Apple says cheaper new products in the pipeline
"Greater value, lower gross margins"
In response to questions from Richard Gardner of CitiGroup asking "why gross margin should be down as much as you have it" in the company's future guidance, Oppenheimer answered, "we expect gross margin to decline about 34% primarily due to four factors.
"First," Oppenheimer said, were "new products we have and will announce, delivering greater value, lower gross margin than predecessors."
Oppenheimer later mentioned that Apple had already introduced products with "lower ASPs [average selling prices]," referencing new lower priced MacBooks that resulted in the company's notebook sales gobbling up a 74% share of all Mac sales.
Apple had also introduced its cheapest ever iPhone offering this summer, although Chief Operations Officer Tim Cook also noted, in response to a question about how the $99 iPhone 3G impacted sales of the new iPhone 3GS, that "the demand for the [iPhone] 3GS did exceed expectation; we quickly changed our orders for components." Cook added, "I think it shows there's an intense appetite for Apple's latest technology and we were very pleased with the result."
Other impacts on future profits
"Second," Oppenheimer said, "a seasonally higher mix of iPods" will push down margins and the company also expects "Snow Leopard box sales to be less."
Cook later said that, "the upgrade sales of Snow Leopard, which we include family and box sets, were more than double what we experienced from Leopard over the same 5-week sales period [following the release of each]. That was much more than we planned, very pleasantly surprised."
"Third," Oppenheimer said, the company expects to pay "significantly more air freight, while fourth, Apple anticipates having to face "higher component costs than September quarter."
Cook later explained that costs associated with "air freight is not related to the iPhone. Generally speaking, it's planned to get enough units into the channel in time for the holidays." He said that Apple expects freight costs to be "more than normal," adding that while "in general we spend more in freight in [holiday] Q1, but this increase is larger than usual. I'm sorry, I can't be specific on the product, but it's an abnormal sequential increase."
"Regarding revenue, as you know, the education and back-to-school seasons are over," Oppenheimer added. "The December quarter is typically driven by holiday purchases. Our guidance includes double-digit revenue growth from last year."
Apple trading premium margins for volume
The company's efforts to reach broader markets for its products rather than simply servicing existing customers with premium priced, high end alternatives to PCs and music players is not entirely new.
Apple has aggressively pushed down iPod prices to remain competitive with other vendors. For example, Apple has now undercut Microsoft's Zune offerings with lower priced alternatives for three years in a row.
The company also dropped the original iPhone's price so rapidly that it created a controversy resulting in rebates to early adopters, and followed up with the second generation iPhone 3G using cheaper construction materials to achieve an even lower price point.
Apple's latest MacBook introductions this summer scaled down prices dramatically while still delivering high end engineering features, and the company is expected to release significantly cheaper desktop Macs this fall in time for the holiday shopping season.