Apple Inc. (NASDAQ:AAPL)’s third-quarter revenue might have missed the consensus estimates. But the company surprised the Wall Street with its improved gross margins, which came in at 39.4%. Morgan Stanley analyst Katy Huberty said in a research note that strong gross margin in the June quarter was driven by lower warranty accruals. Apple’s warranty accruals as a percentage of revenue have declined from 3.7% in Q4, 2013 to just 2% in Q3, 2014. In the same period, gross margins rose from 37% to 39.4%. Huberty has an Overweight rating on Apple with $110 price target.

Apple Warranty Accruals

Apple’s off-balance sheet commitment for component purchases jumps 22%

The iPhone maker’s latest 10-Q filing clearly indicates that the company is set to launch several new products in the current quarter and add some new revenue streams. The Cupertino-based company disclosed two key things that suggest strong product cycle ramps. One, its off-balance sheet commitment for third-party manufacturing and component purchases surged 22% QoQ to $15.4 billion in the latest quarter. Two, commitment for manufacturing process equipment, product tooling, advertising, R&D and telecom services grew an eye-popping 100% QoQ to $5.6 billion.

Total commitments of $21 billion rose 36% QoQ, the highest sequential growth in June quarter since the launch of the iPhone in 2007. Moreover, Morgan Stanley noted that there is a 97% correlation between the off-balance sheet commitments with a one-quarter lag. Huberty says the increase in total commitments is due to the increased iPhone supply chain order and the forthcoming launch of the iWatch.

Apple Off Balance Sheet Commitments

Is Apple joining hands with Visa for mobile payments?

Meanwhile, Apple’s R&D expenditure reached a record high of $1.6 billion in the latest quarter, up from $1.18 billion in the same quarter last year. The company management estimates operating expenses to rise 25% YoY in the September quarter. Katy Huberty forecasts a 10% increase in the SG&A expenses, in-line with the recent quarters. That means the R&D expenses are likely to soar 60%.

Apple R&D

Some of the R&D growth can be attributed to the acquisitions of Beats Electronics. But the research firm believes that Apple has upped the investment to take the iOS beyond mobile devices. Recent reports suggest that Apple is in talks with Visa Inc (NYSE:V) to launch a mobile payments service. Last week, the San Francisco-based payment technology company announced the creation of Visa Digital Solutions. It provides secure payments on mobile devices with a tokenization service set to be launched in September.

Katy Huberty said a mobile payments platform could generate new revenue streams for Apple.