Apple again warns margins will decline due to new products
In its annual Form 10-K (PDF) with the U.S. Securities and Exchange Commission for the fiscal year 2010, Apple warned that it "expects its gross margin percentage to decrease in future periods compared to levels achieved during 2010."
The Cupertino, Calif., company has forecast gross margins of 36 percent for the first quarter of fiscal year 2011. Apple's gross margins in 2010 were 39.4 percent, compared to 40.1 percent in 2009. The filing notes that the decrease in margins from 2009 to 2010 is largely due to the introduction of the iPad, a new product with "higher cost structures," though the company's margins were helped by sales of the iPhone, "which has a higher gross margin than the Company average."
As sales of new products continue to take off, Apple sees its margins declining further. "This expected decline is largely due to a higher mix of new and innovative products that have higher cost structures and deliver greater value to customers, and expected and potential future component cost and other cost increases," wrote Apple.
In addition to the iPad, the recently released MacBook Air is expected to have low margins because of its greatly reduced pricing and the switch from hard disk drives to the more expensive solid-state drives.
Apple cites the difficulty of obtaining "custom components available from only one source" as a reason its new products often have lower margins. The company also lists its ability to obtain key components such as "microprocessors, NAND flash memory, DRAM and LCDs at favorable prices and in sufficient quantities" as a factor in the reduced margins.
During the company's Q3 2010 conference call in July, Apple CFO Peter Oppenheimer warned that the iPad's pricing would affect the company's margins. "We have been pretty aggressive here with pricing, and it's going to play true of it on the margin line," Oppenheimer said.
The iPad's aggressive pricing has made it hard for rival tablet makers to compete, giving Apple a significant early lead in the market.
"Our potential competitors [in tablets] are having a tough time coming close to iPad's pricing," Apple CEO Steve Jobs said. "iPad incorporates everything we've learned about building high value products. We create our own A4 chip, software, battery chemistry, enclosure, everything. This results in an incredible product at a great price. The proof will be in the pricing of our competitors' products, which will offer less for more."
For their part, analysts were optimistic about Apple's gross margins leading up to the September quarter, citing growing sales of the iPhone as an upside to the iPad's lower margins. In August, Gleacher & Co. analyst Brian Marshall stated his belief that Apple's gross margin profile is in the process of bottoming. AppleInsider contributor Andy Zaky had predicted a Q4 2010 gross margin of 38 percent.