Perhaps the iPhone 5S is unbreakable, or maybe Apple Inc. (NASDAQ:AAPL) has changed its warranty policies, but one thing is clear. The company massively reduced its warranty accruals in the first three months of 2014, and the change led to much better gross margins, and a significant boost on the company's stock price in the days since.
Stifel analysts Aaron C. Rakers et al. took a look at the less sexy side of the Apple Inc. (NASDAQ:AAPL) earnings report in a recent research note on the company. The analysts said that the majority of the gross margin beat that Apple managed in the quarter came from lower warranty accruals. Whether or not that's a trend that's here to stay is a question without current answer.
Apple tones down the warranty
Apple Inc. (NASDAQ:AAPL) spent $1.253 billion on warranty accruals in the quarter it recorded as the second of 2014. The company spent more than $2 billion in the area in the first quarter of the year. The numbers hasn't shown much of a seasonal trend before, and Apple Inc. (NASDAQ:AAPL) hasn't publicly changed a warranty policy, so the cost reduction might be temporary, but they sure helped Apple investors reap gains in the last week.
According to the Stifel analysis, the large drop in warranty accruals led to a 180 basis point, or 1.8 percentage point, drop in the company's gross margin, that number came in at 39.3%. The number was expected to come in at exactly 180 basis points lower in the second quarter of the year.
Apple Inc. (NASDAQ:AAPL) warranty accruals may have been a victim of poor weather in the first three months of the year. Wednesday's numbers might be random chance. Either way the Stifel analysts aren't looking to bet on the warranty accruals being a big mover of the stock through 2014, though the headline effect on Thursday, combined with the company's other positives, might have been incrementally positive.
Apple's missing $8.5 billion
Apple Inc. (NASDAQ:AAPL) is constantly spending on capital in order to improve its supply chain and its own facilities. In the second quarter Apple Inc. (NASDAQ:AAPL) announced that it still planning a $8.5 billion capital expenditure spend in the second quarter of the year. The company's future certainly involves a couple of major projects, but it is unclear where this money is going to go.
According to the Stifel analysis of the company the most likely targets for the $8.5 billion influx are the building of the company's new headquarters, and improvements of the company's supply chain. Apple does not have that much time to spend the $8.5 billion. The company's fiscal year ends in September.
Apple surely has big plans for the rest of 2014, and the company's remaining $8.5 billion in capital is sure to figure in there somewhere. Investment remains an important principle in Cupertino, even if sharing the target of investment isn't always held in high esteem.