume game a bit. It is the No. 3 PC maker in the U.S. and has a lot of open field before it bumps into Dell and HP in those top two spots. Part of the margin pressure is back to school promotions, but executives also noted that there will be an undisclosed product transition that will also lower prices and hurt margins.
Oppenheimer said "we’ve got a future product transition that I can’t discuss with you today" as he explained the gross margin outlook. In fact, Oppenheimer said that exact phrase three times according to the SeekingAlpha conference call transcript.
So what will these product transitions be? It's a safe bet that you may get new portables from Apple, lower priced MacBook Airs and newfangled-but-less-expensive iPods with touch navigation. For instance, Oppenheimer noted that there has been some strong demand based on Apple's iPod Shuffle price cut. Apple is walking the line between its premium pricing heritage and stoking demand.
Piper Jaffray analyst Gene Munster outlines his case in a research note:
We believe Apple is readying new iPods and new portables that will apply downward margin pressure in the Sept. quarter and into FY09. We believe there is an 80% chance Apple will introduce redesigned MacBooks and possibly new MacBook Pros at lower price points. Specifically, Apple may re-enter the $999 price point (currently $1099)with the MacBook, or test the $1,799 price point with the MacBook Pro (currently $1999). In addition, we expect slightly redesigned iPods in the Sept. quarter, with lower-cost touch-based iPods for the holiday season. We believe Apple is getting slightly more aggressive with its pricing; but overall the company is not diverting from its strategy of premium pricing.
Munster's take is most likely correct. Apple can easily play in a lower price point with out getting into the $599 weeds where other PC manufacturers roam. And psychologically that $999 price point matters to the retail consumer. As for iPods, it only makes sense that touch becomes the primary navigation.
The other item to note here is that the margins on the iPhone aren't likely to boost the September quarter because of the way revenue is recognized.
Oppenheimer's full explanation about the outlook:
We are targeting revenue of about $7.8 billion, which is 25% growth over last September. We have included in our revenue guidance the full quarter ASP impact of the back-to-school promotion, a future product transition that I can’t discuss today, and also the elasticity that we’ve seen from the iPod Shuffle price reduction and its result on ASP.
I would tell you that we are very happy with our revenue growth and we’ve just reported the best Mac quarter ever and double-digit iPod growth, and are off to a fantastic start with the iPhone 3G.
We expect to sell more iPhones this quarter than we have in any previous quarter, but this will have a limited impact on the September quarter but will build significant revenue and earnings, which we’ll report in future quarters. If iPhone sales were reported as revenue when sold, the September revenue guidance would be significantly higher.
Bottom line: If you're in the market for an Apple iPod or notebook a little procrastination may not hurt given the company's comments.