At first glance, Apple's (AAPL) guidance for the all-important holiday season was a little weaker-than-expected, as the company guided gross margins to be between 36.5% and 37.5%. Upon further inspection, there's more than meets the eye.
On the company's earnings call yesterday, CFO Peter Oppenheimer noted that Apple would be deferring $900 million in revenue this quarter, due in large part to the new initiatives to make Mac OS X Maverick, iLife, iPhoto and iWork free of charge to users.
Analysts were initially unaware of this when the call started, with Morgan Stanley's Katy Huberty asking a question about the margins. If you exclude the $900 million deferral, which Apple is recognizing over one quarter, gross margins for the fiscal first quarter, would be around 38.%, much better than investors had feared.
Even though Huberty asked about the deferred $900 million in revenue, it was not until Barclay Capital's Ben Reitzes asked about the gross margins that investors finally became comfortable with Apple's guidance. Reitzes noted that margins would be up around 160 basis points if not for the $900 million in deferred revenue, and CFO Peter Oppenheimer sort of blesses that number. "Ben, I’d just add on to that, thank you for saying it and I agree," Oppenheimer said on the call. "And I would also say that we’re really happy to be guiding gross margin flat not only because of the deferral but in addition to all of the new products that we’ve introduced with higher cost structures and lower prices and we’ll -- no hard and fast commitments, but we’re going to work really hard to get down the cost curves as we have successfully in the past."
For the fiscal first-quarter, Apple expects to have between $55 and $58 billion in revenue, so an approximate 150 basis point move in margins is significant in earnings power.
Outside of gross margin concerns that were not well understood, Apple continues to chug along, as the company gets set to enter new product categories. Apple earned $8.26 per share on $37.5 billion in revenue, with iPhone sales topping 33.8 million during the quarter. Even the iPad, which had seen decelerating unit sales over the past two quarters, selling 14.1 million iPads in the quarter, compared to 14 million in the year ago quarter.
The holiday shopping season will be in focus over the next few weeks, as Halloween passes, Thanksgiving comes and goes, and December starts. Given concerns over iPhone inventory during the quarter, and the availability of the iPad Air and iPad mini with Retina Display, Apple's problems are not actually selling the devices at a lower price point, but rather making enough to keep up with demand.
On the earnings call, CEO Timothy D. Cook seemed to note the company's supply constraints for the new iPads and iPhones, especially the iPhone 5s. Cook noted there was a "huge backlog" for the iPhone 5s, and that it would be very difficult to forecast when supply and demand will start to balance for the new iPad mini.
While shareholders such as Carl Icahn might worry on boosting Apple's stock in the short-term with a bigger buyback, rising gross margins and increased sales will do more to help Apple in the long-run, once it gets supply and demand in order for its new iPhones and iPads.
Talk about a first world problem.