Apple Inc. (NASDAQ:AAPL) has seen its share of downgrades in the past few weeks. However, some analysts still see a bright future for the tech giant. Analysts at Morgan Stanley are among the optimists who have a new research note based on Apple Inc. (NASDAQ:AAPL)’s recent 10Q. We highlight the key points of the report below:
Gross margin:
Management was more specific in the December quarter 10-Q stating Apple’s gross margin will be lower in FY13 compared to FY12. They have historically said “the company expects to experience decreases in its gross margin percentage in future periods” without specifying the time frame. This is in-line with the firm’s 38.7% estimate for FY13, below 43.9% for FY12.
Management elaborated that the lower gross margin Y/Y is due to (1) a higher mix of new and innovative products with flat or reduced pricing that have higher cost structures, (2) anticipated component cost and other cost increases, and (3) potential future strengthening of the U.S. dollar.
NAND prices hurt in December but could ease:
Deferred margin on component sales represents Apple’s component cost advantage relative to spot prices and correlates with Apple Inc. (NASDAQ:AAPL)’s GM. This metric deteriorated in C2H12 but could improve going forward given the recent increase in spread between NAND contract and spot prices. A more favorable NAND contract price trend is consistent with Apple increasing NAND in the 9.7” iPad last week.
While Apple states in its 10-Q that FY13 GM will fall short of the FY12 peak (43.9%), lower capital equipment purchases and potentially more favorable NAND prices could improve margins later this year.
Purchase Commitments:
Apple Inc. (NASDAQ:AAPL)’s off balance sheet purchase commitments not worse than seasonal. Purchase commitments of $19.8B fell 10% Q/Q vs. five-year average of -12%, and suggest C1Q13 revenue could trend closer to seasonal average of -17% vs. Morgan Stanley’s model of -21%.
Retail stores:
The company expects to open 30 stores in FY13, with 75% of them outside of the US. This is lower than their expectation for 30-35 openings in FY13 three months ago, though the mix of international stores has not changed. Apple Inc. (NASDAQ:AAPL) opened 33 stores in FY12 and 40 stores in FY11. Accordingly, under drivers for SG&A growth Y/Y, management removed “expansion of the Company’s Retail segment.”
Capital assets:
Apple Inc. (NASDAQ:AAPL) added disclosures stating that it invested in capital assets, such as manufacturing process equipment, at suppliers’ facilities. It also added that the company reviews such capital assets and inventory prepayments for impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable.
Outsourcing:
Apple Inc. (NASDAQ:AAPL) took out the words “single-sourced” when referring to outsourcing partners in Asia in the most recent 10-Q.
Morgan Stanley believes that Apple likely increased dual sourcing for assembly and expanded the number of major assemblers of its products from two to three. In the December and September 2012 quarters, Apple Inc. (NASDAQ:AAPL) disclosed that three suppliers accounted for more than 10% of its vendor non-trade receivables, up from two in prior quarters.
The 10-Q discloses $904M of commitments for equipment purchases compare to $4.5B just two quarters ago when Apple Inc. (NASDAQ:AAPL) invested in new in-cell touch displays for the iPhone 5. Analysts at Morgan Stanley believe that the decrease is likely due to iPhone 5S not requiring significant hardware changes, therefore iPhone GM could be much higher in C2H13.
Quality problems:
Apple Inc. (NASDAQ:AAPL) added a comment that quality problems in its products and services can cause harm to the company’s reputation, in addition to past comments that it could result in decreased sales and operating margin. This addition is likely in response to widely publicized issues with Apple’s Maps Application during the quarter.
