[ChuckMcM]

No way to hide this:

   2013: Revenue $37.5B, Profit $7.5B (20%)
   2012: Revenue $36.0B, Profit $8.2B (22%)

Loss of 2% net profit year over year. Just under a 5% drop per share on a diluted basis. So its becoming less profitable to be Apple which speaks to the margin pressure they are under from credible Android phones and tablets. I don't think the market expected that (or maybe they did, GOOG is trading over $1000 these days)

[clarky07]

There are several things at play here. First, the iPad mini didn't exist last year, and it is a lower margin product by design.

Second, is this is really key, is that they started deferring more revenue because they are starting to give software away for free.

They guided for 36.5-37.5% margin in the next quarter and the stock tanked $30 after hours because the street wanted 37-38%. They then explained that they are going to defer an extra 900Mil of revenue on Mac and iOS because of moving the software to free. Without that, the revenue range would have been higher and the margin guide would have been closer to 38.5%. So they beat expectations for revenue, margin, and profit both this quarter and in guidance for next quarter, yet the stock tanked on release.

Once they mentioned this in the conference call, the stock regained all the losses and actually was up after hours for a bit. Now it's back down, but only slightly. I suspect just because more people are looking at the headlines and not reading or listening to the whole call.

Now, overall the margins are still lower this quarter than they were last quarter, but I don't see that as a huge problem. They changed the product mix. They had higher total revenue, large growth in total iPhone sales, and guided to revenue and profit growth for next quarter. They are still in pretty good shape. Oh and they have 150 bil in cash.

[ChuckMcM]

I think this is excellent analysis but note that this : "Now, overall the margins are still lower this quarter than they were last quarter, but I don't see that as a huge problem. They changed the product mix." sounds like you're dismissing the margin change.

Overall gross margin is a blend of all your products, that gross margin is where you get the money for everything you do, pay salaries, buy capital equipment, etc. So it really doesn't matter if your margin is lower because you are shipping more inexpensive product (the mix), all that matters is that its lower. That changes the amount of revenue you must have to run the business and increases downside risk if you are close to the edge (as Dan Warmenhoven is famous for saying, you have much more control over margin than you do over revenue).

In the case of the iPad Mini it says that additional growth in the Tablet market is in the lower margin segment. That is accretive if you're holding on to your existing market share at the high end, and dilutive if you're losing high end share to the mid-range or bargain products. Same with phones, lets say the 5C turns out to be "good enough" and sales of the 5S plummet because it's extra cost (and margin) isn't "valuable" enough to the consumer to pay the extra money. Now you have to sell a lot more units to get the same profit, but that requires more "business" (and by that I mean more assemblers, more sales people, more trucks driving around, more logistics, etc.) You lower the price (which increases sales rate, but that also reduces margin, so you have to sell more to make the same amount.

Now I don't think Apple is anywhere near any of that, they are a very strong company with a solid brand. My observation is that the reduction in overall gross margin will come out of the business, whether it fewer product managers for more products, or lower salaries for retail staff, or what, the numbers have to balance.

[downandout]

Let's remember that everyone was anticipating the iPhone 5s for all but 10 days of the third quarter, which naturally slowed iPhone 5 sales. Then Apple almost instantly ran into supply constraints after its release. Because of these two factors, these results aren't that meaningful. 4th quarter results will give a far more meaningful picture of iOS's place in the current market.

[Kylekramer]

Aren't those pretty much the exact same conditions as last year's quarter? iPhone 5 release: September 21, 2012. iPhone 5s/5c: September 20, 2013. And both had supply issues at launch. It seems fair to compare the quarters and draw some tentative conclusions.

[ChuckMcM]

However Apple's product release schedule being as rigorous as it is tends to make quarters more comparable. Perhaps a better indication here is the drop from 40% gross margins to 37% gross margins. That comes right out of the business.

Generally lower revenues but same margins is a sign so constraints in the supply chain. Higher revenue but lower profits is a sign of margin erosion. Lower revenue and lower profits and lower margins is perhaps one of the most alarming situation.

It is good to push back on folks who thought he tablet was just a fad? You know the ones who said "There isn't a 'tablet' market so much as their is an 'iPad' market." Well those folks have been shown to be mistaken.

I don't own any Apple stock (well I might in my blind 401k but I wouldn't know if I did :-) I've been tempted to pick some up after it dropped from the 700's into the 400's. But the thing that I keep wondering about is their ability to execute in a contested market by a competent opponent. This coming quarter will be an interesting one for everyone I expect.

[downandout]

IMO, supply constraints mattered....and this quarter is different because Apple threw a lower margin iPhone into the mix: the 5c. These have been consistently available, while the 5s has not. That means that for all but a couple of days during the quarter, all they had to sell was the lower margin 5c, while revenue from the higher margin 5s was waiting in the wings and won't be seen until next quarter.

[ChuckMcM]

That is certainly a fair point, we can come back to this discussion in 3 months :-)

[gonzo]

Chuck,

If you really think that Apple will drop like that, you should short it.

[ChuckMcM]

I wouldn't short a stock for a single down quarter.

[jljljl]

This argument would explain slower sales or lower revenues, but I'm not sure this has much validity in explaining the lower net profit or gross profit margins.

Lower gross profit margins are probably better explained by either downward pressure on prices or upward pressures on costs of manufacture. It can also be driven by changes in product mix (e.g., higher sales of the lower margin iPad Mini). It's not unreasonable to attribute this to greater competition from lower margin Android products.

[tlrobinson]

I'm curious what portion of Apple's customers actually anticipate new versions of products and hold off on purchasing until they're released.

I imagine it's common among the Hacker News segment, but what about the average person?

[mitchty]

My buddy has held off on a retina macbook pro waiting for the new one.

And I know some others that do similar, not because they need to but to see what the new version offers.

[tannerc]

Same here. I waited a few months to see what was going to be announced in regards to MBP, wasn't disappointed (though I wasn't really surprised either).

I imagine the waiting pool is larger than the "act now" pool. Especially since we now have resources like MacRumors buyer's guide.

[jsz0]

It could also be that FY2013 was just a dud for Apple product updates. Starting with the iPhone 5, that was released in FY2012 but primarily sold in FY2013, there were considerable supply issues along with some blowback on the new Lighting connector. Moving onto the iPad Mini we have a low resolution tablet with a -1 generation processor at a premium price. All indications are it sold well but I'm not sure it spoke well of Apple's reputation selling quality products. The display was simply not good and a quick glance could inform any non-technical people of that. We also got the iPad 4 which was merely a CPU upgrade with no reduction in weight or thickness.

Then we have the new iMac which also faced some supply problems and delays and offered customers something they probably didn't even care about -- a thinner desktop all-in-one PC. IIRC the Ivy Bridge update to the Mac Mini eliminated a SKU that offered a semi-decent GPU. Then Apple disappeared for a very long time and later in the year introduced Haswell updates to only the MacBook Airs leaving informed MacBook Pro would-be buyers facing old technology with a premium price tag.

Next we have the iPhone 5C which in most ways is a step backwards from the premium quality iPhone 4S (or would be iPhone 5) that occupied that price point. Contract free the device is totally non-competitive on pricing compared to better Android devices. The 5S was quite a good -S model upgrade however consumers are starting to get wise to the tick tock strategy and perhaps are choosing to wait for the iPhone 6 upgrade.

I've been watching Apple for quite a while now and FY2013 was not a great year for product upgrades. I'm actually kind of surprised they only took a 2% hit on profits.

[capkutay]

That's surprising to me. I expected their margins to improve given that they always sell the year-old generation and the 5c is cheaper to produce than the 5. I wonder how terrible their margins would've been if they didn't do the 5c at all.

[pbreit]

Good. I'd much rather see more sales and lower margins.

[natch]

They explained that. It's a long-term play.

[sigzero]

It actually beats analysts expectations.