Apple Inc. updated several products towards the end of October, including two surprise updates on the iPad and iPod line-ups. The company was expected to introduce iPad mini, while refreshing its iMac line up. However, it choice of venue with a capacity never witnessed before in any of its major events aroused speculation that the event was indeed going to be massive. This was all about the good news in the eyes of investors, but what was hidden in mystery did not take long before finally being revealed.
Apple’s transition from the older generation products to the new ones meant significant upgrades in materials and components used in designing the new generation products, including iPad 4, iPad mini, a fifth generation for the iPod line-up, as well as updated iMacs line-up. Consequently, this squeezes on the company’s gross margin in the sense that the new components and materials are indicative of high costs.
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Jefferies Equity research analysts estimate that Apple Inc. (NASDAQ:AAPL) is likely to suffer from short term margin quandaries, due to the newly launched products. The analysts are of the opinion that the products are likely to experience assembly and yield bottlenecks in the near term, especially during Q4, but are optimistic that the quandary will be eliminated during the March quarter 2013.
The analysts noted, “due to the large number of new products being introduced, our checks indicate that the iPhone 5, iPad 4, iPad mini, new iMacs, and fifth-generation iPod touch models will have some yield and assembly issues. We believe these additional transition costs are causing a short-term compression in Apple’s gross margin for CQ4, but will largely be worked through by CQ1”.
The analyst noted the additional cost to Apple Inc. (NASDAQ:AAPL) due to the transition process, saying, “we have estimated a cost of each component, the current yield rate, and how much of the additional cost is being absorbed by Apple and how much by the supplier. We then weighted the GM impact based on our CQ4 shipment estimate for each product”.
The analysts point assembly at Hon Hai as the main bottleneck in the production and supply of the iPhone. The component bottleneck is also blamed for deterring iPhone 5 ramp as some 50 million idled employees were noted in Q3. hon Hai chairman was quoted saying, “it’s not easy to make the iPhones. We are falling short of meeting the huge demand”. However, Hon Hai has since hired more staff to cope with the increasing demand for Apple Inc. (NASDAQ:AAPL)’s new products.
Jefferies equity research analysts noted, “after display and 28mn bottlenecks were alleviated, we believe the situation has flipped and that Hon Hai is trying to hire more people to meet demand”.
Another upside for Apple’s prospects of eliminating the current assembly and yield bottlenecks is exhibited by Qualcomm, Inc. (NASDAQ:QCOM)’s Q4 guidance, which indicates an estimated 168-178 million units in shipment, as compared to 141 million reported in Q3. This supports an estimate of 60 million units of iPhone sales in CQ4, which puts Jefferies analysts’ estimates well within the realm. The analysts said, “assuming Qualcomm’s non-Apple business grows slightly Q/Q would imply a 33M increase in iPhone shipments or ~60M total for CQ4”.
The analysts also expect the yield bottleneck to decline by some 168 basis points in Q4, as compared to the current 372 basis points. “This implies a 200bp Q/Q GM uplift to 42.0% (St 41.0%). Additionally, we believe Apple is able to pressure its component suppliers and get price concessions of ~2-5% per Q,” the analysts concluded.
Apple Inc. (NASDAQ:AAPL) closed at $537.75 per share, on Thursday, down $20.25, or 3.63% decline from the previous close. It was trading at $539.22 per share during late hours.