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What to Expect for Apple Inc.'s Margins Moving Forward

By Motley Fool Staff - May 6, 2016 at 9:56AM

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It might be time for the Mac maker to say goodbye to 40% margins.

It's rare that decreasing gross margin makes sense, but in the case of Apple (AAPL 1.62%), an argument can be made.

In this clip from the Industry Focus: Tech podcast, Dylan Lewis and Nathan Hamilton share a few tips for investors looking at Apple's gross margins from quarter to quarter. Find out how much they fell in the most recent quarter, what factors caused the drop, and why we can probably expect the downward trend to continue.

A transcript follows the video.

This podcast was recorded on April 29, 2016. 

Dylan Lewis: The second thing you mentioned in that episode a year ago, was focusing in on gross margins. A year ago, they clocked in just under 38%. Now they're around 39.4%. So, it's actually a nice little uptick. But if you look quarter-to-quarter, the story is a little bit different. They've actually trended down.

A while back, you said the days of high-40% gross margins, which is something I think they realized as recently as 2012 or so, those days are over. And I totally agree, that's just not sustainable for what they're doing right now. Is there anything you're seeing on the gross margin side, or the average selling price side?

Nathan Hamilton: On the ASP side, again, going back to the most recent release, it's not reflected in the quarter. As they mentioned on the call, and as many people are predicting, over the next few quarters, you'll probably see some pressure and some downward trends on the ASP because, as you look at the [iPhone] 6 SE, it is going to be a cheaper model. It's not necessarily made for U.S. markets. 

I'm sure people will buy it here, but really, the play is, how do we get this thing to expand in India, China, all the other developing economies, where people want the luxury of an iPhone, the high-end model, but may not be willing to pay up for it.

Lewis: Yes. And something we saw with this most recent report was, ASPs were down year over year and sequentially. In the guidance ...

Hamilton: Tough comps again!

Lewis: Tough comps again! And that'll probably continue to trend down. As you mentioned, the product mixed profile has changed dramatically with the SE, and the currency headwinds in the foreign markets are going to persist. That's not going anywhere, either.

Hamilton: Yeah. But, for the currency headwinds, just look at the constant currency revenue basis. That's the true guide of what a business is doing. If you're a short-term trader, OK, sure you can look at that and put it into your model and see what it spits out and make your decision. But if you're longer-term, you just have to look at what the actual business is doing, not what currencies are doing, which is out of their control.

Lewis: Yeah. Looking forward, from the conference call, management guided for gross margin to come in somewhere between 37.5%-38% for this upcoming quarter. Again, this will be down sequentially. I think that's very realistic, and I think that's where you're going to continue to see things. Last quarter, we talked about on the show, they actually had an above-40% gross margin, and that was a slightly inflated number, because they had about $500 million coming in via a patent dispute with Samsung. That added to the top line, and that was not the true measure of the product operations. That was just a one-off that was coming in.

Hamilton: Yeah, one time, non-recurring.

Lewis: Exactly. So, don't get too used to the idea of those 40% margins. I think we'll be seeing them in the mid to high 30s.

Hamilton: But, at the same time, and we'll talk about this a little bit, the high margin businesses they do have, that, as we look at it, pretty much as I see it, en fuego. They're not super meaningful to the company...well, to Apple. But any other company, any of those companies as a single one company, would be a huge success, but not in Apple's standards.

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