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Monday, October 22, 2012, 06:01 am PT (09:01 am ET)

Apple expected to partially absorb higher quality control costs for iPhone 5

Difficulties in manufacturing the iPhone 5 are expected to affect Apple's gross margins for the near term, as the company is predicted to absorb some of the quality control costs associated with producing its latest handset.

Ahead of this Thursday's Apple quarterly earnings report, analyst Shaw Wu with Sterne Agee said he expects "vintage conservative" guidance from the company ahead of a big holiday quarter. The key reason for that expectation, he said, is he believes Apple will partially absorb quality control costs associated with the iPhone 5.

Wu believes Apple's near-term gross margins will be between 40.5 percent and 41.5 percent. That's lower than Wall Street consensus between 42 percent and 43 percent.

The prediction comes less than a week after an unnamed official with Foxconn, Apple's assembly partner, said the new iPhone 5 is the Most difficult device the company has ever assembled. The complex design of the iPhone 5 has apparently resulted in low yields, which has led to constrained supplies in the market.

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Source: @rollermog via Twitter


Beyond the iPhone 5, Wu believes that Apple's margins will also be pushed lower by the anticipated launch of a smaller 7.85-inch iPad. He expects Apple will sell its so-called "iPad mini" at lower margins than the full-size iPad, at least initially, allowing the company to achieve a lower price point and take on competitors like the Amazon Kindle Fire HD and Google Nexus 7.

For the September quarter, Wu believes Apple sold between 25 million and 26 million iPhones, slightly lower than Wall Street consensus of 27 million. He has also predicted iPad sales of 16.5 million, just below consensus of 17 million to 18 million. And for the Mac, he sees Apple having sold 4.8 million units, at the upper end of Wall Street consensus of 4.7 million to 4.8 million.