In Apple's (NASDAQ:AAPL) most recent earnings release, the company said that it expects its gross profit margins for the coming quarter -- the company's peak iPhone quarter -- should come in between 39 and 40 percent.
On the surface, this might not seem like all that big of a deal in light of the fact that Apple's gross profit margin percentage during its fiscal 2015 came in at just over 40%. But it is a big deal and, frankly, quite impressive. Here's why.
This year's iPhone features a lot of improvements
Apple's revenue base is dominated by iPhone sales, so the gross margin profile of its iPhone products has a large impact on the company's overall gross profit margin profile.
This year, Apple brought a lot of improvements to the iPhone that, in aggregate, should have led to a pretty sizable uptick in the cost structure in the iPhone. Some of the cost adders that immediately come to mind include:
- Inclusion of 3D Touch (this requires that capacitive sensors be integrated into the backlight of the device as well as a controller chip to be included on the logic board)
- Doubling of RAM
- Inclusion of a larger applications processor built on leading edge (read: relatively expensive) 14/16-nanometer manufacturing processes
- Use of a more expensive, custom Series 7000 aluminum alloy to build the device's casing
- Use of a newer, more advanced cellular modem that also likely required increased RF chip content over the prior generation iPhone
The fact that Apple was able to deliver all of these improvements from the prior generation model while still guiding to an overall gross profit margin level for the quarter of between 39% and 40% is really impressive, especially given that in the year-ago period Apple saw a gross profit margin of 39.9%.
A richer mix of Apple Watch, too
In the year ago quarter, Apple had not yet begun selling the Apple Watch. During the current quarter, Apple is likely to sell quite a lot of Apple Watches.
Although things may have changed since then, Apple had previously indicated that the gross profit margins that it saw on Apple Watch sales were below the corporate average. The fact that Apple's gross margin guide is so strong even with Apple Watch is, in my view, something that should impress investors.
Apple truly manages its supply chain to perfection
The fact that Apple has been able to keep its gross profit margins high even as it dramatically ramps up the feature-sets of its next generation iPhones and sees a greater mix of Apple Watch sales is a testament to Apple's supply chain management team.
Designing and building class-leading products is a difficult feat in its own right; it's hard to imagine that there is any other smartphone vendor on the planet that can deliver on building unequivocally great products as Apple can.
Designing and building class-leading products while keeping cost structure lean enough to maintain best-in-class gross profit margins, on the other hand, is truly the stuff of legends.
Although the company does face some very real challenges in the coming fiscal year -- namely, trying to grow iPhone sales after such a monster iPhone 6/6 Plus cycle -- long-term investors should feel comfortable knowing that they hold shares of what is arguably the best run technology company on the planet.