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Apple’s profit margins decline
February 12, 2013
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NEW YORK: Apple’s profit margins are falling back to levels not seen since sales took off after the 2007 debut of the iPhone, as competition and lack of breakthrough products pressure the company to lower prices.

Concern over falling margins helped prompt a 33 per cent decline in Apple shares from a record high of $705.07 on Sept.21, making it the worst-performing stock in the Standard & Poor’s 500 Index in the same period. Last week, Apple said the board and management are discussing the return of more money to shareholders, after a proposal by Greenlight Capital’s David Einhorn to pay out more of its $137.1 billion in cash and securities, possibly with higher-yielding preferred stock.

The latest quarter’s drop in gross margin to 39 per cent from 45 per cent a year earlier was caused by the introduction of the iPad mini, other products with higher costs and price cuts for existing products, Apple said. Unless Chief Executive Officer Tim Cook unveils a revolutionary new gadget with premium pricing, Apple shares will remain under pressure.

“It will be almost impossible for Apple to maintain the margins it’s had in the last few years,” David Yoffie, a professor at Harvard Business School, said in an interview. “They’ve been able to charge pretty much whatever they wanted for their products, but competition is increasing.”

A central challenge is slowing sales of the iPhone, Apple’s best-selling and most-profitable product that accounts for 56 per cent of revenue. Samsung Electronics, HTC Corporation and other rivals are introducing cheaper and feature-laden smartphones and tablets based on Google’s Android software.

Steve Dowling, a spokesman at Apple, declined to comment.

One product with the potential to be profitable enough to slow the margin slide could be an Apple-branded watch that also makes phone calls, accesses the Web and provides location-tracking services, said Poonam Goyal, an analyst at Bloomberg Industries. A watch with these features might retail for much less than $200, keeping it within the price range that is the fastest-growing portion of the time-piece market and also the most profitable, she said.

Apple could sell millions of the watches, and generate a margin of about 50 per cent, she said. That’s about twice the margin Apple might earn by making a TV or selling an inexpensive phone for less-affluent shoppers, said Michael Morgan, an analyst at ABI Research.

The company is developing a wristwatch-like device using curved glass, the New York Times reported yesterday, citing unidentified people familiar with the situation. Natalie Kerris, an Apple spokeswoman, declined to comment on the plans.

Apple is also seeking new customers in China, where it will be harder to charge premium prices. New products such as the iPad mini are also being priced at relatively lower points, eating into margins.

Gross margin, or how much Apple earns after paying for raw materials, labor and production to build iPhones, iPads, Macs and other products, is projected to decline in fiscal 2013, according to the company’s Jan.24 filing with the US Securities and Exchange Commission.

Bloomberg

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