“Apple Computer Inc. has a runaway hit with its market-leading iPod digital music player, but could the device’s success actually hurt the company’s profitability over the longer haul? ‘It’s an excellent question,’ said Shaw Wu, an analyst at American Technology Research, who estimates the gross margin average of all iPod models is about 22 percent, narrower than the margin earned on its higher-end Macintosh computers. ‘You look at last quarter, their gross margin went down a bit sequentially,'” Duncan Martell reports for Reuters.
“Gross margin, or 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. Gross margin is one common metric analysts and investors track to gauge the health of a business and how much to pay for a company’s stock,” Martell reports. “As Apple’s business shifts more to consumer electronics items like its iPod — sales of iPods now account for nearly a third of total Apple sales — that means the sales of its more profitable Mac computers make up less of the total. ‘As music and iPods continue to outpace computer hardware sales we expect that shift to drive lower profit margins,’ said Deutsche Bank analyst Chris Whitmore. ‘But that will continue to translate into pretty strong operating-income dollars and earnings per share.'”
Martell reports, “But even as Apple’s gross margin declined in the fourth quarter from the third and year-over-year, there are other things Apple is doing in its business that may hearten investors: it’s spending less on research and development, sales and marketing and other costs as a percentage of revenue. Operating income as a percentage of revenue in its most recent fourth quarter was 11.4 percent, more than double the 5.5 percent in the year-ago quarter, although down from 12.1 percent in the third quarter. ‘Apple has offset the gross margin pressure by managing its business better,’ Wu said.”
Full article here.
Advertisement:
The New iPod with Video. The ultimate music + video experience on the go. Buy it now at the Apple Store. From $299. Free shipping.
Related articles:
New Apple video-capable iPod dissected, gross profit margin estimated – October 21, 2005
Apple’s video-capable iPod and iTunes are first vital link in new distribution paradigm – October 21, 2005
USA Today: Apple’s new iPod + video: world’s foremost portable music players have gotten only better – October 20, 2005
Comprehensive review of Apple’s iPod 5G with Video – October 20, 2005
The Motley Fool: ‘Apple’s new video-enabled iPod is about to save the televised content industry’ – October 20, 2005
Ars Technica reviews Apple’s new video-capable iPod – October 20, 2005
NY Times Pogue: ‘watching video on new iPod’s 2.5-inch screen is completely immersive’ – October 19, 2005
MSNBC columnist: after initial coolness wears off, Apple’s video iPod will wind up in dresser drawer
Apple’s $1.99 iTunes TV show downloads may be ‘the savior of good television’ – October 17, 2005
Apple opens Pandora’s box for the media business, could have profound long-term consequences – October 17, 2005
BofA analyst: Apple video play an ‘evolutionary opportunity,’ 9.3m iPods to be sold this quarter – October 17, 2005
Apple has the potential to change not just the audio industry, but the whole entertainment industry – October 17, 2005
Advertisers welcome Apple’s iTunes Store commerical-free content – October 17, 2005
New York Times writer can’t think different: ‘video iPod may not be ready for prime time’ – October 17, 2005
Podfather: iPod porn is going to be huge – October 14, 2005
Forrester Research: Apple transformed music distribution, now it is doing the same for video – October 14, 2005
Watching episode of ABC’s ‘Lost’ on 2.5-inch iPod screen surprisingly compelling – October 13, 2005
Get ready for the iPod video torrent search sites – October 13, 2005
Apple’s new iMac G5, iTunes 6, iPod video designed to bait Hollywood – October 13, 2005
Apple video iPod+iTunes could create mass audience for video on the go, despite studios’ misgivings – October 13, 2005
Using QuickTime Pro to create videos for playback in new Apple iPods – October 13, 2005
Analyst: Apple has just produced ‘the tipping point’ for entertainment content – October 13, 2005
Apple’s video play likely to unsettle movie, TV, advertising and retail markets for years to come – October 12, 2005
Apple unveils new 5th generation iPod, now plays music, photos, and video – October 12, 2005
Surely this would only become a problem if their mac sales started to fall? As is mac sales are up so surely iPod sales are a bonus on top of growth in their traditional markets? Admittedly I haven’t read the whole article.
Sure, sell more, go out of business. Sick!
MXNT – exactly! And the opposite is happening.. Mac shipments are growing some 43% a year! Once MacIntels come out, this is likely to increase. Shaw “Wong Way Wu” gets his knickers in a twist again…
So more sales = lower gross margin, and this right on the heels of record quarterly sales and profits = stock price drop. OK, I give up. This is bizarro-world.
Left is right! Up is down! Right is wrong! Good is evil! Say goodbye when you arrive and hello when you leave!
I’m outta here…
On a side note, Time Warner now supports Blu-ray DVD spec.
This is why having nothing but MBAs in a small room is dangerous.
Profit is profit – if you’re making more money than your expenditures take away, you’re in good shape. Since, literally, any positive margin can be considered a good one, 28% is certainly nothing to be concerned about. What other investment makes that kind of coin reliably?
If you’re margins are good AND your’re expanding your market in absolute numbers (as Apple is), AND even expanding your share of that market as a percentage (as Apple is), then …
I’m sorry. What exactly is the problem again?
Wow. Computer sales on on the increase, iPod sales are increasing at a faster clip so gross margins go down.
They need to use common sense. If a company sells widgets only and gross margins go down, yes, it’s bad. Apple is expanding in different directions right now. They have no debt and a huge cash reserve.
These analists are overreacting.
/yes I spelled analists wrong
This story is brought to you by Reuters. They have something of a track record for spinning stories to put Apple in a bad light.
They’ve run many stories that attempt to diminish Apple or the iPod.
Come to think of it, they have something of a track record for distorting other stories for no apparent reason.
Truth is flexible for Reuters.
Ironically, the Magic Word is ‘fact’
Well, that Wu person seems to frequently comment with very peculiar cautionary possibilities when considering Apple, with only an occassional burst of enthusiasm. Looks like an agenda to me, but even if it’s not .. in regard to Apple anyway, it’s certainly a pattern, and one that seems to often be at odds with prevailing reported market activity, imho.
The only way increased iPod sales would be a problem is if Apple couldn’t produce as many computers because they were instead producing iPods. Like if they produced Macs and iPods on the same assembly liine. Obviously, they aren’t even produced in the same factory, much less the same line. There is no constraint between the two.
The only constraint seems to be the availability of CPUs from IBM and Freescale. Apple is working on solving this problem with the introduction of the Intel based Macs. The constraint on iPods is that they are so popular that Apple can’t keep them in stock.
What was the problem again?
I doubt Mr. Wu has his MBA. And if he does, he should be ashamed of himself.
If Apple decides tomorrow to sell purses and can sell them for a dollar more than they make them, without adversely affecting their other product lines, then investors should applaud such a move.
> there are other things Apple is doing in its business that may
> hearten investors: it’s spending less on research and development
That depends on whether you are a short or long term investor.
In other news adding water to cola creates a “wattered down taste”
If you think of AAPL as a holding company for the Mac Business Unit and the iPod Business Unit, then this article is pointless. The MBU gross margins are UNAFFECTED by the iBU gross Margins and vice versa.
What the article should be pointing out is that Mac mini price points are bringing down MBU gross margins. But when you sell entry level boxes for $499 and quad core pro systems for $4,999 then the product mix is MUCH more important than the average gross margin of all that stuff.
Bottom line is that to look at any one stat for AAPL is a massive mistake. They sell $999 software packages at 80%+ gross margin. They sell lower end iPods at <30% margin. They sell lowend desktops, high end workstations, OS software, Server software, home applications like iLife and Pro stuff like StudioPro. And digital music. And iPods. And accessories. And extended warranties. And web email/file storage.
MDN word: social
These guys are complete MORONS. This article must have the highest proportion of stupid statements relative to total statements of any article I’ve seen this year. Your average convenience store owner has more business sense, and it’s NOT just the silly point about margins going down (which would you rather have, margins going down and total profits going way up, or the reverse?). The R&D point is even more unbelievably dopey; R&D is going down as a PERCENTAGE because Apple is selling more of the same type of products while R&D is staying pretty much the same. Only if Apple were to develop more types of NEW products/services would the R&D percentage have to increase. Since Apple has proven it can be very innovative at this level of R&D over the last few years, there’s no reason to increase R&D, so it will decline as a percentage of total costs/revenues. More R&D is NOT always good since every company hits a point of diminishing returns beyond which R&D dollars are wasted or simply less efficient in generating innovations.
Another spin to these statistics is that as a market matures and more and more competitors enter the market, gross profit margins decline. This is normal occurrence. If the dominant market player plays it cards right then the extra competition can force it to innovate to stay ahead of the pack,
Sound familiar? Video as a free option differentiates Apple from its competitors. And if there’s one thing Apple is renowned for is it innovation.
However, other companies mature differently, they stop innovating and begin to lose focus. Does that sound familiar…Microsoft ? I agree with the figures I just interpret them in a different way.
Wong Way Wu, i like that!
” width=”19″ height=”19″ alt=”grin” style=”border:0;” />
Anyhow, this guy is wrong more often than not. As someone else suggested above, perhaps he has a hidden agenda?
At any rate, according to this article, iPod gross margins are more likely around 50%:
http://www.macminute.com/2005/10/21/bw-video-ipod/
From the original article: “The latest iPod, like its smaller sibling, the iPod Nano, enjoys similarly fat gross profit margins in the neighborhood of 50%, according to iSuppli analyst Chris Crotty, who estimated the price of the parts used in the iPod (see BW Online, 9/21/05, “Unpeeling Apple’s Nano”). He reckons the 30-gigabyte version of the new iPod, which sells at retail for $299, costs Apple (AAPL ) $151 to manufacture. “This is in line with what we have seen with other iPod products from Apple,” he says.”
RainyDay, while the article needs more context, your example of component costs is also misguided. Apple traditionally has margins of 27 to 28%. The 50% you cite is just component cost, relative to retail price, a completely different metric.
When all is said and done, Apple’s margins have hovered around 27 to 28%. The Shuffle brings that percentage down a bit as it has a 20% margin, and so did the HP iPod deal, as they had to cut HP some profit, so that deal was also about 20% gross margin. The traditional iPods were presumed to be roughly the same as Apple’s typical margins of 27 to 28%. The new nano, give that it’s flash, might have a lower margin like the shuffle, but we’ll get a better read on that after the Xmas quarter.
Yes, this is true. The best thing would be for all sales of iPods to come to a halt as early as possible. Runaway sales are clearly a bad sign.
(link=http://macdailynews.com/)Link(/link)
[link=http://macdailynews.com]Link[/Link]
[link=http://macdailynews.com/] Link [/Link]
[link=http://macdailynews.com/]Link[/link]
[link=http://macdailynews.com/]Click[/link]
[link=http://macdailynews.com/] Click [/link]