Apple Inc. (AAPL) 1Q Operating Margins Decline Almost Everywhere

Apple Inc. (AAPL) 1Q Operating Margins Decline Almost Everywhere
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Apple Inc. (NASDAQ:AAPL) disclosed its operating margins by geography in its recent 10-Q filing with the Securities and Exchange. Shares of the tech giant plummeted yesterday after the company reported lower than expected iPhones sales during the first quarter and issued downbeat Q2 guidance. In its 10-Q filing, Apple reported capex of just $779 million in the quarter ended December 28. That includes $108 million in retail capital expenditure and another $671 million in other capex. That’s a bit surprising because the Cupertino-based company continued to reiterate the full year 2014 capex of $11 billion.

Apple Capex

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Rising product warranty accruals affect Apple’s margins

Stifel analysts Aaron C. Rakers and Sanjiv R. Wadhwani noted that Apple Inc. (NASDAQ:AAPL)’s product warranty accruals increased 50% QoQ in the first quarter. The company’s 10-Q filing shows product warranty accruals of $2.077 billion for the December quarter, compared to $1.37 billion in September quarter. Stifel analysts estimate that the increased accruals negatively affected Apple’s gross margins by at least 120 basis points in Q1.

Apple product warranty

Apple’s operating margins decline almost everywhere

Coming to profit margins, Apple Inc. (NASDAQ:AAPL)’s operating margin in Greater China stood at 35.5%, down from 37.2% in the same quarter last year. Operating margins by geography don’t include sales at Apple-owned retail stores because the company reports this data in a separate segment. The tech giant’s revenue in Greater China jumped 29% YoY to $8.84 billion. Greater China made up 15.4% of Apple’s total revenue for the December quarter, up from 12.5% a year ago. Apple generated an operating income of $3.14 billion from Greater China.

Apple Greater China

Apple Inc. (NASDAQ:AAPL) earned $7.226 billion in Q1 operating income from the Americas, down 1% from the previous year but 40% QoQ. During the first quarter, the iPhone maker’s operating margin in the Americas came at 36.2%, slightly up from 36.1% in September quarter. But it has declined from 37.2% in the same quarter a year ago. The company noted in its 10-Q that iPad ASPs declined in the region during December quarter.

Apple Americas

Meanwhile, the company posted an operating income of $4.57 billion in Europe, compared to $3.03 billion in the corresponding quarter last year. Apple Inc. (NASDAQ:AAPL)’s Europe operating margins plunged from 37.8% in Q1, 2013 to 35% in Q1, 2014.

Apple Europe

First quarter operating income in Japan rose 5% YoY to $2.4 billion. Japan generates the highest profit margin for Apple Inc. (NASDAQ:AAPL) at 48.1% in Q1. Though it has declined from 50.9% in the same quarter last year. The October-December period was the first full quarter of selling iPhones to NTT Docomo Inc (ADR) (NYSE:DCM) (TYO:9437). However, the weaker yen remained a headwind to Apple’s revenues in the country. On the other hand, operating profit from the rest of Asia-Pacific plunged 16% from the previous year to $1.33 billion in the first quarter. Despite this drop in profit, operating margin has improved from 33.4% in Q1 2013 to 36.6% in the latest quarter.

Apple Japan

Apple to open 30 retail stores this year

Operating income at Apple Inc. (NASDAQ:AAPL)’s retail stores finally returned to a YoY growth. The tech giant has 420 stores worldwide, including four stores opened during the first quarter. Apple’s operating margin at retail stores came at 24.9% compared to 24.2% in a year ago quarter. Operating income rose 12% to $1.7 billion, recording the first YoY growth in quarterly profit since Q4 2012. The average revenue per store increased slightly from $16.26 million in Q1 2013 to $16.74 million in the latest quarter.

Apple Retail

Apple Inc. (NASDAQ:AAPL) said in its 10-Q filing that it will open 30 new retail stores during the fiscal 2014, and remodel 20 existing ones. The company said 20 of the new stores will be outside the U.S.

Apple Inc. (NASDAQ:AAPL) shares gained 0.84% in pre-market trading Wednesday to $510.75. Stifel has a Buy rating on the stock with a $650 price target.

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  1. How much more stuff motivates a consumer to switch brands: 3/2, 4/3, 5/4? Somewhere in the range drives Apple’s margin down to 20%.

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