On Aug. 1, Apple (NASDAQ:AAPL) reported its financial results for the third quarter of its fiscal year 2017. The company's results were solid, with revenue and earnings per share coming in ahead of analyst expectations.
Management had a lot of insight to share about its business on the conference call that accompanied its financial results. Here are three items from the call that I found particularly interesting -- and I hope you will, too.
Inside the gross margin guidance
During the fiscal third quarter, Apple enjoyed a gross profit margin percentage of 38.5%. This, Apple CFO Luca Maestri said, was "at the high end of [Apple's] guidance range."
This was a solid result, but as analyst Katy Huberty pointed out on the call, Apple is guiding its gross margin percentage at between 37.5% and 38% -- down a bit from last quarter's results, even at the high-end of the guidance range.
Huberty was interested to know what factors are driving that lower guide, and Maestri didn't disappoint.
Maestri began by saying that Apple generally has "product transition costs during the September quarter."
"That's the primary driver," the executive added.
Maestri also pointed to a "more difficult memory pricing environment this year than a year ago."
If you will recall, the vendors of memory products -- both NAND flash (which is what Apple uses for storage across its product lines) as well as DRAM (required in all the computing products that Apple sells) -- are enjoying surging revenue and profits due to a relatively tight supply environment.
The fat profits that the memory makers are currently enjoying are clearly going to take their toll on Apple's gross profit margin percentage in the near-to-medium term.
Apple Watch keeps winning
Apple was "late" to the smartwatch game, but since its entry into the market back in 2015, the company has gone on to take the pole position in this market.
Per research firm Strategy Analytics, industrywide smartwatch shipments totaled 21.1 million units in 2016. Of those, the firm estimates that Apple sold 11.6 million. That translates into unit share north of 50% in a market replete with competitors.
On Apple's earnings call, company CEO Tim Cook said that unit shipments of the Apple Watch "were up over 50% in the June quarter."
Considering that Apple launched its current Apple Watch Series 2 products (as well as the refreshed, lower-priced Apple Watch Series 1) nearly a year ago, this kind of product momentum is encouraging.
And, if a recent report from DIGITIMES is true, Apple is planning to refresh the Apple Watch this year. A product refresh, coupled with a waterfalling of the Apple Watch Series 2 to lower price points, could fuel further growth in the burgeoning product category.
Let's talk iPhone upgrade rates
Analyst Shannon Cross asked management to "talk a bit about the composition of the base of iPhones."
"From an absolute quantity point of view, the upgrades for this fiscal year are the highest we've seen," Cook said.
He then went on to clarify that viewed from the lens of an upgrade rate (that is, the percentage of the installed base that upgraded to new devices during the cycle), it's "similar to what [Apple] saw with the previous iPhones, except for iPhone 6, which as we called out in the past had an abnormally high upgrade rate."
Cook then ended his answer to the question by reiterating a point he made in a previous earnings call.
"We do think that based on the amount of rumors and the volume of them, that there is some pause in our current numbers," the executive said.
On the bright side, Cook indicated that although Apple might be suffering from a "pause" due to the rumor mill going at full-tilt, "it probably bodes well later on."
In other words, if customers are holding off purchases in anticipation of the new models, then to the extent that Apple loses sales today, it should make them up once the new models are available for sale.