Report: iPhone margins are nearly 60%
Turley Muller has been arguing for more than a year that Wall Street seriously underestimates the impact of the iPhone on Apple's (AAPL) bottom line.
Muller, a former mortgage trading analyst, currently unemployed, tracks Apple's performance in his blog Financial Alchemist, where his estimates of Apple's earnings put the Street's consensus to shame. Over the past four quarters, he has missed reported EPS by 4 cents, 2 cents, 1 cent and 0 cents, respectively. (In those same four quarters, the Street underestimated Apple's EPS by 15 cents, 40 cents, 24 cents and 18 cents.)
In fact, in our latest Analyzing the Analysts report, Muller's predictions were closer to actual results than any other analysts' in four categories out of seven — including the tricky non-GAAP revenues non-GAAP earnings.
On Wednesday Muller issued his third detailed report on the iPhone's profit margins, and it's an eye opener. Bottom line: Apple's gross margins on the iPhone are now so high — Muller's estimate is 58.4% — that the company can use them to subsidize price cuts on the rest of its product line without any noticeable impact on overall gross margins.
How to predict Apple's gross margins
Apple's (AAPL) fiscal third quarter earnings are due out Tuesday, July 21, and once again the Street is focused on the big numbers — revenues, earnings and units sold for the Mac, iPhone and iPod.
But savvy analysts will be paying closer attention to the number that is the best measure of a firm's profitibilty: gross margin, expressed as the ratio of profits to revenues. Or
(Revenue – Cost of sales) / Revenue
Apple's gross margins, which have averaged 34.8% over the past eight quarters, are the envy of the industry. Dell's (DELL) first quarter GM, by contrast, was 17.6% and the company warned Wall Street last week that it is expecting a "modest decline" next quarter.
In its April earnings call, Apple low-balled its guidance numbers as usual, forecasting a sharp drop in gross margins over the next 6 months. Specifically, it warned analysts to expect no better than 33% in Q3 and "about 30%" in Q4.
But Turley Muller, for one, doesn't buy those numbers, and he should know.
