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Apple admits gross margins will decline further this year

Samantha Tomaszczyk
May 20, 2013

Second quarter results show revenues rose but profits fell for the quarter as firm cut iPhone, iPad prices

Apple expects its gross margins to decline further in 2013 as it lowers the prices of its iPhone and iPads to appeal to first-time buyers.

The Californian manufacturer reported record sales in the first three months of this year (Apple’s second financial quarter).

It sold 37.4 million iPhones in the quarter, an increase of seven per cent – 2.3 million devices – on the same period last year. Sales of its iPad rose from 11.8 million in Q2 of last year to 19.5 million, a 65 per cent increase.

However, gross margins, or the ratio of revenue to profit, fell year on year from 47.4 per cent to 37.5 per cent, which meant Apple’s net profit for the second quarter of 2013 was $9.5 billion (£6.2 billion), down from $11.6 billion (£7.6 billion) in the same period last year.

Apple CFO Peter Oppenheimer, who spoke to the media via a webcast immediately after the results were published on Tuesday 23, said that in June, gross margin will fall by between 50 and 100 ‘basis points’, or 0.5 to one per cent.

Affordable handsets

Oppenheimer put this down to Apple taking on a different approach, such as making the iPhone 4 more affordable in “many markets” such as China.

This, he said, has contributed to the average selling price (ASP) of the iPhone falling by $28 (£18) quarter on quarter, from $641 (£420) last year to $613 (£402) this year.

Apple CEO Tim Cook said Apple would continue with this strategy of lowering prices for older iterations of its iPhone in an attempt to attract first-time smartphone buyers.

Cook said: “We see an enormous number of first-time smartphone buyers coming to market and so what we’ve done to address that – and we started last quarter – is we’ve made the iPhone 4 even more attractive to first-time buyers. We are continuing to do that.

“You should see this with most of our range – general lower mix as we move away from launch date.”

Oppenheimer added: “With the iPad Mini, its margins were well below the company average. But we believe we have made a good strategic decision to introduce a cheaper product.”

Frustrating decline

Cook admitted that Apple’s growth rate has slowed and its profit margins decreased from its peak in 2012 following the iPhone 5 launch on September 12.

Apple share prices peaked in mid-September at $702 (£455) but have fallen steadily since then and, at the time of writing, stood at $405 (£263), which Cook said was “very frustrating”.

He also said that Apple’s weekly growth has slowed and that gross margins were closer to those recorded two years ago.

Cook said revenue would be “flat” for the June quarter in comparison to the same time last year, with Oppenheimer predicting it would be between $33.5 billion (£21.7 billion) and $35.5 billion (£23 billion). This would be a quarteron- quarter decline from the March quarter, which saw revenues of $43.6 billion (£28.6 billion).

“We acknowledge our growth rate has slowed and our margins have decreased from the exceptionally high level we experienced in 2012,” Cook said.

“Our revenues grew about $13 billion in the first half of this fiscal year. Even though that’s like adding the full first-half fiscal revenue of five Fortune 500 companies, our average weekly growth slowed to 19 per cent. Gross margins are closer to two years ago.

“Our fiscal 2012 results were incredibly strong and that’s making comparisons difficult this year – last year our business benefited from both high  growth and demand for our products along with a richer mix of higher gross margin products, favourable foreign currency and historically lower costs.

“We are gliding to flat revenue year on year for June, along with a slight sequential decline in gross margins.

“The decline in Apple stock price over the last couple of quarters has been very frustrating to all of us, but Apple remains very strong and we will continue to do what we do best. We can’t control exchange rates in world economies, and even certain cost pressures. But the most important objective for Apple will also be creating innovative products, and that is within our control.”

Full article in Mobile News issue 538 (May 6, 2013).

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