Apple Inc. (AAPL)’s Q4 Earnings Points to Declining Gross Margins

Apple Inc. (AAPL)’s Q4 Earnings Points to Declining Gross Margins
ElisaRiva / Pixabay

Apple Inc. (NASDAQ:AAPL) reported fiscal 4Q12 EPS of $8.67, which was below consensus of $8.75 and above Apple Inc. (NASDAQ:AAPL)’s original guidance of $7.65. Apple shares dropped significantly after hours, but ended the trading session down only 1.2%. Revenue  came in at $36.0 billion. Gross margin of 40.0% was below consensus estimates of 40.8%; Benjamin Reitzes, a technology analyst at Barclays, believes that the lower-than-expected gross margins vs. the street were driven by product transitions (possible price protection and air freight).

Apple Inc. (AAPL)'s Q4 Earnings Points to Declining Gross Margins
Source: Pixabay

iPhone shipments were 26.9 million, above consensus of 25.4 million – upside to iPhone estimates drove the earnings beat. Benjamin believes that sales of iPhone 4S exceeded expectations, especially once prices were lowered at quarter end. iPad shipments were 14.0 million, below Barclays’ revised estimate of 15.1 million and consensus estimates of 17.3 million. He believes that Apple Inc. (NASDAQ:AAPL) lowered channel inventory ahead of new products and the December quarter will see big improvement with the iPad mini).  Below the line, earnings were negatively impacted by lower-than-expected other income (a $0.23 per share hit vs. Barclays’ estimate), but positively impacted by a lower tax rate ($0.12 per share help vs. Barclays’ model).

For fiscal 1Q13 (C4Q) Apple expects revenue of “about” $52 billion vs. current consensus of $55.15 billion.  For fiscal 1Q13, Apple expects EPS of $11.75 compared to consensus estimates of $15.41. The revenue outlook is a relief and shows that Apple can improve production of new products including iPhones and iPad minis. However the EPS outlook likely shows that gross margins will remain depressed given product transitions and mix – although they really think this EPS outlook seems conservative.

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Oppenheimer notes that  Apple Inc. (NASDAQ:AAPL) delivered in-line results, but a disappointing outlook that’s likely to leave investors with some questions.  They believe that the sales and margin guidance reflects an unusual combination of events— a short quarter, an unusually high new product mix, supply-chain uncertainty and a tough macro.

However, Gene Munster of Pipper Jaffary believes that gross margins will improve.  He expect margins to rebound in March following December, which is the largest product transition quarter in the company’s history.  He also notes that  September results demonstrated the strength of the iPhone franchise as units were ahead of Street expectations driven by non-iPhone 5 sales. Based in part on a positive trend from Pipper Jaffary’s iPhone 5 survey this week, he remains confident in their iPhone demand assumptions for the combined December and March quarter.

On the conference call,  CEO Tim  Cook noted that demand for iPhone 5 continues to outstrip supply and he is confident that Apple will be able to supply “quite a few” phones in December. Furthermore,  Tim Cook noted that, like the iPhone 5, customers anticipated an iPad refresh, which impacted September quarter demand.



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