Apple Inc. (NASDAQ:AAPL)’s biggest problem, according to most analysts, is its gross margins. There’s no doubt that the company’s financials have been feeling the pressure, but just where is that pressure coming from? Probably not where you think.
CNN Money contributor Philip Elmer-DeWitt reported on a very interesting tidbit that also has been covered by a handful of others, who he lists in his article. While it’s true that Apple Inc. (NASDAQ:AAPL)’s first calendar quarter margins were at 37.5 percent—the low end of its guidance—we’ve got to take into account that the company had to deal with $414 million in warranty accruals.
Apple: The Cost Of Doing Business In China
Keep in mind that starting in March, Apple Inc. (NASDAQ:AAPL) had a major headache to deal with: the Chinese state-run media. After a couple of reputation attacks dealing with the company’s warranty policies, CEO Tim Cook apologized and then changed the warranty policies. On the surface it may have looked like a big win for Apple Inc. (NASDAQ:AAPL), but underneath, the company had to deal with all those warranty accruals. And the problems just kept continuing as scammers began to take advantage of Apple Inc. (NASDAQ:AAPL)’s warranty policies even before they were changed.
But when you take that $414 million out of Apple Inc. (NASDAQ:AAPL)’s iPhone revenue during the first quarter of the year, you see a new gross margin emerge. It’s actually 38.4 percent, which is just below the top end of the company’s margin guidance. That’s according to Morgan Stanley (NYSE:MS) analyst Katy Huberty.
So the pressure on Apple Inc. (NASDAQ:AAPL)’s margins may not be coming from any of the usual suspects, like Samsung or inexpensive Android manufacturers. It may simply be coming from China.