Turley Muller: Warranty Expense Crimps Apple's Margins in 4Q10

If estimated warranty expense had remained constant in absolute dollar terms ($150M), GM would have been 38.4% vs 36.9%. If If estimated warranty expense had remained constant in as a percentage of revenue (1%), GM would have been 130bps higher at 38.2%.

via Financial Alchemist: Warranty Expense Crimps Apple’s Margins in 4Q10.

Muller spots the culprit in the margin drop. He notes that this is money set aside and may have been in anticipation of returns of the iPhone 4 due to antennagate. Note how in 3Q cost of claims was 155 and accruals were 157, about a 1:1 ratio whereas in 4Q costs were 286 and accruals were 457 about 1:1.6.

It’s possible that if the costs this quarter do not materialize then we could see a margin upside surprise.

(Contrast this insight with today’s large scale sell-off in shares due to mass media repetition of earnings guidance from the conference call as shocking “news.” See also evidence of unlawful trading behavior here.)

  • dave

    that is why the stock is down?

    wow! how non news moves a stock.

  • Actually, and no one in the financial community for some reason points this out…on the adjusted free cash flow basis, the margins improved substantially. (Adjusted for one time working capital fluctuations.) IMHO, this is a much better metric of real profitability then accounting earnings.

  • Bar Jockey

    Also keep in mind that Apple aggressively pushes its "Surprise and Delight" policy in Apple Stores when they're trying to pick up market share. When the iPod first started coming under fire from the second generation of competitors, it was insinuated to Geni at the bar that they were licensed replace customers' iPods for any reason at all up to and including physical/water damage. This likely isn't a sign of defective products, but rather a temporary broadening of what constitutes an "in warranty" repair. I wonder if analysts would have such a negative view of this number if it was cast in the light of essentially buying customer loyalty?