Apple again warns margins will decline due to new products

Posted:
in AAPL Investors edited January 2014
In a filing with the SEC, Apple reiterated earlier statements that new products such as the iPad and MacBook Air will likely drive its gross margins down for the fiscal year 2011.



In its annual Form 10-K (PDF) with the U.S. Securities and Exchange Commission for the fiscal year 2010, Apple warned that it "expects its gross margin percentage to decrease in future periods compared to levels achieved during 2010."



The Cupertino, Calif., company has forecast gross margins of 36 percent for the first quarter of fiscal year 2011. Apple's gross margins in 2010 were 39.4 percent, compared to 40.1 percent in 2009. The filing notes that the decrease in margins from 2009 to 2010 is largely due to the introduction of the iPad, a new product with "higher cost structures," though the company's margins were helped by sales of the iPhone, "which has a higher gross margin than the Company average."



As sales of new products continue to take off, Apple sees its margins declining further. "This expected decline is largely due to a higher mix of new and innovative products that have higher cost structures and deliver greater value to customers, and expected and potential future component cost and other cost increases," wrote Apple.



In addition to the iPad, the recently released MacBook Air is expected to have low margins because of its greatly reduced pricing and the switch from hard disk drives to the more expensive solid-state drives.



Apple cites the difficulty of obtaining "custom components available from only one source" as a reason its new products often have lower margins. The company also lists its ability to obtain key components such as "microprocessors, NAND flash memory, DRAM and LCDs at favorable prices and in sufficient quantities" as a factor in the reduced margins.



During the company's Q3 2010 conference call in July, Apple CFO Peter Oppenheimer warned that the iPad's pricing would affect the company's margins. "We have been pretty aggressive here with pricing, and it's going to play true of it on the margin line," Oppenheimer said.



The iPad's aggressive pricing has made it hard for rival tablet makers to compete, giving Apple a significant early lead in the market.



"Our potential competitors [in tablets] are having a tough time coming close to iPad's pricing," Apple CEO Steve Jobs said. "iPad incorporates everything we've learned about building high value products. We create our own A4 chip, software, battery chemistry, enclosure, everything. This results in an incredible product at a great price. The proof will be in the pricing of our competitors' products, which will offer less for more."



For their part, analysts were optimistic about Apple's gross margins leading up to the September quarter, citing growing sales of the iPhone as an upside to the iPad's lower margins. In August, Gleacher & Co. analyst Brian Marshall stated his belief that Apple's gross margin profile is in the process of bottoming. AppleInsider contributor Andy Zaky had predicted a Q4 2010 gross margin of 38 percent.
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Comments

  • Reply 1 of 26
    Gross margins of... what?! It's so suspenseful! But not so much that we'd not rather you complete the post before submitting.
  • Reply 2 of 26
    As an investor I say, ehh still pretty good.



    As an iProduct purchaser I say, Bring it on!
  • Reply 3 of 26
    Quote:
    Originally Posted by Tallest Skil View Post


    Gross margins of... what?! It's so suspenseful! But not so much that we'd not rather you complete the post before submitting.



    Obviously Apple did not want us to know and has erased the article's author. Somewhere, no one knows for sure where, there's an author laying dead on his keyboard.
  • Reply 4 of 26
    Quote:
    Originally Posted by stldoug View Post


    Obviously Apple did not want us to know and has erased the article's author. Somewhere, no one knows for sure where, there's an author laying dead on his keyboard.



    With his dying breath, he hit "Submit".
  • Reply 5 of 26
    Quote:
    Originally Posted by tallest skil View Post


    gross margins of... What?!



    Too gross to mention. Ewww!
  • Reply 6 of 26
    Full Article



    Quote:
    Originally Posted by AppleInsider View Post


    In a filing with the SEC, Apple reiterated earlier statements that new products such as the iPad and MacBook Air will likely drive its gross margins down for the fiscal year 2011.



    In its annual Form 10-K (PDF) with the U.S. Securities and Exchange Commission for the fiscal year 2010, Apple warned that it "expects its gross margin percentage to decrease in future periods compared to levels achieved during 2010."



    The Cupertino, Calif., company has forecast gross margins of 36 percent for the first quarter of fiscal year 2011. Apple's gross margins in 2010 were 39.4 percent, compared to 40.1 percent in 2009. The filing notes that the decrease in margins from 2009 to 2010 is largely due to the introduction of the iPad, a new product with "higher cost structures," though the company's margins were helped by sales of the iPhone, "which has a higher gross margin than the Company average."



    As sales of new products continue to take off, Apple sees its margins declining further. "This expected decline is largely due to a higher mix of new and innovative products that have higher cost structures and deliver greater value to customers, and expected and potential future component cost and other cost increases," wrote Apple.



    In addition to the iPad, the recently released MacBook Air is expected to have low margins because of its greatly reduced pricing and the switch from hard disk drives to the more expensive solid-state drives.



    Apple cities the difficulty of obtaining "custom components available from only one source" as a reason its new products often have lower margins. The company also lists its ability to obtain key components such as "microprocessors, NAND flash memory, DRAM and LCDs at favorable prices and in sufficient quantities" as a factor in the reduced margins.



    During the company's Q3 2010 conference call in July, Apple CFO Peter Oppenheimer warned that the iPad's pricing would affect the company's margins. "We have been pretty aggressive here with pricing, and it's going to play true of it on the margin line," Oppenheimer said.



    The iPad's aggressive pricing has made it hard for rival tablet makers to compete, giving Apple a significant early lead in the market.



    "Our potential competitors [in tablets] are having a tough time coming close to iPad's pricing," Apple CEO Steve Jobs said. "iPad incorporates everything we've learned about building high value products. We create our own A4 chip, software, battery chemistry, enclosure, everything. This results in an incredible product at a great price. The proof will be in the pricing of our competitors' products, which will offer less for more."



    For their part, analysts were optimistic about Apple's gross margins leading up to the September quarter, citing growing sales of the iPhone as an upside to the iPad's lower margins. In August, Gleacher & Co. analyst Brian Marshall stated his belief that Apple's gross margin profile is in the process of bottoming. AppleInsider contributor Andy Zaky had predicted a Q4 2010 gross margin of 38 percent.



  • Reply 7 of 26
    Even though the consensus appears to be that the expected margin reduction is due to iPads, new MacBook Airs and other "yet to be announced" lower margin products, I think the real reason is that Apple will be forced to reduce the iPhone pricing as of next year to compete more effectively with the flood of Android based phones.
  • Reply 8 of 26
    Lower Verizon subsidy???
  • Reply 9 of 26
    sheffsheff Posts: 1,407member
    Profit margin is a reward for coming up with a product that is needed in the market. The fact that apple is willing to forego this reward means there is something else more valuable they see coming out of this.



    Apple could be doing this to increase market share and make up for lower margin with higher volume and adoption rates (which in case of iPad and iPhone make a hell of a lot of sense).



    Apple could also simply want to push the envelope of what's possible here. They have plenty of safety cash they can sit on, and it's entirely possible that they want to spend more money during this great time they've been having increasing technological lead, building good supplier relations and hiring great staff as assets for long term growth and competitiveness.



    Also since Apple is not a bank or an oil company their focus can't be just on bottom line. I want to believe that top management is more concerned with building great products then looking good for an earnings call.
  • Reply 10 of 26
    Apple cities? I know Apple is a large company but they have their own cities now? I guess 1 infinite loop wasn't enough.
  • Reply 11 of 26
    If the market cannot understand that such dips in margins are a necessary part of Apple's ability to achieve value from future growth, and if the stock declines significantly, I say, bring it on: It is simply -- speaking for myself -- an opportunity to buy-and-hold even more for the long haul.



    There are few companies that have so consistently proven the ability to execute their strategies as methodically, rigorously, and successfully as Apple has.
  • Reply 12 of 26
    Why this obsession with margin percentages? Of course they are important as a relative indicator of financial health, but they should not be taken out of context. Companies do not thrive or fall on percentages. Absolute numbers is where we should be focusing our attention on when analyzing the results of Apple or any other company.



    So what if Apple's gross margins decline a few percentage points, and because of market penetration more than compensate in total "real" revenue and net profit growth.



    They are taking strategic steps to capture and defend the markets they have created through very aggressive innovation.
  • Reply 13 of 26
    Quote:
    Originally Posted by yeshuawatso View Post


    Apple cities? I know Apple is a large company but they have their own cities now? I guess 1 infinite loop wasn't enough.



    Yeah mistakes like that are why I don't normally use autocorrect. Unfortunately for some reason on the iPhone you have to have autocorrect on to use spell check (they do let you turn off spell check if you only want to use autocorrect however. The other day I meant to send an email that said "Thanks I got it" but I guess I hit 'f' instead of 'g' and it was autocorrected to "Thanks, I for it." unfortunately I didn't notice until right after I hit the send button.
  • Reply 14 of 26
    Quote:
    Originally Posted by sheff View Post


    Profit margin is a reward for coming up with a product that is needed in the market. The fact that apple is willing to forego this reward means there is something else more valuable they see coming out of this.



    Apple could be doing this to increase market share and make up for lower margin with higher volume and adoption rates (which in case of iPad and iPhone make a hell of a lot of sense).



    Exactly. The equation is easy; if net profit is higher at lower margins and higher volume, you do it. So far, Apple has found profit maximization at close to 40%. With the changing product mix, vastly higher volume, efforts to enter China, etc, it may well be that the company will be more profitable at 35% gross margins.
  • Reply 15 of 26
    Back in D8 session early this year, Steve mentioned that they want to price things low, and go for volume. We see this happen in the iPad, it was reinforced with the release of $99 Apple TV, and now we see this in the $999 Macbook Air.



    Clearly Steve is no longer trying to have a small portion of the market with a premium priced product, 50%-60% gross margins (aka Apple premium). He's going for a larger market share. Previously, there was always a risk that Apple will be the early market leader, only to lose it to lower priced competitors. This time, Apple seems to be playing for keeps. They are trying to dominate new segments of the market with initial low price.



    The iPad's low initial prices forced competitors to redesign their product, and left the field open for Apple for a long time. No credible product is out after 7 months of sale. During this time, Apple is consolidating its first mover advantage.



    Apple TV's $99 price basically rendered Google TV to DOA. Google TV might have been a successful product.... Unfortunately, everyone is comparing it against Apple TV, which is being sold at 25% of the cost of Google TV.



    Apple's Macbook Air's $999 is extremely competitive. Cost analysis suggest a margin in the 20% to 30% area. This will make competitors difficult to price compete with Apple's much better build quality. Anybody looking for a SSD based ultra light notebook will be hard pressed to find something better. Given Apple's price advantage in flash memory, margins will be tiny for competitors.



    All this will feed into the entire iOS or Mac OS X ecosystem. The larger the ecosystem, the greater amount of third party resources will be dedicated to the Apple ecosystem. If eventually iOS and OS X merge, it will be even bigger threat to MSFT Windows dominance. Anybody thinks Steve doesn't have a crack team merging the two OS? We are already seeing iOS features being announced in Lion.



    First step, iPad and iPhone OS is merged with iOS 4.2.

    Either next year or by 2012, don't be surprised iOS and Lion is merged, and all iOS Apps could be run in Lion or its decedent.



    Once that happens, MSFT could get in trouble in a matter of years. iOS based apps and games will continue to improve, and grow in quality, robustness, and complexity. As iOS apps become more robust, more work and entertainment will be performed using iOS apps.



    Google's Android system really is the only potential competitor. Although Google seems to be unsure which horse to ride, Android or Chrome.



    It will be interesting next few years.
  • Reply 16 of 26
    Quote:
    Originally Posted by AppleADayKeepsDrAway View Post


    Either next year or by 2012, don't be surprised iOS and Lion is merged, and all iOS Apps could be run in Lion or its decedent.



    An entirely good and insightful post, but I have to take issue with this claim. iOS and OSX are already merged at the API level -- there isn't 100% overlap, but if a function exists in both, it is named the same and takes the same parameters.



    However, they will never be merged at the binary level unless/until they run on the same CPU architecture. iOS is ARM, OSX is Intel. It is *possible* that Apple would ship an ARM emulator with OSX, with special hooks to let iOS and OSX apps communicate via a proxy layer. But I'm very skeptical, especially for things like OpenGL, which is fairly different between the two.



    There are also huge UX challenges in merging two two -- iOS doesn't have the concept of a mouse, OSX doesn't have the concept of multitouch. How would you pinch-to-zoom an iOS photo app running on OSX?



    Not to say it can't or won't be done. But it will be well past 2012, if it ever happens at all.
  • Reply 17 of 26
    Quote:
    Originally Posted by BrooksT View Post


    There are also huge UX challenges in merging two two -- iOS doesn't have the concept of a mouse, OSX doesn't have the concept of multitouch. How would you pinch-to-zoom an iOS photo app running on OSX?



    And I need to correct myself here. Of course OSX has multitouch. What it doesn't have is the concept of 1:1 touch:screen interaction, which is what I was trying to get at. iOS apps that rely on elements of the screen exactly following your fingertips are going to be hard to implement on OSX.
  • Reply 18 of 26
    Quote:
    Originally Posted by BrooksT View Post


    And I need to correct myself here. Of course OSX has multitouch. What it doesn't have is the concept of 1:1 touch:screen interaction, which is what I was trying to get at. iOS apps that rely on elements of the screen exactly following your fingertips are going to be hard to implement on OSX.



    Didn't they already say at the Lion Preview that this was going to be done on a touchpad?
  • Reply 19 of 26
    wizard69wizard69 Posts: 12,826member
    In fact considering the high price we pay for more flash storage on these devices i would think margins are pretty damn thick. Apple sells three versions of the iPad for which you get nothing but more Flash storage at pretty stiff increments. To get anything more you have to buy the 3G/GPS card which is also pretty stiff.



    Speaking of the iPad and the lack of competition I think it is more involved than simple pricing. Lets face it if you had an ATOM based product in the works it would not have competed very well with iPad. Like wise ARM based chips are few and far between especially 18 months ago when designs where being considered. Then you have the issue of Operating Systems suitable for such a device. It is frankly a bunch of BS to impky that iPad can't be competed with on price, I actually think that is the easy part. The problem is having a complete product to compete with. Think about it, we have vendors rushing to Android even as Google has been saying publically that it isn't really ready for tablets.



    So we really need to whip this idea from our minds that iPad is such a low price machine and such a bargain. Apples announcement is likely the result of multiple factors across the entire product line. Margins on iPad can't be that much worst than the notebooks percentage wise.



    Another way to look at this is to consider that tiny motherboard in the iPad and vompare it to some of the dirt cheap PC motherboards for size and complexity. If you can get one for $80 bucks, do you really think that little printed circuit board cost Apple more (minus the variable flash cost)? I like the iPad but to call it low cost or aggressively priced is a laugh.
  • Reply 20 of 26
    Declining margins?!?!?



    NOOOOOOOOOOOO!!!!! Apple is DOOOOOOOOOOOMMMED!!!!

    Sell your shares while you still can!!!11!!1one!!!!exclamation point!!!!





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