Why didn’t Apple’s margins improve last quarter?

“I expected Apple’s margins to improve last quarter. They didn’t and so the question I needed to answer is why,” Horace Dediu reports for Asymco.

“For a company selling hardware these are extraordinarily high margins. They are higher than those of Google and have narrowed the gap with Microsoft, neither of which has a high proportion of hardware sales,” Dediu reports. “But they are not growing and the reason is to be found in the reason they grew in the first place: because of proportion of iPhones making up the total sales.”

Dediu reports, “As a reminder, the iPhone is a uniquely profitable product. I estimate that it obtains about 50% gross margins… Contrast that with the iPad. As its breadth of offerings increases, it causes a lower price per unit. The iPhone is now at $613 per unit, even with two older generation products available. (The lowest price was in Q2 2012 when the average price was $608.) The iPad is at $449 per unit, down from $662 at launch three years earlier.”

Much more in the full article, including the usual excellent charts, here.


  1. If they are in the middle of ramping up new products, switching suppliers and buying parts contracts to insure future components, and revamping existing products, that takes time and money. Doesn’t seem too difficult to understand.

    1. Assuming that is what they are doing, then ok.

      The problem is that we have no real idea of what is happening.

      The people who automatically support Apple no matter what seem to me to be saying this: “There is nothing behind the curtain so that PROVES there is something behind the curtain just because Apple is smarter than me. I am a mere peon so how could i know.”

      OK, but at some point there better ACTUALLY BE something behind the curtain. Common sense.

  2. I’m surprised Horace expected margins to go up with all the stories of the iPhone 4 selling like hotcakes in the lower-margin carrier-unsubsidized markets. Combine that with the breakout success of the (again) lower-margin iPad Mini and I would have thought a shot to AAPL’s margins would have been a foregone conclusion.

  3. The larger the gross margin, the more attractive it is for a competitor to enter the market. A margin of 47% can’t be defended for very long, unless the seller has a total monopoly.
    So from a competitive perspective, Apple’s 38% margin leaves less room for a competitor to make a profit, unless of course the product is cheaper to make than the equivalent product from Apple. Apple’s product mix naturally varies, and the quarterly gross margin % reflects that as well. A decline to 38% gross leaves plenty of room for net profit, but net profit cannot increase without dramatic revenue increases to offset the drop in gross margin. Apple did not anticipate that one of its major suppliers would copy the look and feel of the iPhone, but as it did happen, the market it created for its competitors reduced its sales potential dramatically. Also, it takes time to set up in markets outside North America, and foreign markets are increasingly important to its future growth. None of this is rocket science, but this is an accountant’s view, which seems to differ from the market analysts’ views. They like companies like Google and Amazon, but where are their dividends, and what are their P/E ratios?

  4. Apparently Horace thought wrong.

    Thinking that margins would go up from 47%+ is just stupid. Having a margin of 47%+ is ridiculous, and one of Apple’s historical highs for any quarter.

    Introducing the iPad mini (with ramp-up production costs), the razor-thin iMac (with supply problem) must have hurt margins. Yet Apple still managed 38%.

    I fully expected Apple’s margins to decrease, because 47% just isn’t sustainable when you are in such a touch competition as Apple is with Samsung, HTC, Google, etc. for the mobile market.

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