iPhone 6S May Not Hurt Apple’s Margins So Much

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iPhone 6S May Not Hurt Apple’s Margins So Much
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As the unveiling of the iPhone 6S approaches, we’ve heard all sorts of rumors about what new technology and features Apple will include. The natural follow-on consideration when it comes to adding new tech to the iPhone is how much the new and improved components will cost.

iPhone S versions easier on gross margins

With all the rumors about improvements for the iPhone 6S, Wall Street appears to be concerned that it will pressure margins. However, most investors don’t seem to remember that the S versions of the iPhone are usually easier on Apple’s gross margins—a point Bernstein analysts made in their note dated Aug. 20.

The reasons the S versions of the iPhone tend to be easier on Apple’s margins is because the company typically doesn’t make many significant design changes to it. As a result, the bill of materials for the S versions tends to be lower, as are manufacturing costs.

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Will the iPhone 6S upgrades break margins?

Among the updates Apple is rumored to be working on for the iPhone 6S are a harder casing, Force Touch technology, improvements for the TouchID fingerprint sensor, more RAM, and a higher storage capacity on the smallest model. Bernstein analysts Toni Sacconaghi, Jr. and Daniel Chen think these features are in line with the types of updates Apple has done in past S models, so they don’t think they will weigh on gross margins as much as some investors seem to think they will.

They also think that continuing declines in costs across the iPhone bill of materials and manufacturing processes will mostly offset any increase in costs from the addition of these features or updates. The analysts call the component cost environment right now “relatively benign,” saying that the commoditization of smartphone components plus slowing growth create a “favorable environment” for costs on components for the iPhone 6S.

In particular, they noted that prices for DRAM have dropped significantly from where they were last year, which they said could mean that doubling the DRAM in the iPhone 6S might not impact the smartphone’s margins much at all.

Apple management not worried about margins

The Bernstein team also noted that Apple management’s guidance suggests that there won’t be much of an impact from the iPhone 6S on margins because it was exactly the same as the guidance they provided for the June quarter at between 38.5% and 39.5%.

They have found that when Apple management guides for gross margins that are flat or better than their guidance from the previous quarter, usually iPhone margins are up, and vice versa. They added that management warned investors before the iPhone 4 and 5’s launches that gross margins would be significantly impacted.

Still risks to Apple’s gross margins

Naturally they do still see some risks to Apple’s margins, however, as a mix shift toward older iPhones or an iPhone 6C, if Apple updates its less-expensive plastic-backed model, would weigh on the company’s overall margins. The Bernstein team points out that the iPhone 6 and iPhone 6 Plus were different because they were the first to have larger screens. As a result, they think a higher percentage of iPhone buyers this year will opt for the iPhone 6 or the iPhone 6C, if Apple offers one.

Also if Apple does increase the amount of storage on the cheapest iPhone 6S model, then that would impact sales as well because consumers may buy one with the lowest amount of storage because they think it will be enough.

And finally, China is a risk to Apple’s margin thanks to the government’s decision to devalue the yuan. Apple has received about 23% of its sales in China in recent quarters, and while the company manufacturers its products there, its bill of materials are in U.S. dollars. This means Apple has full exposure to the devalued yuan and could mean that the company might consider raising prices on its iPhones in China.

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Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at [email protected]
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