Apple’s Gross Margin Up Despite Increase In iPhone 5 Production Costs

Updated on

Apple Inc. (NASDAQ:AAPL) experienced increased costs in producing the new iPhone 5, but according to analyst reports, this did no harm to its gross margin (GM). According to equity research report by Jefferies Equity Research, iPhone 5 is expected to record a gross margin of approximately 55%, as compared to Apple’s CQ2 GM of 43%. Indeed, according to the Bill of Materials Analysis (BOM), iPhone 5 is expected to aid Apple’s gross margin, besides benefiting other companies, such as Broadcom Corporation (NASDAQ:BRCM), and Avago Technologies Ltd (NASDAQ:AVGO).

Apple's Gross Margin Up Despite Increase In iPhone 5 Production Costs

Jefferies  Semiconductor  analyst,  Sundeep  Bajikar, believes that  besides Hynix and Toshiba, SanDisk will also be in in the mix in supplying NAND for the new iPhone device. on the other hand, the analysts expect Elpida to supply DRAM, which will benefit Micron, a company that is targeting to acquire it by mid 2013. The analysts believe that the moves by the two companies (Sandisk and Elpida), will come at the expense of Samsung Electronics Co. ltd.

The teardown is a good illustration of all the parties involved in the production of the new iPhone 5, from the hardware components manufacturers to software developers.  According to Jefferies equity analysts, these are the parties that have contributed in driving the iPhone production cost up, to new levels. The 16 GB model has a BOM of $199 per piece, while the 32GB model is pegged at $209. The most expensive model, the 64GB, attracts a BOM cost of $230.

In addition to these, there are some other manufacturing costs, inform of overheads, which are rather low, and are estimated at $8.00 per piece across all models. This means that on average, for every piece of iPhone shipped, ~$213, goes to the partner companies, which ideally means that for the off contract purchase, while that cost scales upwards when you add the manufacturing cost of $8.00 a piece.

Apple Inc. (NASDAQ:AAPL)’s iPhone 5 communication components are the biggest cost drivers, contributing $38 on each model with QualComm taking $25, while the display section comes in second at $29 a piece across all models. The NAND memory is costing Apple Inc. $7.00 per iPhone, while DRAM costs $3.50. Apple’s aluminium metal casing is another major cost driver, at $12 a piece, while the   processor, A6 draws $22 from every unit of  the new iPhone 5 produced.

The total cost amounts to $292.75 per piece including Royalties and shipping, as compared to the estimated average selling price of $650 per piece. this translates to a gross margin of $357.25 per unit, or ~55%. The BOM this time around was up 6% from what iPhone 4S cost the company, notably because of the increase in the cost of the processors A6, and the enlarged screen size, along with LTE 4G capability.

Jefferies Equity research has an estimated F4Q12 EPS of $8.05 for Apple Inc. (NASDAQ:AAPL), which just as expected is slight decline from F3Q12 value of $9.32, while the december quarter nearly double the  F3Q12, at $18.47  EPS. the overall gross margin is expected to decline slightly for the F4Q12, at 40% as compared to F3Q12’s figure of 42.8%. Nonetheless, the annual gross margin estimate is expected to outperform 2011 results, which notched 40.5%, by recording 43.9%. This nearly 10% increase from last years GM, as compared to the 6% increase in production cost.

Apple Inc. (NASDAQ:AAPL) closed last week at $700.09 per share, slightly above the previous week’s close of $699.78. However, this is a huge rally as compared to its pre iPhone 5 launch trading price of approximately $667 per share.

Leave a Comment