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Apple\'s gross margin too narrow?

updated 04:10 pm EDT, Fri October 21, 2005

Apple\'s gross margin

The percentage of revenue left after subtracting product costs for Apple in its September-ended quarter was 28.1 percent, narrower than the 29.7 percent in the June-ended quarter, which leads some analysts to believe that over time. Shaw Wu, an analyst at American Technology Research estimates the gross margin average of all iPod models is approximately 22 percent, narrower than the margin earned on its higher-end Macintosh computers, according to a report from Reuters. "You look at last quarter, their gross margin went down a bit sequentially," Wu said, referring to Apple. Chris Whitmore, a Deutsche Bank analyst noted "as music and iPods continue to outpace computer hardware sales we expect that shift to drive lower profit margins, but that will continue to translate into pretty strong operating-income dollars and earnings per share."

Analysts say the cost of flash chips, which is expected to decrease over time, is a factor that can push Apple's gross margin in either direction. "As those costs go down, Apple's likely to respond by lowering prices because they're anxious to fend off competitors," said Roger Kay, principal of market research firm Endpoint Technologies Associates. Operating income as a percentage of revenue in the company's most recent fourth quarter was 11.4 percent, more than double the 5.5 percent in the year-ago quarter. "Apple has offset the gross margin pressure by managing its business better," Wu said.




by MacNN Staff

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Comments

  1. michaeljohn63

    Joined: Dec 1969

    0

    Yeah, right...

    Yeah, Apple's last several quarters have demonstrated that Apple doesn't know how to make money, or enough money anyway. Please. This guy is clearly not paying attention. Apple is slowly converting itself from a high profit low volume vendor to a high volume high profit company. That profit per unit is getting lower is part of what Apple is trying to accomplish, to stay competitive, and grow volume. How many times in the past, oh, say, 25 YEARS, have these analysts criticized Apple for just the opposite: trading off volume sales and marketshare for higher profit and lost markets? I'd say just about every other day.

    If Apple can continue to leverage the consumer space with the iPod and eventually a media center, it can afford to lower profit margins on Macs to grow that market. Great! Carefully, slowly, Apple seems to making all the right moves right now.

  1. benj

    Joined: Dec 1969

    0

    How to fix slim margins..

    Raise Prices!..

    I'm kidding...people complain that Apple is too expensive (Dvorak) and now someone complains that Apple doesn't make enough money off of their products? I'm sure there's a bunch of spreadsheets at Apple which indicate where drive prices are heading and how they affect the product (and margin). As far as i can tell...Apple is driving hardware sales with(free) iTunes and (Somewhat free) Quicktime along with the affordable to expensive range of iPods. This feeds into other hardware sales...obviously since Apple's market share isn't stagnant or falling.

  1. SavMan

    Joined: Dec 1969

    0

    ???

    I'm confused... I'm looking at two articles, right next to each other on MacNN. One is telling me that the profit margin for an iPod is a hearty 50 percent, the other telling me that it's an anemic 22 percent. Am I missing something?

  1. beeble

    Joined: Dec 1969

    0

    Switch to Nano

    Let's not forget that during that quarter Apple ran down it's inventory of iPod minis and had to build an inventory of iPod Nanos before their introduction. This transition has skewed many numbers such as the drop in overall iPod sales.

    That drop versus an increase in Mac's sold seems to completely counter this guys explanation for the lower margins. Less iPods were sold, more Macs were sold. Lower margins can't then be blamed on the iPod, at least not entirely.

    One day an analyst will wake up, get out of bed an make the decision to think through his/her comments before talking out loud, North Korea will stop plotting to take over the world, we'll discover that faster than light travel is possible after all, the secret to cold fusion and how to make the perfect omelet. Yes I'm a dreamer but I think 4 out of those 5 things are actually possible. You can guess which one isn't.

  1. LouZer

    Joined: Dec 1969

    0

    Idiots you all

    First, one guy says it could affect profitability. The second actually stated that margins would drop, but overall profit and earnings per share should be OK. And of course, since it wasn't a glowing review, all you shout "Analysts don't know what they're talking about!". Guess what? They do!

    Apple's highest profit margins came from their computer lines. However, they have shown that computers are now their secondary concern (how many new iPods were released this year vs. new macs, right, thought so). Second, lower margins can be offset with more sales, for which the iPod has been doing so far (sell more, make more total profit).

    However, if you actually think Apple's sales of the iPods are going to keep increasing forever, your nuts. And once the sales start leveling off, guess what, lower margins on steady sales means lower profits.

    Note, BTW, they don't actually say "Watch out, next quarter is going to suck!". They're giving a future forecast and analysis. Its their job. And, yes, Apple could make changes that affect that. Duh, that's what businesses do (and if you don't think that Apple has its own analysts who aren't telling them the same thing, you're still dreaming. So Apple knows the same thing, and I'm sure their plans are to deal with it as the time comes.

    To me, the worst you should say about this is "Duh! Who can't figure that out. More commentary from Mr. Obvious." But it isn't wrong analysis.

  1. LouZer

    Joined: Dec 1969

    0

    Re: ??

    The previous article was just breaking the iPod down to its components, summing up how much they think each piece costs, and then saying "The rest is profit!" They didn't count in the cost of R&D, overhead, marketing, or the like. h***, $50 of the new iPod price probably goes to pay for fuel for steve's plane!

  1. Eriamjh

    Joined: Dec 1969

    0

    It all BS.

    Don't have anything real to report on?

  1. mduell

    Joined: Dec 1969

    0

    I see different numbers

    I see Apple's gross margin at 36.9%, which is 16.3 points better than the industry average.

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