Why Apple’s gross margins were helped by the commodity market
Why the favorable commodity market helped Apple's gross margins (Part 1 of 5)
Apple’s gross margins increased despite loss in leverage from declining revenues
Apple (AAPL) recently announced its fiscal Q314 earnings in which its gross margins came in higher than the company’s own expectations. Apple initially expected the gross margins to be between 37%–38% for the third quarter, but the actual gross margins came in at 39.4%. This is even more surprising considering Apple’s revenues declined sequentially, which means there was a loss in leverage.
As the following chart shows, Apple’s revenues have declined sequentially in the last two quarters, but its gross margins continue to increase. Improving gross margins bodes well for Apple’s own investors, but also exchange-traded funds (or ETFs) like the iShares U.S. Technology ETF (IYW), the Technology Select Sector SPDR (XLK), and the PowerShares QQQ Trust (QQQ), which have high exposure to Apple.
Why Apple’s gross margins continue to increase
Apple had expected its revenues for the third quarter to decline because people started to wait to purchase a device with the impending launch of a newer version. In this case, the new version is the iPhone 6, which Apple expects to launch in September. Clearly, the loss in leverage from revenue decline didn’t have any impact on gross margins.
Apple’s management mentioned that favorable commodity markets benefited the company and kept its manufacturing cost down. NOT and (or NAND), mobile dynamic random access memory dynamic random-access memory (or DRAM), and liquid crystal displays (or LCD) pricing declined, while the PC DRAM price increased. These are the key components that go inside Apple’s products. Apple procures some of these products from Micron (MU).
Apple could again beat its own expectations of gross margins for Q4 quarter
Apple expects its gross margins range to be between 37%–38% in the 4Q14 fiscal year end quarter. The company expects that LCDs and mobile DRAM pricing will continue to decline, while NAND pricing will essentially remain flat. PC DRAM pricing will increase in the quarter that includes September. However, we believe Apple would again easily beat its own expectations of gross margins. The release of iPhone 6 in September would definitely help Apple as iPhone 6 would carry higher average selling price, which would push gross margins further up.
Browse this series on Market Realist:
