Apple Inc. (AAPL) iPhone 5S, 5C Gross Margin Analysis

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Apple Inc. (NASDAQ:AAPL) spends $213 in materials to manufacture a 16 GB iPhone 5S and $156 to manufacture 16GB iPhone 5C, according to a report from UBS. UBS analysts, after a thorough tear-down analysis of both the iPhone 5S and 5C, and after examining the bill of materials, have come up with their estimates on the gross margin commanded by Apple on the two new devices.


Gross margin estimates

Gross margins for iPhone 5S can near 45-55 percent and for iPhone 5C it could come around 48-54 percent as production increases and matures, according to analysts. In a research report, analysts mentioned that non-component costs will be around 33 to 40 percent of the total device cost, primarily fueled by depreciation and software authorization expenses.

Wholesale discounts that Apple Inc. (NASDAQ:AAPL) gives to its channel or carrier partners may be around 8 to 10 percent. Analysts expect the total product gross line margin of 49.9 percent can be achieved, assuming the purchase of the iPhone 5C with storage capacity of 20 GB. For iPhone 5S, analysts assume the average purchase to be of 30 GB, which will result in a gross margin of 50.4 percent.

Cost break-down

The iPhone’s display adds the most to its cost, which is around 20 percent of 5S’ total cost and 27 percent for the 5C. Display cost, according to UBS, is around $42.11. Suppliers are Samsung Display, LG Display and Sharp.

Analysts are guesstimating that depreciation costs for Apple Inc. (NASDAQ:AAPL) would be around $25 per device, accounting for the company’s massive investment in non-leading edge production equipment. The warranty accrual rate of the iPhone maker might be somewhere around 1.8 percent and manufacturing (including freight) would be around $18-20 per unit, incorporating manufacturing.

Software amortization expense is estimated at $55-$60 per device, and there are possibilities of Apple Inc. (NASDAQ:AAPL) iOS development cost being less than Microsoft Corporation (NASDAQ:MSFT) or more or less at the same rate as users have access to many upgrades for free over the life of the device. Non component cost is estimated between $108 and $120 per device, which would be more than a third of total device costs.

Factors affecting margins for Apple

The profitability throughout the device cycle may be affected by factors including currency fluctuations, production start-up costs, manufacturing yield expenses, and Apple Inc. (NASDAQ:AAPL)’s ability to influence its cost curve.

According to analysts, these factors will impact the fiscal 2014 gross margin of the company by around 2 to 3 percent. The iPhone 5S is expected to be at the top of the product mix, contributing around 45 percent of total iPhone sales in fiscal 2014, while the remaining will be accounted for by iPhone 5C and 4S. In such a scenario, analysts expect iPhone gross margin for 2014 to be around 47 percent.

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