One of the analysis I do on Apple’s finances every quarter is to adjust the company’s reported gross margin for its warranty accruals. Apple’s warranty charges have ranged from 0.9% to 3.7% of total revenue since fiscal 2007. I believe it is worthwhile to understand the changes and dynamics to them as it provides insight into what are the “true” costs of Apple’s products and how gross margins may change. (Note that I own Apple shares).
Warranty accruals have a negative impact on gross margins and can also “mask” the company’s actual gross margins for its products. I have developed a Google Doc that has Apple’s gross margins and warranty accruals from fiscal 2007 to 2009 on an annual basis and then quarterly to September 2015 available via this link.
September’s warranty accruals tied for the lowest percentage since June 2012
Apple’s warranty accruals as a percentage of revenue were 1.7% in the September quarter. This tied the March quarter’s number and were the lowest since June 2012’s 0.9%.
They were down 50 basis points from 2.2% in the June quarter, which is a bit interesting since Apple has been shipping the Watch for a few months. It could mean that the Watch is pretty reliable (while only a sample of one a friend of mine has gone through three due to reliability issues) or that there haven’t been enough sold to impact the dollar amount that the company has to set aside.
Lower dollar amount set aside in fiscal 2015 than 2013
Something that stood out when I looked at the numbers is that Apple set aside $5.022 billion for warranty accruals in fiscal 2015. This is very slightly less than 2013’s $5.032 billion and very slightly higher than 2014’s $4.952 billion. However Apple’s revenue has increased 37% over the two year period.
One reason the company has probably been able to lower the amount it sets aside for warranty claims is that it over-reserved in fiscal 2013 and to a degree in fiscal 2014. In 2013 it set aside $5 billion for warranty claims but only had $3.8 billion in claims the following year. In 2014 it set aside $4.95 billion and only had $4.2 billion in 2015. This has allowed the set aside for warranty claims to climb to $4.8 billion.
What this means is that the help given to Apple’s gross margin by setting aside a lower percentage of revenue (20 basis point help in fiscal 2014 and 60 basis points in 2015) will eventually end and possibly reverse to some degree. It could be a headwind to gross margins in fiscal 2016 but given the company’s increased gross margin guidance for the December quarter it doesn’t look like it will happen right away.
“Adjusted” gross margin highest in three years
One other number I look at is to add Apple’s reported gross margin and its warranty accruals to give an indication of the true cost of its products and services. When you do this for fiscal 2015 the company’s gross margin was 42.2% compared to 40.6% in fiscal 2013 and 41.3% in fiscal 2014. It isn’t surprising that gross margins have trended higher as the percentage of revenue generated by iPhones has increased from 53% in fiscal 2013 to 56% in fiscal 2014 to 66% this year.
